Labor have announced that they will increase the child care rebate to 50 percent from its existing 30 percent. What this means is that working families will be able to claim 50 percent (up to a total of $7,500 per child) as a tax deduction. What is more, it will come quarterly.
This is a very significant change over existing arrangements. Actually, it is only this year that I, with an economics PhD, have been able to work those arrangements out and get a rebate. Previously, you had to have receipts and acknowledgements from many years before, that were claimed years later but only if you had filled in Form B of requisition C-182 and got your child to stand on their head for 90 minutes without complaint; or the equivalent thereof. So more transparency and immediacy is a good thing.
But will parents ultimately pocket the rebate? Well, yes and no. Yes, in the sense that it is in effect a subsidy to the industry and so parents, especially those about to have children, will likely see benefits from increased supply of child care centres.
But, there is also a no. The problem is that a rebate such as this has different impacts on families with different incomes. If you have a very high income, you will probably pocket your $7,500 per child. If you have a moderate income, you’ll also do relatively well. But if you have a low income, you may not pay enough in tax for this to matter as much.
Consider a family with two children in child care and both parents working. Then, even if you have no other deductions, under current tax rates, you will need a combined family income of $86,000 before being able to claim the maximum deduction. Under the proposed tax cuts by both parties, that figure will be even higher.
What this means is that high income families are getting a larger subsidy for child care than lower income ones. So if you were a child care provider, where would you set up shop? The investment equation is pretty clear.
Personally, I am all for thinking about interventions in child care as there are a number of distortions that make the work-home choice biased (especially with regard to tax implications). However, any rebate through the tax system will reflect the fact that richer folk pay more taxes and so get a larger benefit. It would be better to subsidise child care places themselves. While there are plans for such things within Labor’s overall policy, it is important to remember that the rebate, on its own, doesn’t really do the job of targeting working families in need.
Joshua Gans is a professor of economics at Melbourne Business School, University of Melbourne and maintains a blog on these issues at economics.com.au.