HOW THE TAX SYSTEM CAN NARROW (OR WIDEN) THE GENDER GAP
WOMEN IN ECONOMICS NETWORK SEMINAR
NSW STATE LIBRARY, SYDNEY
7 SEPTEMBER 2018
I acknowledge the Gadigal people of the Eora Nation, and pay respects to their elders past and present. My thanks to Leonora Risse and Danielle Wood for your hard work establishing the Women in Economics Network. It’s an honour to be hosted by you today, and I’m looking forward to the inaugural Australian Gender Economics Workshop in Melbourne next February.
It’s not often that you speak on a topic that many people don’t even think is worth discussing. Earlier this year, Scott Morrison opined that ‘The tax system doesn’t discriminate by gender. It’s an absolutely ridiculous proposition.’ He went on to say ‘You know, you don’t get pink forms and blue forms to fill out your tax return… So it’s just a nonsense of an argument.’ The Centre for Independent Studies called the conversation ‘absurd’. The Australian Taxpayers’ Alliance said it amounted to ‘shamefully using women as political pawns’.
So, I feel I should start by explaining why we need to discuss gender and tax.
Yes, Virginia, there is a Gender Gap
The starting point is that there are still massive gender differences in Australia today. Women comprise just 26 percent of ASX200 board directors and 7 percent of ASX200 CEOs. There are more large companies run by men named John than by women.
Women make up just 28 percent of the judiciary. In federal parliament, women comprise only 32.4 percent of federal parliamentarians, ranking us 50th globally. A new analysis by Megan Hemming looks at the names of the current parliamentary seats. She finds that 92 are named after men, while just 15 are named after women (the remaining 43 are named after places and families).[i] Little wonder that 30 percent of girls believe their gender is a barrier to a political career (compared with 4 percent of boys).[ii] Among full-time workers, women earn 85 cents for every dollar earned by men.[iii] That’s like women working without pay for the first seven weeks of the year. The gender pay gap closed a little this year, but it’s still only a little smaller than it was two decades ago.
Women are twice as likely to be sexually harassed as men, and three times as likely to be a victim of intimate partner violence.[iv] Half of all mothers report experiencing discrimination while pregnant, on maternity leave, or after returning to work.[v] Women do 19 hours of unpaid housework each week, compared with 6 hours for men. In superannuation, women’s balances are half those of men. As Senator Jenny McAllister’s 2016 report put it, ‘A husband is not a retirement plan’.[vi]
Campaign groups have drawn attention to the ‘pink tax’, which sees women pay more for similar items. A study by the New York City Department of Consumer Affairs found that products for women or girls cost 7 percent more than comparable products for men and boys, with the largest differences emerging for personal care products and adult clothing.[vii] The study even found that girls’ toys are more expensive than boys’ toys. This is especially unfair given that girls get 26 percent less pocket money than boys.[viii]
If you’ve watched sport lately, you’ve probably watched men’s sport. Women’s sport accounts for just 7 percent of televised sports coverage in Australia, which helps explain why it attracts less sponsorship and pays lower salaries.[ix]
So if you think that Australia has more work to do on the path towards gender equality, then it seems strange that you would immediately rule out the possibility that the tax system could have any role to play on that journey.
Oddly, many of those who think that the tax system has nothing to do with gender equality do acknowledge that the tax system has an impact on poverty and inequality.
So in effect, they want to put a sign up at the door of the tax debate that says “Feminists, Keep Out! (Egalitarians Welcome)”.
How Taxes Affect Gender Inequality
The fact is, the tax system already exacerbates gender inequality in a number of important respects.
First, women tend to face higher effective marginal tax rates than men. Effective marginal tax rates combine the impact of income taxes and benefit withdrawal. In essence, they answer the question ‘if I earn one more dollar of wages, how much better off am I?’. If someone is in the 30 cent tax bracket, and faces a 30 percent phase-out of family benefits, then their effective marginal tax rate is 60 percent. In other words, for every dollar they earn, they are 40 cents better off.
One thing to immediately notice is that this is a higher effective marginal tax rate than someone in the top tax bracket. If you have a million-dollar income, you face a marginal tax rate of 47 percent (including the Medicare levy). But as Miranda Stewart and others have pointed out, women with children often face marginal tax rates of 70 or 80 percent.[x]
High effective marginal tax rates are not an accident. Analysis by Peter Whiteford shows that Australia’s social safety net is the most tightly targeted in the world. The upside of this is that a dollar spent through the Australian welfare system does more to reduce inequality than a dollar spent via the income support system of any other nation. But the way in which we achieve this is through a series of income tests (and sometimes asset tests). So the downside of targeting is high effective marginal tax rates.
Nowhere is this more true than with child care. Because women have traditionally done the majority of unpaid child care, child care subsidies have a strong impact on women’s labour force participation rates. That’s why Labor opposed the Abbott-Turnbull-Morrison Government’s recent changes to the system to introduce a means test and an activity test. A child care means test based on family income risks sending a message to women who are married to higher-earning men: ‘don’t bother re-entering the workforce, it’ll cost you more than you’ll earn’. That’s bad for productivity, bad for growth, and bad for equity. My colleague Amanda Rishworth has raised concerns that the Coalition’s child care changes may make it harder for many women to combine work and parenting.
Now, if women were less responsive to tax rates than men, then this might be less of a concern for policymakers. When I taught public finance, we would remind students that optimal taxation theory dictates that the most efficient taxes are those which have the least distortionary effect on productive behaviour. If women were less likely than men to withdraw from paid work in the face of high effective marginal tax rates, then policymakers could put the problem to one side.
Alas, the reverse appears to be true. According to a literature review by the Australian Treasury, women are significantly more responsive to tax rates than men. This is especially true among those who are married. On average, the research suggests that a 10 percentage point increase in effective marginal tax rates reduces married women’s labour force participation by 3 percent.[xi] The impact on married men is zero. Similar results can also be seen in other advanced countries. Raise the effective marginal tax rate on married women, and they drop out of the labour force in droves. Raise effective marginal tax rates on married men, and the effect is close to zero. This result has led economists Alberto Alesina, Andrea Ichino and Loukas Karabarbounis to argue that from the standpoint of optimal taxation theory, income tax rates should be lower on women than men.[xii] Before Scott Morrison’s head explodes, I should be clear that I am not making this proposal. My point is a different one: women are highly responsive to effective marginal tax rates, so if we want to encourage more women into work, we need to get the tax and transfer system right.
From a gender equity perspective, one thing that Australia has gotten right is to levy income taxes on an individual basis, rather than taxing the combined incomes of married couples. Like Canada, the Australian tax system was based on individual income from the outset, which means that lower-earning spouses face low marginal tax rates. By contrast, New Zealand and Britain began by taxing married couples joint income, and then moved back to individual filing. The United States still maintains a system of joint tax filing for spouses, creating what public finance economists romantically call a ‘marriage penalty’. By raising the marginal tax rate on the lower-earning member of the couple, joint filing tends to reduce female labour force participation – particularly for women who are married to high-earning men.
Second, the existing disparity between the earnings of men and women means that cuts to top tax rates disproportionately benefit men. We know from work by Hiau Joo Kee that the gender pay gap grows larger towards the top of the wage distribution.[xiii] For workers in the bottom tenth of the wage distribution, there is effectively no gender pay gap. For workers in the top tenth, the gender pay gap is 27 percentage points.
Analysis by Miranda Stewart, Sarah Voitchovsky and Roger Wilkins used 2013-14 tax office data to look at the gender composition of the top 10 percent of adults – those with individual incomes over $94,000. They found that just 26 percent of this group were women. This makes the Australian top 10 percent more male-dominated than in Spain, Denmark, Canada, New Zealand, Italy or the UK. [xiv] A similar story emerges from wealth holdings, with the richest 200 Australians being heavily male dominated.[xv]
Because high-income earners are mostly men, cutting top tax rates widens the gap in take-home pay between men and women. The Parliamentary Budget Office’s analysis of the personal income tax cuts announced in the 2018 budget found that package as a whole was skewed towards men. This was particularly true of the third phase of the package, due to commence in July 2024. Removing the 37 percent marginal tax rate (so that all income from $41,001 to $200,000 is taxed at a marginal rate of 32.5 percent) benefits men over women at a ratio of two to one, while increasing the lower threshold for the 45 percent marginal tax rate from $180,001 to $200,001 benefits men at a ratio of three to one.[xvi]
This parallels the impact of the cuts to services in the 2014 budget, which adversely affected women more than men.[xvii]
Third, men are significantly more likely to claim tax deductions than women. The average male taxpayer claims $3200 in deductions, while the average female taxpayer claims $1900, meaning that men deduct about two dollars for every dollar of tax deductions by women.[xviii] Women received 43 percent of the benefits of the capital gains tax discount and 38 percent of the benefits of negative gearing.[xix] Just 29 percent of the tax benefits of the dividend franking credit went to women.[xx]
But surely, I hear you say, I’m repeating myself. I’ve already noted that men’s average incomes are higher than women’s, so how can it be a surprise that men’s deductions are higher than women’s?
It turns out things aren’t so simple. Analysing a confidentialised sample of tax returns released by the tax office, Australian National University researcher Peter Varela explored what happened when you take account of observable differences in income, age, occupation and marital status.[xxi] Once we’re comparing married 60 year-old professionals who earn $200,000, do we still see a gap in deductions? The answer turns out to be yes. Varela finds a 12 percent deductions gap between men and women, equivalent to about $75. This suggests that measures to curtail tax deductions are likely to help close the gender pay gap.
Fourth, businesses owned by women tend to have lower turnover than businesses owned by men. Among unincorporated enterprises, the average profit received by women is half as much as the average profit received by men. Among incorporated enterprises, those run by women have on average two-thirds the income of those run by men.[xxii] This suggests that policies targeted towards small (or even micro) businesses may have a disproportionate impact on women entrepreneurs.
Fifth, consumption taxes may have a gender bias.[xxiii] The best-known example of this is the tax on tampons and sanitary pads – effectively a tax on women. When our GST laws were written in 1999, they were mostly drafted by male public servants, reporting to a male-dominated cabinet, in an overwhelmingly male parliament. As a result, tampons and pads were subject to a 10 percent GST. Yet incontinence pads, sunscreen and nicotine patches – even Viagra – are exempt from the tax. In the nearly two decades since the GST has been in operation, this decision has come to seem increasingly archaic.[xxiv]
More generally, because women tend to have lower incomes and lower savings rates, a tax mix switch that increased consumption taxes and decreased income or company taxes would effectively increase the tax burden on women.
A Feminist Tax Agenda
So, what principles should guide the taxation policies of a government that seeks to narrow the gender gap?
First, as the saying goes, ‘what gets measured gets done’. While I have benefited in this speech from a range of data produced by government agencies, thinktanks and universities, some statistics are frustratingly hard to find. Governments need to do better in producing gender-disaggregated data.
In 1984, the Hawke Government initiated the women’s budget statement, a document that continued to be produced through the subsequent Keating, Howard, Rudd and Gillard Governments. But when the Abbott Government won office in 2014, it ceased. From opposition, Labor has continued to produce a ‘shadow’ women’s budget statement. If we win government, we will restore this important piece of analysis.
We also need to do a better job of measuring gender gaps. Perhaps the most gendered survey carried out by the Australian Bureau of Statistics was the time use survey, which measures unpaid activities such as caring, housework and volunteering. When Australia conducted our first national time use survey in 1992, we were pioneers. But as Tanya Plibersek has pointed out, we haven’t done one since 2006 – before the iPhone launched. As the Australian National University’s Marian Sawer points out, ‘it was feminists who campaigned for national time-use surveys to measure the volume and distribution of unpaid work’. A Shorten Labor Government will fund the Australian Bureau of Statistics to conduct a time use survey in 2020 and 2027.
Second, we should maintain a progressive income tax. As Meredith Edwards and Miranda Stewart argue, ‘A progressive income tax on individuals with marginal rates that rise as income rises is important for women’s equality because women earn less than men… a progressive income tax is both efficient (taxing less responsive higher income earners more highly) and equitable, being based on ability to pay. The tax system operates in the context of gender-unequal workforce outcomes in both wages and hours, and with the lion’s share of part-time work done by women.’[xxv]
As Milton Friedman reminded us, to tax is to spend.[xxvi] Cutting the revenue base ultimately means cutting spending. Some kinds of spending go equally to men and women, but many kinds of expenditure reductions have a more adverse impact on women. These include Medicare cuts (because women are more likely to see a doctor), university cuts (because women are more likely to attend university), public service cuts (because women are more likely to work in public service jobs), and social service cuts (because women are more likely to be sole parents, carers and pensioners).
Third, we should close unjustified tax loopholes. When I studied graduate public finance, one of my lecturers was Martin Feldstein. Feldstein had chaired the Council of Economic Advisers for Ronald Reagan, and was not one of Harvard’s most progressive economists. But as you know, there’s a surprising amount you can learn from someone of a different ideological persuasion. I liked Feldstein’s style – a meld of maths and war stories. One of the points he made is that ‘tax expenditures’ had proliferated in the US, and that ‘Congress should review these tax expenditures and eliminate those that the country cannot afford.’ Reducing tax expenditures, Feldstein points out, raises revenue more efficiently than increasing tax rates. In economic jargon, closing loopholes has a lower deadweight loss than raising rates. In addition, tax expenditures tend to be much less fair than budgetary expenditures. So closing loopholes is more equitable than cutting spending.
That approach has informed Labor’s tax philosophy over recent years, as our economic team has made a number of politically tough decisions to close tax loopholes. We will prospectively restrict negative gearing to newly built homes, ensuring that the tax concession helps add to housing supply. We will prospectively halve the capital gains tax discount from 50 percent to 25 percent. To address unfair income-splitting, trust distributions to adult beneficiaries will attract a minimum tax rate of 30 percent. We will end the unique situation of Australia being the only country in the world to provide cash refunds of dividend imputation credits for people who have paid no tax. In the company tax system, we will prevent multinationals using excessive debt deductions to unfairly lower their tax bill. From a gender perspective, the result is similar to maintaining a healthily progressive income tax system: we ensure that government is funded by those with the ability to do so, and has the resources it needs to run the programs the community supports.
Fourth, we should reject attempts to switch the tax mix on to consumption. After becoming Treasurer, Scott Morrison spent summer 2015-16 toying with the idea of raising the GST, an idea long championed by right-wing lobby groups. To do so would be to systematically disadvantage Australian women, given the regressive nature of consumption taxes. That said, I’m not aware of any definitive study of the scale of this impact. So if any junior researcher in the room is looking for a new topic, a gender analysis of increasing consumption taxes is sure to be heavily cited when the next ‘raise the GST’ campaign rears its ugly head.
We can also improve the gender equity of the GST by exempting tampons and pads. This was an idea briefly floated by then Treasurer Joe Hockey in 2015. Unfortunately, Hockey was unable to identify an alternative source of revenue for the states and territories. The GST legislation requires that any changes to the tax be supported by all states and territories, and Hockey’s proposal to simply exempt sanitary items failed to win universal support.
Labor’s proposal, announced this year by Bill Shorten, Tanya Plibersek and Catherine King, is to replace the $30 million currently raised by taxing sanitary products by applying GST to 12 natural therapies that are not supported by scientific evidence, such as herbalism and naturopathy. The proposal has received support from the Premiers of Victoria, Queensland and WA, the Chief Ministers of the ACT and the NT, and Labor leaders in NSW, SA and Tasmania. In axing the tampon tax, Australia would be following jurisdictions such as Canada, New York, Illinois and Florida, which have removed the sales tax on sanitary products. We estimate that over a lifetime, our decision would save the typical woman around $1000.
Fifth, while my focus today is on women and taxation, it would be remiss not to touch on some other economic policies that will improve gender equality.[xxvii]
- Preserving the Education Entry Payment, an annual $208 payment to assist certain social security recipients with the cost of education. Recipients are overwhelmingly women studying so they can enter the workforce, often after their caring responsibilities cease.
- Restoring weekend penalty rates. Women comprise a majority of the Sunday retail, accommodation and food service workforce. Penalty rate cuts, costing low-paid workers up to $1378 each year, have the effect of widening the gender pay gap.
- Supporting ten days paid domestic violence leave, allowing women to attend court, see a counsellor, or find a new place to live
- Investing to build a Reproductive Health Hub in Hobart, providing surgical terminations as part of the public hospital system, so Tasmanian women no longer have to travel interstate or pay huge out of pocket fees to access surgical abortions
- Introducing gender impact assessment for all new policies, and working with government departments to set and report on gender indicators across portfolio areas
Good policies for women are more likely to emerge when there are more women in the room. Women now comprise 46.3 percent of Labor’s federal representatives, about twice the share of the Liberal Party (23.5 percent). Just 9.5 percent of National Party parliamentarians are women. No political party is perfect, but when Julia Banks last week announced that ‘bullying and intimidation’ had led her to retire from politics after just one term, I couldn’t help thinking that the bad behaviour was partly a function of the Liberals having fewer women in the party room now than in 1998.[xxviii]
Labor’s affirmative action policies were controversial in the 1990s, but I can honestly say that after eight years in politics, no-one has ever suggested to me that the women in the Labor caucus are any less talented than their male counterparts. Given that the Liberal Party has failed to increase the share of women in federal parliament over a twenty year period, perhaps they should grit their teeth and try the approach that has worked for us. My guess is that the sky wouldn’t fall in on Menzies House, and our parliament would be a better debating chamber than it is today.
We also need to think about the role of women in key economic roles. As Chris Bowen pointed out last year, Australia has had a female Prime Minister and a female Governor-General. Every state bar one has had a female Premier, and we now have a female Chief Justice. Yet ‘We have never had a female secretary to the Treasury. Or a female Reserve Bank governor. Or deputy governor. Or female chair of the ACCC. Or APRA. Or ASIC. Or the Future Fund. Or the Productivity Commission.’[xxix] We need to change that.
In our discussion today of deadweight costs, labour supply elasticities and feminism, I hope I have persuaded you that the topic of taxation and gender is far from ‘absurd’. Plenty of thoughtful scholars, including Miranda Stewart, Guyonne Kalb, Meredith Edwards, Maria Raccionero, Sarah Voitchovsky and Pamela Katic have explored these issues, and I have learned a great deal from their work.
Once you accept that the conversation about tax and gender is worth having, a few implications follow. High effective marginal tax rates make it harder to combine a fulfilling career with raising a family, so we need to ensure that our transfer system and child care policies do not throw up unnecessary barriers. Making the income tax system less progressive will widen the gender gap, while closing unnecessary tax loopholes will tend to narrow it. Similarly, higher consumption taxes have a more adverse effect on women than on men.
Gender gaps in Australia remain significant, and if we want our sons and daughters to grow up in a more equal world, it isn’t enough to just focus on how government spends money – we also have to look at how it raises revenue.
Authorised by Noah Carroll, ALP, Canberra.
[i] See also Kim Rubenstein and Katrina Hall, ‘Time to Update the Electorate Guidelines’, Canberra Times (September 3, 2018).
[v] Australian Human Rights Commission, Supporting Working Parents: Pregnancy and Return to Work National Review, (October 31, 2014).
[vi] Senate Economics References Committee, A husband is not a retirement plan' Achieving economic security for women in retirement, (April, 2016).
[vii] Anna Bessendorf, From Cradle to Cane: The Cost of being a Female Consumer: A Study of Gender pricing in New York City, (December, 2015).
[x] Miranda Stewart, ‘Gender Inequality in Australia’s tax-transfer system’, in Tax, Social Policy and Gender: Rethinking Equality and Efficiency, edited by Miranda Stewart, ANU Press, (2017), 1-34.
[xi] The mean uncompensated wage elasticities of labour supply are estimated to be 0.34 for single women, 0.28 for single men, 0.30 for married women, and 0.00 for married men. See Sandra Dandie and Joseph Mercante, ‘Australian Labour Supply Elasticities: Comparison and Critical Review’, Treasury Working Paper 2007-04 (October, 2007).
[xii] Alberto Alesina, Andrea Ichino, and Loukas Karabarbounis. 2011. ‘Gender-Based Taxation and the Division of Family Chores.’ American Economic Journal: Economic Policy, 3 (2): 1-40.
[xiii] Joo Hiau Kee, ‘Glass Ceiling or Sticky Floor? Exploring the Australian Gender Pay Gap’, Economic Record, 82(259):408-427, (December, 2006).
[xiv] Miranda Stewart, Sarach Voitchovsky and Roger Wilkins, ‘Women and top incomes in Australia’, in Tax, Social Policy and Gender: Rethinking Equality and Efficiency, edited by Miranda Stewart, ANU Press, (2017), 257-292.
[xv] Pamela Katic and Andrew Leigh, ‘Top Wealth Shares in Australia 1915–2012’, Review of Income and Wealth, 62:2, 209-222, (January, 2015).
[xvi] Parliamentary Budget Office, ‘Publicly released costings or budget analyses outside the caretaker period’,
Personal Income Tax Plan, Advice provided to Senator Ketter, Senate Economics Legislation and References Committees, Partial response 1 of 2 released: 5 June 2018.
[xviii] Peter Varela, ‘A gender deduction gap’, Working paper 4/2017, ANU TTPI, ANU, Canberra (2017).
[xix] Parliamentary Library analysis, based on data from the 2015-16 tax year.
[xx] Kathleen Lahey, ‘Australian tax-transfer policies and taxing for gender equality: Comparative perspectives and reform options’, in Tax, Social Policy and Gender: Rethinking Equality and Efficiency, edited by Miranda Stewart, ANU Press, (2017), 35-68.
[xxi] Peter Varela, ‘A gender deduction gap’, Working paper 4/2017, ANU TTPI, ANU, Canberra (2017).
[xxii] The average profit received by women unincorporated business owners in 2011 was $22,000, compared with $46,280 by men. Among incorporated enterprises, average incomes were $51,900 for women and $75,400 for men. See Kathleen Lahey, ‘Australian tax-transfer policies and taxing for gender equality: Comparative perspectives and reform options’, in Tax, Social Policy and Gender: Rethinking Equality and Efficiency, edited by Miranda Stewart, ANU Press, (2017), 35-68.
[xxiii] Kathleen Lahey, ‘Australian tax-transfer policies and taxing for gender equality: Comparative perspectives and reform options’, in Tax, Social Policy and Gender: Rethinking Equality and Efficiency, edited by Miranda Stewart, ANU Press, (2017), 35-68.
[xxiv] Not every expert on gender and taxation takes this view. For example, Melbourne University’s Miranda Stewart has argued ‘We would be better off building the strength of our GST – by broadening the base – and also strengthening our income tax base, to ensure that we pay for services such as childcare and public education’: cited in Jessica Irvine, ‘Why you should keep paying the tampon tax’, Sydney Morning Herald, 18 June 2018.
[xxv] Meredith Edwards and Miranda Stewart, ‘Pathways and processes towards a gender equality policy’, in Tax, Social Policy and Gender: Rethinking Equality and Efficiency, edited by Miranda Stewart, ANU Press, (2017), 325-348.
[xxvi] Friedman reversed the words, but the point remains the same.
[xxviii] ABC RMIT Fact Check, Fact check: Is the level of Liberal women in Parliament lower now than it was in 1996?, (12 July, 2018).