Taxation and Labour Supply

Abstract

Cross country comparisons of lifecycle labour supplies show that female hours of market work are significantly lower in Australia than in other comparable OECD countries, notably, the US, UK and Sweden. This paper argues that an explanation can be found in the rate structure of the Australian family income tax system, in combination with a poorly developed and costly childcare sector. A detailed analysis of marginal and average tax rates shows how various policy instruments are used to set rates on the income of a second earner, typically the female partner, that reduce her net wage to a level that makes it difficult to finance childcare from the additional income. The system is also shown to be unfair. The paper proposes a return to a progressive individual income tax, with universal family benefits, together with the development of a high quality, education oriented, public sector childcare system.