2.3.5  Case Five: A Two-Income Couple With Two Children

Figures 18 and 19 show EMTR profiles and budget constraints of a person with two children (aged six and nine) and a working partner based upon the family’s combined income and the different sources of this income (market incomes earned by both parents and Family Assistance and welfare payments). Figure 18 is based on an assumed wage rate of $10 per hour and figure 19 is based on an assumed wage rate of $15 per hour. In both cases it is assumed that the working partner has an unchanging gross market income of $11,500. Net family incomes are shown on the vertical axis at the left of the figure. EMTRs are shown on the vertical axis at the right of the figure. Hours of work are shown on the horizontal axis of the figure. The extent that personal income taxes reduce gross total family income is also shown in the figures. Vertical lines in the diagrams indicate the hour levels corresponding to personal income tax thresholds applying to the market income of the spouse whose hours vary. However, for couples the thresholds applying to personal income tax rates on total individual gross income are not necessarily equivalent to these lines. This is because total individual income for tax purposes includes both individual market income and one half of the family’s gross benefit income.

Figures 20 and 21 show the frequency distributions of the hours of work of individuals who are members of two-income couples with two or more children. These figures exclude those people with zero hours of work. Given that there are likely to be few observations of particular family types at certain wage rates, wage bands (of below and above median wages for particular demographic groups) have been used to calculate the frequency distributions of hours of work. Figure 20 shows the distribution of hours of work for those people receiving wage rates up to and including the median wage rate for this demographic group. Figure 21 shows the distribution of hours of work for people receiving wage rates above the median wage rate for this demographic group. The median wage is calculated as the median wage of all those people in couples (including primary and secondary earners) who receive market income. The median wage for this demographic group is $16.04 per hour. As the median wage differs from the wage rates assumed in the calculation of EMTR profiles and budget constraints, some variance in the distribution of hours of work and the distribution of incentives would be likely to arise.

The net Unemployment Benefit abates at a rate of 70% against increases in gross non-benefit family income above $80 per week ($4,160 per annum).

As the working partner earns $11,500 the family non-benefit income is already greater than $80 per week when the person for whom the profile is drawn begins to earn market income. This person thus immediately faces Unemployment Benefit abatement on non-benefit earnings. In a couple, the personal income tax rate on benefit income for each individual is calculated on the basis of half of the family’s total benefit income. The marginal income tax rate applying to the benefit income is thus 15%. While the person’s total income (market income plus half the family’s benefit income) is under $9,500 (until approximately 12 hours of work at $10 per hour and approximately 8 hours of work at $15 per hour) the marginal tax rate on the total income is also 15%. Thus when the person works for one hour the gross benefit abatement is 0.824 (given by 0.7 / (1 – 0.15)), the change in gross income equals 0.176 (given by 1 – 0.824), the change in disposable income equals 0.138 (given by (0.176 (1 - 0.15) – 0.012), and the EMTR equals 0.862 (given by 1 – 0.138). (The method for calculating EMTRs is explained in appendix 3.)

This EMTR of 86.2% continues until the person’s total income increases to above $9,500 and the marginal tax rate on total income increases to 21% (the marginal tax rate on benefit income remains at 15%, however). Thus when this person works for one additional hour the gross benefit abatement is 0.824 (given by 0.7 / (1 – 0.15)), the change in gross income equals 0.176 (given by 1 – 0.824), the change in disposable income equals 0.127 (given by 0.176 (1 - 0.21) – 0.012), and the EMTR equals 0.873 (given by 1 – 0.127).

This EMTR continues until the combined family gross income equals $20,000, at which point the Family Support programme begins to abate. Between $20,000 and $27,000 the Family Support abatement rate is 18%. The abatement of Family Support is this abatement rate multiplied by the change in gross income. The Family Support abatement is thus 0.032 (given by 0.176 x 0.18) and the EMTR is thus 90.4%.

The 90.4% EMTR continues until the point at which the benefit is abated. The higher the hourly wage the person receives the sooner this point is reached. When the benefit is fully abated the family begins to receive the Child Tax Credit. This payment is added together with the Family Support Tax Credit and it is this total figure that abates. As the family is no longer receiving the Unemployment Benefit the abatement of the benefit no longer reduces gross non-benefit earnings. Thus abatement of the Family Assistance programmes increases to 18% and the EMTR increases to 40.2% (given by 0.18 + 0.21 + 0.012).

This EMTR continues until the gross family income increases to $27,000, at which point the Family Assistance abatement rate increases to 30%. At this point the EMTR increases to 52.2%. The EMTR remains at this level until the family’s entitlement to the Family Assistance programmes is fully abated. When these programme are fully abated the EMTR drops to 22.2%, a level that it remains at until the primary income earner’s income increases to $38,000 and the EMTR increases to 34.2%.

A person in a couple with two children receiving the Unemployment Benefit has little incentive to undertake part-time work if his or her partner has a fixed income of $11,500. At around 26 hours of work at a wage rate of $10 per hour (or at 17 hours at a wage rate of $15 per hour) the benefit is fully abated and the family receives the Child Tax Credit. There is thus a reduction in the disincentive to supply labour above this point (although this is weakened by the abatement of the Family Support and Child Tax Credits).

As the median wage differs from the wage rates assumed in the calculation of EMTR profiles and budget constraints, some variance in the measured distribution of hours of work and the measured distribution of incentives would be expected. In spite of this, however, the financial incentives from social assistance programmes do appear to play an important role in influencing the frequency distribution of hours of work of different demographic groups.

The frequency distribution of hours of work for two-income couples with two children and two incomes and hourly wages equal to or below the median for the demographic group ($16.04) demonstrates a small mode at around 25 hours and a larger mode at around 45 hours. For these families the small mode at around 25 hours reflects the change in the slope of the budget constraint when the Unemployment Benefit becomes fully abated and the family becomes eligible for the Child Tax Credit. The larger mode at around 45 hours is above the abatement of the Unemployment Benefit and thus is more likely to be influenced by the personal income tax scale, Low Income Earner Rebate, and abatement of the Family Assistance programmes. Large proportions of people in this demographic group work around 25 hours per week or above and thus do not face the relatively high EMTRs that arise below this point due to the abatement of the Unemployment Benefit.

As was the case for those couples with two incomes and two children and hourly wages below or equal to the median for the demographic group ($16.04), the frequency distribution of hours for couples with hourly wages above the median demonstrates a mode at around the 45 hour point. This mode is above the abatement of the Unemployment Benefit and is thus more likely to be influenced by the personal income tax scale, Low Income Earner Rebate, and abatement of the Family Assistance programmes. Large proportions of people in this demographic group work around 20 hours per week and above and thus do not face the relatively high EMTRs that arise below this point due to the abatement of the Unemployment Benefit.

Overall, few people seem to locate in the abatement-free zone for the Unemployment Benefit, but there may be a large number of people at zero hours of work who could nevertheless be affected by any change to this zone. The lower the hourly wage the greater the significance of the abatement of the benefit and the abatement-free zone for financial incentives. Large proportions of people in this demographic group face incentives that arise from the personal income tax scale, Low Income Earner Rebate, and abatement of the Family Assistance programmes.

In comparison to other family types, the numbers of individuals in both distributions of working couples with two children are relatively large. Significant numbers of individuals in working couples with two children who work do so for between 40 and 60 hours per week.

Figure 18: EMTR Schedule and Budget Constraint of a Person with a Working Spouse and Two Children (under 13) and with a Wage Rate of $10 Per Hour

Figure 19: EMTR Schedule and Budget Constraint of a Person with a Working Spouse and Two Children (under 13) and with a Wage Rate of $15 Per Hour

Figure 20: Frequency Distribution of Hours of Work of People with a Working Spouse and Two or More Children (Wages up to and including Median ($16.04) for Group)

Figure 21: Frequency Distribution of Hours of Work of People with a Working Spouse and Two or More Children (Wages over Median ($16.04) for Group)