Policy Research Paper No 29

The Social Security Review
Background/Discussion Paper No.5
Issues in Assistance for Families

Horizontal and Vertical
Equity Considerations
Social Security Review

Department of Social Security
PO Box 1
WODEN ACT 2606
Issues in Assistance for Families
Horizontal and Vertical Equity
Considerations
Peter Whiteford
Research Paper No.29

Research and Statistics Branch
Development Division
Department of Social Security
August 1986
This series of background and discussion papers incorporates
work undertaken as part of the Social Security Review.
The papers are intended to provide background research and
other information which will form the basis for discussion and
consideration of various available options for reforming the
social security system.
The views expressed in these papers are those of individual
authors and are not necessarily those of the Social Security
Review, the Department of Social Security or the Minister for
Social Security.
The author of this paper is PETER WHITEFORD formerly of the
Policy Review and Co-ordination Branch of the Development
Division, and currently at the Social Welfare Research Centre
at the University of New South Wales. An earlier version of
this paper was presented at the Social Welfare Research Centre
in November 1985.
This paper builds on previous work carried out in the

Development Division. I am particularly grateful for the
assistance provided by Jim Moore. Ann Harding, Alan Jordan,
Carol Oxley and Frankie Seymour have also contributed
significantly. Special thanks also to Deborah Atkinson for
word processing. Helpful comments have been received from
other officers of the Development Division. I alone am
responsible for any errors, and the views expressed are my own.
ISBN 0 642 51636

ISSUES IN ASSISTANCE FOR FAMILIES -
HORIZONTAL AND VERTICAL EQUITY CONSIDERATIONS
Peter Whiteford
SUMMARY
The Australian system of income support for families with

children covers 2.5 million families with 4.3 million children
and is therefore of crucial significance to the welfare of
Australian families. This paper describes the main features of
family income support programs and identifies current
concerns. The programs analysed include family allowances,
which is the major form of income support for all families,
income support arrangements for pensioners and beneficiaries
with children, and various forms of tax relief for taxpayers
with dependants.
The paper argues that tax and social security programs should
not be thought of as inherently different measures covering
different groups, with social security being some sort of
residual system. Social security payments like taxation
allowances are simply policy instruments to achieve certain
goals. Common perceptions that social security increases are a
burden to the community, while tax reductions are a benefit,
disguise the essential similarity of the effects of these
programs, and can lead to inappropriate policy conclusions. In
particular, when tax cuts or increases in tax rebates are being
proposed, consideration should also be given to increases in
social security payments, so that people with children do not
fall behind in relation to those without children.
The paper looks in detail at the example of family allowances.
Until 1976 most taxpaying families received tax deductions or
rebates for their children, as well as smaller child endowment
payments. The lowest income groups, who paid no tax. only
benefited from the small child endowment payments. Now in
contrast, all payments are at the same level irrespective of
income and the payment goes to the person with the major
responsibility for caring for children - the mother. Thus
rather than being a welfare measure that goes to the rich,
family allowances can be considered as a general tax measure
that provides additional assistance to the neediest.
The major concern that can be expressed with current
arrangements is with the level of support provided. The paper
argues that by any standards, support for families in general
and for low income families in particular is inadequate.
Assistance for average income families is low by international
standards. In 1978 Australia provided the fourth lowest
relative level of assistance for average families of 19 OECD
countries. In 1982. even after family allowances had been
increased by 50 per cent, this ranking had dropped to second
lowest of 21 OECD countries.
Concern with low income families has been prompted by the
increasing number of children for whom income-tested payments
are made, increasing from 370,000 in 1976 to nearly 855.000 in
1985. or from 8.6 per cent of children to 19.8 per cent. While
some of this increase comes from positive government actions to
extend assistance to needy groups, there are now more than
100.000 children in Australia whose parents have been
unemployed for than a year, and more than 300.000 children
whose parents have been reliant on sole parent pensions for
more than a year.
Moreover, a wide range of Australian and international research
on the costs of children suggests that the allowances for
children of pensioners and beneficiaries are relatively low.
Currently, additional pension/benefit plus family allowances
for one child amounts to 12 per cent of the married rate of
pension or benefit. Australian research suggests that the
appropriate relative payment should be 16 per cent ($7 p.w.
more), overseas research suggests the figure should be 20
per cent ($14 p.w. more), while the OECD suggests a figure of
29 per cent ($30 p.w. more). In addition, this research
suggests that the direct costs of children at least double
between infancy and being a teenager. This increase in costs
is recognised very imperfectly by the current structure of
family allowances.
Finally, analysis of trends over time in the real value of
family income security programs shows significant declines in
assistance over the past decade. Family allowances are now
29 per cent lower in real terms than in 1976. and despite
substantial increases in the last three budgets, additional
pension/benefit is still 4 per cent lower than in 1976 and
mother's/guardian's allowance is 19 per cent lower. As a
consequence of these and other trends, the real value of total
social security payments for all sole parent pensioners and
pensioner/beneficiary couples with four or more children is now
less than in 1976. In contrast, the real value of the
after-tax incomes of most wage and salary earners is greater
now than in 1976, although with the exception of Family Income
Supplement recipients the increases are smaller for larger
families. Thus, these trends would have tended to widen the
gaps between the incomes of families with and without children
and in particular between the poorest families and the rest of
the community.
The paper also discusses arguments for universality and
selectivity in family assistance programs. The major argument
for income-testing of family allowances and/or tax rebates is
that at times of tight budgetary restraints, this is the only
practical means of increasing assistance for low income
families. This argument has some force, but a number of
contrary points can be made. First, the suggestion that family
allowances should be income-tested is based on the idea that
all payments from the Department of Social Security should be
restricted to the poor. This overlooks the fact referred to
earlier that in essence family allowances ace a general tax
measure. Those families who lost their family allowance
entitlement would effectively have their tax burden increased
even though there would appear to be no reason why only those
with children should pay more.
Finally, the paper asks whether or not current family
assistance programs are progressive (ie. provide greater
benefit to lower income families). The findings include:
nearly 50 per cent of current spending on total family
income support (on both universal and income-tested
payments) goes to the 20 per cent of families with the
lowest incomes;
the benefits of family allowances are distributed over
the life-cycle, from periods when people do not have
children to care for, to periods when they must meet
the additional costs of child rearing; and
both child payments and some forms of tax relief
increase the disposable income of families with
children. recognising the greater needs of those
families at all income levels.
ISSUES IN ASSISTANCE FOR FAMILIES
HORIZONTAL AND VERTICAL EQUITY CONSIDERATIONS
PETER WHITEFORD
(ii)
"The effects of a tax depend upon what it is.

not what it is meant to be ..."
R A MUSGRAVE, 1959. V.
(iii)
CONTENTS
PAGE
1. INTRODUCTION - THE SOCIAL SECURITY REVIEW 1
2. THE INTERACTION OF THE TAXATION

AND SOCIAL SECURITY SYSTEMS 4
2.1. Current provisions affecting families 4

2.2. Parallels and overlaps - the tax-transfer
system 8
2.3. Perceptions and presentational issues 17
3. OBJECTIVES OF FAMILY ASSISTANCE 22
3.1. Ability-to-pay and horizontal and vertical

equity in the tax system 22
3.2. Criteria for evaluating social security
policies 24
3.3. Private choice and public support 27
4. CURRENT CONCERNS 31
4.1. Adequacy of payments 31

4.2. Family assistance and social change 36
4.3. Universal or selective support 43
5. SUMMARY AND CONCLUSIONS - RESEARCH QUESTIONS

IN FAMILY INCOME SUPPORT 48
BIBLIOGRAPHY 52
1. INTRODUCTION - THE SOCIAL SECURITY REVIEW
In November 1985 the Minister for Social Security, the Hon.

Brian Howe M.P.. announced the establishment of a two-year
review of aspects of the Australian social security system.
This Review is to be conducted by Professor Bettina Cass,
seconded from the Social Work Department of the University of
Sydney, and by the Development Division of the Department of
Social Security.
In a paper for a seminar on Income Distribution. Taxation and
Social Security: Issues of Current Concern held at the Social
Welfare Research Centre in November 1985. Professor Cass
discussed the case for the review, pointing out the major
economic, social and demographic changes that have occurred
over the past decade and which have significant implications
for the social security system. These changes include the
rapid increases in the rate and duration of unemployment,
changes in the distribution of unemployment, an increase in the
number of sole parent families, the large increase in the
number of families with children dependent on pension or
benefit, and changes in the composition of the population in
poverty as defined by the Henderson poverty line (Cass, 1986,
pp. 6-10).
The Social Security Review is to examine the following areas:
Coverage: Is existing coverage appropriate? Are the
boundaries of historically established categories of
eligibility still relevant? Are all socially recognised
needs included?
Adequacy: Are existing payment levels adequate in view of
recipients' varying needs and circumstances?
Targeting: Are existing programs targeted effectively?
Is there a case for targeting new programs and additional
payments more closely on the most vulnerable groups in the
population? What are the most equitable and efficient
means of targeting income security programs? What are the
social and economic costs of targeting mechanisms?
Redistribution of income: Does the income maintenance
system, in conjunction with other programs, facilitate more
equal access to income and opportunities?
Opportunities for employment, earning income and saving:
What are the effects of income maintenance programs on
people's aspirations and opportunities to become
self-supporting?
Simplicity and access: Can the system be readily
understood and does it facilitate people's access to their
entitlement? Can it be administered fairly and effectively?
The mix of public and private income support for the aged
and retired: What are the most equitable combinations of
insurance-based retirement programs, private savings and
Page 1
income security measures which will provide comprehensive
and adequate support for aged people in various
circumstances?
Community awareness: Is there widespread understanding of
the central role of the social security system in
redistributing income and opportunities for participation
in society? This is a particularly important issue, bound
up with the necessity to scrutinise and reject the view
that social security recipients constitute a separate and
distinct category from taxpayers. Not only is there
considerable overlap and continuity at any one time and
over any single year between beneficiaries and taxpayers
(bringing into question the distinction between the
"supporters" and the "supported") but a longer view
illuminates continuities over the life-cycle (Cass. 1986.
pp. 10-11).
The Review will focus on three main areas - income support
policies for families with children, social security policies
and workforce participation in relation to the unemployed, sole
parents and disabled people, and the connections between social
security and insurance-based income support measures for the
aged, notably superannuation.
The key issues identified in the area of income support for
families include the income support needs of children in all
families (both single and two parent), the question of whether
and how increased assistance for children should be targeted
towards families within particular categories of need, and the
determination of the relative merits of cash payments and
taxation assistance in child income support. The Review will
also examine the most appropriate and adequate mix of support
for families, taking into account income-tested payments for
the parent, the range of universal and targeted transfers for
children. and the role of child maintenance payments in
increasing the overall adequacy of the income of sole parent
families. Finally, the question of beneficiaries' transition
to workforce participation will be explored, so as to identify
programs which might facilitate such participation (Cass,
1986. pp. 11-12).
The purpose of this paper is to provide a preliminary
discussion of issues relevant to the review of family income
support.
The first part of the paper describes the major features of the
personal income tax and social security systems in Australia,
discussing the parallels between the two systems and analysing
their interaction.
The paper then discusses the traditional criteria of equity,
efficiency and simplicity, concentrating on the issue of
horizontal equity - the concern that people in like
circumstances should be treated alike - and discusses what this
implies for the treatment of families within the tax-transfer
system.
Page 2
The paper reviews a number of important measures - family
allowances, the dependent spouse rebate, and income-tested
social security payments for families with children - and
raises a number of often expressed concerns with these
arrangements. Major concerns with current programs include the
inadequacy of assistance to low income families with children,
the cost of providing universal assistance to families
regardless of their income, questions of the relevance of the
assumptions underlying these programs to contemporary family
arrangements, the effects of these programs on incentives to
work. and the appropriateness of the structure of these
programs. The paper concludes with a brief discussion of
issues that might be considered to require further research and
analysis in the review.
Some limitations of the scope of this paper should be noted.
The paper concentrates on the role and objectives of certain of
the structural features of the personal income taxation and
social security systems. Cash transfers paid by the Department
of Veterans' Affairs are not discussed, nor are important
services such as the provision of child care. The paper does
not deal in detail with the complex and important issues of
social security assistance to sole parent families which will
be addressed as part of the review. In a paper dealing with
horizontal equity, it is virtually impossible to avoid the
issue of the appropriate unit for taxation and social security
purposes, but in this paper that important issue is approached
indirectly rather than explicitly. Finally, in discussing the
concept of "need", the paper concentrates on the relative needs
of different types of families or income units rather than the
fundamental issue of determining needs in relation to some
concept of poverty.
Page 3
2. THE INTERACTION OF THE TAXATION AND SOCIAL SECURITY SYSTEMS
2.1 Current provisions affecting families
The activities of Government have a profound influence on the
distribution of income in Australian society.
Governments use a wide range of measures to influence the
distribution of income and economic well-being. An almost
certainly incomplete list of such policies would include
centralised wage fixing, tariff and other forms of
protection. immigration controls. foreign investment
review, business regulation, capital market controls, free
tertiary education, a whole host of policies to support
home ownership, agricultural policy, and attempted
equalisation between States in the standards of public
services on the basis of the reports of the Commonwealth
Grants Commission (Centre of Policy studies, 1985.
pp. 13-14).
The two key instruments of distributional policy, however, are
the taxation and social security systems. The taxation and
social security systems are of particular significance, first
because of the scope of these two systems and the number of
people affected by them, and second, because taxation and
social security policies are usually regarded as serving
explicit distributional goals. One of the most important
aspects of these distributional objectives is to promote the
well-being of families.
Directly and indirectly, the Government promotes the welfare of
all Australian families through a range of social security and
taxation measures. Programs specifically directed towards
persons with responsibility for children include:
The dependent spouse tax rebate (DSR) which is available to
taxpayers with a financially dependent spouse, with a
higher rate being payable to persons with one or more
children.
The sole parent rebate (SPR). for sole parent taxpayers
with dependent children.
Family allowances, a non-income-tested, non-taxable payment
to all families with eligible children.
Multiple birth payments, a non-income-tested, non-taxable
supplement to family allowances, payable to parents of
triplets and quadruplets (and higher multiples) until the
children reach six years of age.
Handicapped child's allowance. a supplement to family
allowances paid to a parent or guardian of a mentally or
physically handicapped child or dependent student.
Double orphan's pension, which may be paid to a guardian or
institution caring for an orphan.
Page 4
Additional pension or benefit for children. an
income-tested. non-taxable payment to social security
pensioners and beneficiaries with eligible children.
Family income supplement (FIS). an income-tested,
non-taxable payment similar to additional pension or
benefit for children but paid to low income, non-pensioner
or non-beneficiary families with eligible children.
Sole parent pensions, which include supporting parent's
benefit and Class A widow's pension for single persons with
children.
Mother's/gauardian's allowance. an income-tested.
non-taxable supplement for sole parent pensioners and
beneficiaries.
Additional allowances in respect of children of recipients
of zone rebates and remote area allowances, a tax rebate
and social security payment respectively for persons living
in certain remote areas.
Details of these programs are summarised in Table 1.
Apart from these programs specifically directed towards persons
with responsibility for children, there is a wide range of
additional programs whose rationale or structure reflects other
aspects of family composition and which necessarily have a
major impact on the well-being of different types of families.
These programs include:
Age and invalid pensions, which are paid either at the
"standard" rate to single persons or the "married" rate to
each of an eligible couple. The single rate is 60 per cent
of the combined married rate in recognition of the
economies of household sharing.
Wife's pension, which may be paid to the wife of an age or
invalid pensioner if she is not eligible for a pension in
her own right.
Carer's pension, which is payable to people providing long
term care for a spouse or a near relative who is a severely
handicapped age or invalid pensioner, when the carer is not
in receipt of age or invalid pension in his or her own
right.
Class B widow's pension, which is payable to certain older
"single" women who do not or no longer have dependent
children.
Unemployment, sickness and special benefit, which is paid
at the same rate as the combined rate of pension to persons
with spouses. Benefit payments differ from those for
pensioners, as beneficiaries generally receive the entire
amount in one hand, whereas payments for pensioners are
split between the spouses.
Page 5
TABLE 1 : PROVISIONS FOR FAMILIES IN THE TAXATION AND SOCIAL SECURITY SYSTEMS
PROVISION ELIGIBLE GROUP LEVEL OF ASSISTANCE NO OF RECIPIENTS COST INCOME TAXED

( at May 1986) (at 30 June 1985) (1984-85) TESTED
Dependent Taxpayers with a

Spouse Daughter/ financially dependent
Housekeeper Rebate spouse, with and
- with children without dependent $1,030 per year 756, 000 (a) $686m(a) No(b) N.A.
- without children children. $ 830 per year 406, 000(a) $248m(a) No(b) N.A.
Sole Parent Rebate Sole parent taxpayers. $ 780 per year 112,000 (a) $ 77m(a) No(b) N.A.
Family Allowances Parent, guardian or $ 22.80 per month - 1 child 782,000 families
institution with custody $ 55.35 per month - 2 children 883,000 families
or care of children under $ 94.35 per month - 3 children 386,000 families $l,506m No No
16 years, dependent $133.35 per month - 4 children 107,000 families
student 16 and 17 years, $ 45.55 per month - each
dependent student additional child TOTAL
18 to 24 years in 2,191,000 families
disadvantaged families.
Multiple Birth Parents or guardians $150 per month - triplets 183(c) $0.3m(c) No No
Payments with triplets, $200 per month - quadruplets 5(c)
quadruplets or higher and higher
multiples aged under
6 years.
Additional Pension Pensioners with $ 16 per week per child 294,900 families $350m Yes No
for Children dependent children. 519,400 children
Additional Benefit Beneficiaries with $ 16 per week per child 117,900 families $185m Yes No
for Children dependent children. 259,800 children
Family Income Low income, non- $ 16 per week per child 26,400 families $41m Yes No
Supplement pensioner/non-beneficiary 74,900 children
families with
dependent children.
TABLE 1 (CONT) :
PROVISION ELIGIBLE GROUP LEVEL OF ASSISTANCE NO OF RECIPIENTS COST INCOME TAXED

( at Hay 1986) (at 30 June 1985) (1984-85) TESTED
Sole Parent widowed, divorced $102.10 per week 262,000 families $1,170m Yes Yes
Pensions separated and other
single persons with
dependent children.
Mother's/Guardian's Sole parent pensioners $ 12 per week 262,000 families $124m Yes No
Allowance and beneficiaries.
Handicapped Child's Parents or guardians $ 85 per month - severely 25,800 children No
Allowance giving constant care handicapped $27m No
to severely handicapped $ 20 to $85 per month - 3,800 children Yes
children, or handicapped handicapped
children and in
financial hardship.
Double Orphan's Guardian or institution $ 55.70 per month 6,100 children $4m No No
Pension caring for defined
orphans.
Remote Area Pensioners or $ 3.50 per week per child
Allowance beneficiaries resident in addition to entitlements 14.300 $3m No No(d)
in specified areas of of $7 per week single and
Tax Zone A. $6 per week each married.
N.A. : Not applicable, n.a. : Not available
a Numbers of recipients and costs of taxation rebates are for the 1983-84, not the 1984-85 year.
b Mhile these rebates are not income-tested on primary earner's or family's incomes there are income tests to establish the dependency of
spouses and children.
c Numbers of recipients at January 1986 and estimated cost for 1985-86.
d No tax is levied on the payment. However, the amount of any zone tax rebate a pensioner would otherwise receive is reduced by the
amount of remote area allowance received.
The disposable incomes of different sorts of families are also
very significantly affected by the operation of social security
income tests and by the income taxation rate scale. Table 2
provides a summary of current income tests in the social
security system, while Table 3 shows relevant details of the
personal income tax rate scale, major tax rebates and Medicare
arrangements.
When looking at the circumstances of social security recipients
and other low income groups, the most important component of
the tax rate scale is the zero rate step. The zero rate step,
also known as the tax threshold, has the obvious effect of
ensuring that taxpayers do not actually pay tax on the first
$4.595 of their income.(1) This figure is increased for
certain groups because of the availability of tax rebates.
These rebates effectively return to taxpayers the tax payments
for which they would otherwise have been liable. For example,
age pensioners are entitled to a pensioner rebate of $250 a
year, which at the current first rate of 25 cents in the dollar
means that an additional $1,000 of taxable income is free from
tax. giving an effective tax threshold for pensioners of $5,595
per year. The sole parent and dependent spouse rebates provide
higher effective tax thresholds for eligible persons.
2.2 Parallels and overlaps - the tax-transfer system
This brief description of the income taxation and social
security systems should make it apparent that there are a
number of structural features of the systems which parallel
each other. This is so in two ways.
First, the income tests on pensions and benefits are analogous
to the income tax rate scale, in that both reduce the benefit
to an individual of additional income. Both the tax rate scale
and income tests contain a zero rate step - the tax threshold,
under which tax liabilities do not accumulate, and the
pension/benefit free areas, under which social security
payments are not reduced. Further, these zero rate steps are
varied for different family types - the tax threshold by the
operation of the rebates, and the pension free areas by the
higher free area for couples and the income disregard for
children.
This sort of parallel arises because both income tests and the
tax rate scale are generally designed to promote progressivity
income tests by reducing social security entitlements as
other Income rises, and the rate scale by increasing tax
liabilities as taxable income rises. The variation of taxes
(1) As part of its tax reform measures, the Government has

announced that from 1 September 1986 the tax threshold will be
increased to $5.100 per year, and from the 1986-87 year the
threshold will be available only on a pro rata basis for
taxpayers joining the workforce on a full-time basis for the
first time and those leaving Australia permanently.
Page 8
TABLE 2 : SOCIAL SECURITY INCOME TESTS AT MAY 1986*
Category Non-Social Security Reduction in
Income Assistance
Single pensioners $0 - $30 p.w. zero
$30 p.w. and over 50 cents in the $1
Sole parent $0 - $36 p.w. zero
pensioners, one $36 p.w. and over 50 cents in the $1
child (For each additional
child, add $6 p.w. to
the "free area" . )
Pensioner couples $0 - $50 zero
Pensioner couples, $0 - $56 p.w. zero
one child $56 p.w. and over 50 cents in the $1
(For each additional
child, add $6 p.w. to
"free area".)
Beneficiaries $0 - $30 p.w. zero
$30 - $70 p.w. 50 cents in the $1
$70 p.w. and over $1 for $1
FIS recipients $0 - $241 p.w.** zero
Persons receiving $0 p.w. and over (For 50 cents in the $1
rent assistance pensioners this is until assistance
increased by $6 p.w. extinguished
for each child. )
Persons receiving
pensioner concessions
(PHB card holders)
Singles $0 - $65 p.w.*** All benefits
received
$65 p.w. and over All benefits lost
Couples $0 - $106 p.w.*** All benefits
received
$106 p.w. and over All benefits lost
(For each child, add
$20 p.w. to these limits
* From November 1986. the "free area" for pensioners will be
increased from $30 to $40 p.w. for singles and from $50 to
$70 p.w. for couples; the "income disregard" for children
will be increased from $6 to $12 p.w.; and the separate
income test on rent assistance will be abolished.
** Set at $20 above the cut-out point for the married rate of
unemployment benefit and increases six monthly in line with
indexation of that rate.
*** Subject to six monthly indexation.
Page 9
TABLE 3 : PERSONAL INCOME TAX ARRANGEMENTS AT MAY 1986*
TAX SCALE
Taxable Income
From To Tax on Taxable Income
$0 - $4595 $0.00
$4596 - $12500 $0.00 plus 25 cents per dollar over $4595
$28001 - $35000 $7986.25 plus 48 cents per dollar over $280'00
$35001 and over $11346.25 plus 60 cents per dollar over $35000
MAJOR TAX REBATES

Rebate Level Relevant Income Tests
Dependent Spouse: Reduced by $1 for every $4 by
which dependent spouse's income
- with children. $1,030 exceeds $282 p.a. The "with
- without children $830 child" rate is paid only to
those with dependent children;
to be dependent, the child's
income must be less than
$1,786 p.a.
Sole parent $780 Payable only to those with
dependent children, under
circumstances outlined above.
Pensioner $250 Reduced by 12.5 cents for every
(single and couple dollar by which income exceeds
$5.595 p.a.
Beneficiary: Reduced by 12.5 cents for every
- single $170 dollar by which income exceeds
- couple $220 $5.275 p.a. forsingle
beneficiaries and $8,795 p.a.
for married beneficiaries.
MEDICARE
Levy Rate 1.0%
Threshold
- Singles $7.256
- Couples and sole parents $12,504
- Additional per child $1.530
Shade-in Rate 20.0%
Maximum Levy . . None
* In his Statement on Reform of the Australian Taxation System
(September. 1985. p 79) the Treasurer announced the
Government's decision to reduce marginal tax rates from
1 September 1986 and l July 1987.
Page 10
and social security entitlements according to income is
commonly described as reflecting the objective of vertical
equity - the concern that the more well-to-do should shoulder
greater tax burdens than the less well-off, while those less
fortunately placed should receive greater assistance than the
well-to-do (Jackson. 1982. p.15).
The second important aspect of the parallels between the
taxation and social security systems is the way in which the
entitlements and liabilities of different types of family units
are determined within the systems. This is shown in Table 4.
For example, the standard rate pension available to a sole
parent pensioner can be considered to parallel the standard tax
threshold available to a non-pensioner sole parent. Just as a
sole parent pensioner receives a special allowance (the
mother's/guardian's allowance), so too does a sole parent
taxpayer receive a special sole parent rebate. Just as a
pensioner can be eligible for an income-tested additional
payment for children, a non-pensioner can be eligible for an
income-tested income supplement for children. Both pensioners
and non-pensioners are entitled to family allowances for their
children.
This is not to argue that these parallel features are in
themselves necessarily similar in all their important
characteristics. Rather. when comparing one type of
pensioner/beneficiary with another type of
pensioner/beneficiary family and one type of
non-pensioner/beneficiary family with other types. it is
apparent that there are some concerns common to both systems,
in that both provide what can be thought of as a basic
entitlement for individuals and then add supplements in respect
of persons in specified family situations.
This common concern that people with similar incomes and
differing family responsibilities should be treated differently
is generally known as horizontal equity. In fact. this
principle arises from the apparently contrasting objective of
ensuring that people in like circumstances should be treated
alike. However, the contrast is more apparent than real, since
like cannot be defined without necessarily defining what is
unlike.
In the senses discussed above, the taxation and social security
systems can be seen to be linked by the common objectives of
promoting both vertical and horizontal equity. The links,
however, are far greater than indicated just by the existence
of parallel features to achieve similar goals.
For example, it is a mistake to think of clients of the social
security system as not being taxpayers, and thus of two
discrete populations, with social security recipients being
some sort of "burden" on taxpayers. In fact, in 1980-81 some
580.000 persons, or more than 25 per cent of social security
recipients and around 10 per cent of taxpayers, received
Australian Government pensions or benefits during that year and
paid more than $800 million in tax on both their social
Page 11
TABLE 4 : PARALLEL SOCIAL SECURITY AMD TAXATION MEASURES FOR DIFFERENT TYPES OF INCOME UNITS
Income Unit Type Pensioner or Beneficiary Non-Pensioner/Beneficiary
Individuals Standard rate pension Tax threshold

Standard rate benefit
Sole parents Standard rate sole parent's

pension/benefit Tax threshold
Hothers/guardians allowance Sole parent rebate
Family allowances Family allowances
Additional pension/benefit Family income supplement
for children
Both working One working

Couples without children
(married or de facto) Married rate of pension - Tax threshold - Tax threshold
or benefit for both Dependent
spouse rebate
Both working One working

Couples with children
(married or de facto) Harried rate of pension - Tax threshold - Tax threshold
or benefit for both Dependent
spouse rebate
Family allowances - Family allowances - Family
allowances
Additional pension/benefit - Family income - Family income
for children supplement supplement
security and private income. Those taxpayers who received some

pension or benefit during the year therefore contributed about
5 per cent of all revenue from personal income tax (Harding
and Whiteford. 1985a. pp.3-4). By 1983-84 this figure had
increased to some 860.000 persons or 13.5 per cent of taxpayers
(Harding and Whiteford. 1985b. p.2). Over the lifetime of
individuals the degree of movement between the two systems is
likely to be even greater.
This interaction between the tax and social security systems
has increased markedly since the mid-1970s, when most social
security pensions and benefits became taxable. Many basic
rates of social security payments now exceed the general tax
threshold. This is because basic rates of most pensions and
Page 12
benefits have been automatically indexed for inflation, but the
threshold has not. This situation has necessitated special tax
measures, such as the pensioner and beneficiary tax rebates,
which have been introduced and increased during the last four
years to ensure that those who are largely dependent on
pensions and benefits do not have their already low incomes
reduced by income tax. Another reason for increasing numbers
of people being affected by the interaction between the tax and
social security systems lies in the rapid growth in the number
of unemployment beneficiaries since the mid-1970s, many of whom
have spent part of the year as social security recipients and
the remainder of the year in work.
These overlaps have heightened other concerns common to both
the taxation and social security systems. As previously noted,
social security income tests and income tax can be considered
analogous, in that both reduce the benefit to individuals of
additional effort to earn income.
There has been much discussion during the debate on tax reform
last year as to the desirability of reducing marginal rates of
income tax in order to promote work incentives. But as Tables
2 and 3 showed, there are a variety of social security income
tests and tax measures, including income-tested tax measures,
that can apply over the same (fairly low) income ranges.
In fact, once pensioners' and beneficiaries' incomes enter the
taxable range, the combined effect of liability for income tax
and the reduction of pension or benefit through social security
income tests can produce "effective marginal tax rates" far
higher than the current top rate of 60 per cent applied to
taxpayers on the highest incomes. "Effective marginal tax
rates" refer to the amount of income lost, through the
withdrawal of assistance by income test and/or the payment of
tax, out of each additional dollar of private income.
Pensioners and beneficiaries can face effective marginal tax
rates (EMTRs) of 100 per cent or more over certain private
income ranges, and attempts to increase their disposable
incomes, eg. through part-time work, can leave them no better
off or even worse off. These situations are often known as
"poverty traps", in recognition of the possibility that people
in these situations may have the desire to improve their
financial circumstances through work, but the rationality of
doing so may not be evident, and that consequently people may
feel "trapped" into dependency on financial support from the
Government. That is, progressive policies can have unintended
consequences for incentives to work or save.
Table 5 provides details of the effective marginal tax rates
facing some illustrative social security families with children
(at November 1985 pension and benefit rates). It should be
readily apparent from these examples that over wide, but
relatively low. income ranges, social security recipients can
face EMTRs higher than those faced by any other groups in the
community.
Page 13
TABLE 5 ; EFFECTIVE MARGINAL TAX RATES (EMTR) FACING VARIOUS
FAMILY GROUPS UNDER NOVEMBER 1985 TAX AND SOCIAL SECURITY
ARRANGEMENTS
A. Sole parent with one dependent child
Non-DSS Income Total Pension Disposable Income EMTR
($wk) ($/wk) ($/wk) (%)

0.00 - 36.00 123.90 129.15 - 165.15 0
36.00 - 64.93 123.90 - 109.44 165.15 - 179.61 50
64.93 - 231.80 109.44 - 26.00 179.61 - 242.19 62.5*
231.80 - 240.38 26.00 - 21.71 242.19 - 244.34 75
240.38 - 269.88 21.71 - 6.96 244.34 - 250.24 80
269.88 - 283.80 6.96 - 0.00 250.24 - 250.24 100
283.80 - 284.09 0.00 - 0.00 250.24 - 250.38 50
284.09 - 375.00 nil 250.38 - 313.11 31
375.00 - 538.46 nil 313.11 - 399.74 47
538.46 - 673.08 nil 399.74 - 468.40 49
673.08 and over nil 468.40 and over 61
* Plus loss of Fringe Benefits after $85
B Sole parent with two dependent children

Non-DSS Income Total Pension Disposable Income EMTR
($wk) ($/wk) ($/wk) (%)
0.00 - 42.00 139.90 152.65 - 194.65 0
42.00 - 58.93 139.90 - 131.44 194.65 - 203.11 50
58.93 - 237.80 131.44 - 42.00 203.11 - 270.19 62.5*
237.80 - 240.38 42.00 - 40.71 270.19 - 270.84 75
240.38 - 299.31 40.71 - 11.25 270.84 - 282.62 80
299.31 - 315.06 11.25 - 3.37 282.62 - 282.62 100
315.06 - 321.80 3.37 - 0.00 282.62 - 283.90 81
321.80 - 375.00 nil 283.90 - 320.61 31
375.00 - 538.46 nil 320.61 - 407.24 47
538.46 - 673.08 nil 407.24 - 475.90 49
* Plus loss of Fringe Benefits after $105
Page 14
C. Unemployment or sickness beneficiary couple* with one
dependent child
Non-DSS Income Total Benefit Disposable Income EMTR
($wk) ($/wk) ($/wk) (%)
0.00 - 16.09 179.30 184.55 - 200.64 0

16.09 - 20.00 179.30 200.64 - 203.08 37.5
20.00 - 59.36 179.30 - 159.62 203.08 - 215.38 68.75
59.36 - 70.00 159.62 - 154.30 215.38 - 219.37 62.5
70.00 - 208.30 154.30 - 16.00 219.37 - 219.37 100
208.30 - 224.30 16.00 - 0.00 219.37 - 215.37 125
224.30 - 240.38 nil 215.37 - 227.44 25
240.38 - 269.88 nil 227.44 - 248.09 30
269.88 - 284.09 nil 248.09 - 255.19 50
284.09 - 375.00 nil 255.19 - 317.92 31
375.00 - 538.46 nil 317.92 - 404.55 47
538.46 - 673.08 nil 404.55 - 473.21 49
D. Unemployment or sickness beneficiary couple* with two

dependent children
Non-DSS Income Total Benefit Disposable Income EMTR
($wk) ($/wk) ($/wk) (%)

0.00 - 16.09 195.30 208.05 - 224.14 0
16.09 - 20.00 195.30 224.14 - 226.58 37.5
20.00 - 59.36 195.30 - 175.62 226.58 - 238.88 68.75
59.36 - 70.00 175.62 - 170.30 238.88 - 242.87 62.5
70.00 - 208.30 170.30 - 32.00 242.87 - 242.87 100
208.30 - 240.30 32.00 - 0.00 242.87 - 234.87 125
240.30 - 240.38 nil 234.87 - 234.94 25
240.38 - 299.31 nil 234.94 - 276.18 30
299.31 - 315.06 nil 276.18 - 284.06 50
315.06 - 375.00 nil 284.06 - 325.42 31
375.00 - 538.46 nil 325.42 - 412.05 47
538.46 - 673.08 nil 412.05 - 480.71 49
* Where the beneficiary is the only one of the couple earning

private income.
Page 15
E. Couple receiving Family Income Supplement (FIS). one
person in employment, one dependent child
Non-DSS Income FIS Disposable Income EMTR
($wk) ($/wk) ($/wk) (%)

0.00 - 167.60 16.00 21.25 - 188.85 0
167.60 - 229.00 16.00 188.85 - 234.90 25
229.00 - 240.38 16.00 - 10.31 234.90 - 237.75 75
240.38 - 261.00 10.31 - 0.00 237.75 - 241.87 80
261.00 - 269.88 nil 241.87 - 248.09 30
269.88 - 284.09 nil 248.09 - 255.19 50
284.09 - 375.00 nil 255.19 - 317.92 31
375.00 - 538.46 nil 317.92 - 404.55 47
538.46 - 673.08 nil 404.55 - 473.21 49
F. Couple receiving FIS. one person in employment. two

dependent children
Non-DSS Income FIS Disposable Income EMTR
($wk) ($/wk) ($/wk) (%)
0.00 - 167.60 32.00 44.75 - 212.35 0

167.60 - 229.00 32.00 212.35 - 258.40 25
229.00 - 240.38 32.00 - 26.31 258.40 - 261.25 75
240.38 - 293.00 26.31 - 0.00 261.25 - 271.77 80
293.00 - 299.31 nil 271.77 - 276.18 30
299.31 - 315.06 nil 276.18 - 284.06 50
315.06 - 375.00 nil 284.06 - 325.42 31
375.00 - 538.46 nil 325.42 - 412.05 47
538.46 - 673.08 nil 412.05 - 480.71 49
Page 16
It should be noted, however, that as part of its tax reform
package the Government announced an increase in the tax
threshold, cuts in marginal tax rates and a range of social
security measures specifically directed towards some of the
most salient "poverty traps".
Moreover, there is certainly no unanimity of opinion on the
practical significance of high marginal tax rates upon
incentives to work, either for high income taxpayers or low
income social security recipients (see, O.E.C.D.. 1975; Brown,
1980; Whiteford, 1981; Gruen. 1982). There are of course a
wide range of factors other than financial incentives affecting
actual work behaviour. The policy issues involved are complex,
and. as will be discussed, require the harmonisation of
conflicting objectives.
2.3 Perceptions and presentational issues
The interaction between the tax and social security systems has
not only indirect effects on families' circumstances, but also
very significant direct effects. As previously noted, social
security initiatives affect many taxpayers, and tax initiatives
have direct consequences for many social security recipients.
Large numbers of individuals and families have entitlements
under both systems. Thus, the living standards of many
taxpayers are vitally affected by their receipt of either the
dependent spouse or sole parent tax rebates and family
allowances. family income supplement or additional
pension/benefit for children paid through the social security
system. (1)
Indeed, many tax and social security measures can be regarded
as interchangeable mechanisms for achieving policy objectives.
Assistance to families with children can be provided through
tax rebates or deductions for taxpayers with children, or
through cash transfers such as family allowances. Social
security cash transfers can thus be thought of as equivalent to
"tax credits" or "negative income taxes" (Musgrave. 1959, p.18).
This issue is important because just as many may perceive
taxpayers and social security recipients as being discrete
populations, many see taxation and social security instruments
as being inherently different in their nature. Social security
outlays are generally seen as representing a cost to taxpayers
and as contributing to the size of the government sector. In
contrast, similar measures in the tax system (e.g. the
dependent spouse rebate, the sole parent rebate) are often not
regarded as a cost to anyone and tend to be seen as reducing
the size of government.
But both cash transfers and assistance through reductions in
tax liabilities involve calls on revenue and have similar
implications for the budget deficit or surplus. Except for
(1) See Section 4.1 for details of recent trends in the

distributional impact of these programs.
Page 17
administrative costs, neither cash transfers nor tax assistance
add to or detract from the size of the public sector in the
sense of involving the government itself in using up real
resources (in the same way that building roads, hospitals or
ships does). Rather. the two systems simply redistribute
disposable income between individuals and families. Social
security expenditures ultimately are spent by private
individuals for private purposes, in the same way allowed for
by tax concessions.(1)
Perceptions of social security outlays as a cost, while tax
concessions are perceived as costless, are misleading and
unfortunate, since it may mean that tax concessions are subject
to less scrutiny than social security outlays, irrespective of
the actual merits and efficiency of direct expenditures in
comparison with taxation instruments.
In fact, it can be argued that in considering the goals of
income distribution and economic efficiency. taxation and
social security policies should be seen as integrally related
instruments. Since their interaction affects the way in which
incomes and standards of living are distributed throughout the
community, it is necessary when considering policy changes to
either system to examine both together, so that the combined
effects of change can be exposed and any unintended
conseguences of change avoided. Thus, while the tax or social
security systems are frequently considered in isolation,
exclusive concentration upon only one system may frustrate
broader equity and distributional objectives.
This point has been made by the Taxation Review Committee
(1975. p.11):
Throughout and repeatedly in the terms of reference [of the
Committee] the phrase 'taxation system' is used. This way
of regarding a collection of administratively distinct
taxes is of fundamental importance. In a complex modern
economy where government expenditure is at a high level it
is impossible to raise all the revenue needed from any
(1) It should be emphasised, however, that while cash transfers
and tax concessions do not strictly add to the size of the
public sector, they do represent a constraint on government
choices. The revenues not collected or rebated because of tax
concessions and the moneys redistributed through cash transfers
are (generally) not available for the government's other
objectives. Whether family allowances, for example, are paid
as a cash transfer or a tax rebate or whether the DSR is
cashed-out or unchanged does not affect the size of the budget
deficit - it is still money forgone. If governments wish to
increase assistance for certain groups. then whether that
assistance is provided in the form of cash payments or tax
rebates will make little difference to its budgetary impact.
If the budget deficit is not to be increased, it would still be
necessary to either increase taxes elsewhere or reduce other
expenditures.
Page 18
single tax. Each tax will have its own distinct merits and
defects when judged by the various criteria commonly
applied to taxation. When several taxes are used they have
to be seen as supplementing each other and their
interactions - and sometimes their conflicts - have to be
reckoned with. Whatever their individual characteristics
it is their combined impact that must primarily concern the
policy maker. The complete set has therefore to be looked
at as an integrated whole, even though before this can be
done it is necessary to examine the parts that have to be
linked together.
... where tax stops and expenditure starts is often
unclear. A tax concession to a particular area of spending
in the private sector can as well be looked upon as an
expenditure of revenue as a failure to collect it, and it
is often an issue of importance to tax policy whether such
concealed subsidies should not better be given overtly.
Still more important is the point that cash transfers to
individuals, the whole class of social service payments of
every kind, are inextricably bound up with the equity of
the taxation system. ... some consideration of cash
grants, taxable or otherwise, is essential in the design of
an optimal tax system.
In summary, rather than having two separate systems which
affect the distribution of disposable incomes and the labour
force behaviour of the Australian population. in certain
respects, we have a single tax-transfer system. The
distinction made between the two systems is convenient for
analytical purposes, but when considering distributional
policies, tax and social security should be seen as two sides
of the one coin.
It must be said that these propositions are necessarily
arguable. As Musgrave notes in a somewhat different context:
"All these views may be held, and none can be proved correct"
(1959. p. 65). Some examples may show, however, that the views
adopted in this paper provide a consistent approach to the
issues involved.
The first example is provided by the recent debate about the
possible introduction of a broad-based consumption tax (BBCT).
The draft White Paper on Tax Reform illustrated possible
mechanisms for compensating social security recipients for the
regressive effects of any indirect taxes. Indexation and above
indexation increases in social security payments would have
involved additional expenditure by the Department of Social
Security of nearly $1 billion in a full year (Department of the
Treasury, 1985, p.159). But any such additional expenditures
would have generally represented only the return to low income
groups of the extra indirect taxes that they would have been
paying if a BBCT had been introduced. Other groups in the
community would have received their compensation in the form of
income tax cuts. The effect would have been the same, but the
appearance would have been very different.
Page 19
Second, the Australian social security system provides through
the Family Income Supplement (FIS) program cash payments of up
to $16 per week per child for low-income families not in
receipt of pension or benefit payments. The United Kingdom
also has a FIS program, currently paid out through the social
security system. In the recent Green Paper on reform of the UK
social security system, it was recommended that this FIS
payment should be replaced by a tax credit paid through
employers (Atkinson, 1985, p.334).
Similarly. the New Zealand Department of Social Welfare
currently provides an income-tested payment for children in low
and middle income working families called Family Care which,
because of the high level of payment and the low rate of taper,
can be loosely considered a "long FIS". In its recent
statement on taxation and benefit reform, the New Zealand
Government announced that from 1 October 1986 this
income-tested "social welfare" payment, similar payments for
children of beneficiaries and a tax rebate system for families
would all be replaced by a single, income-tested, refundable
tax credit system to be administered by the Inland Revenue
[Taxation] Department, and where possible this new Family
Support program would be paid by reducing Pay-As-You-Earn
(PAYE) deductions (Whiteford and Whitecross, 1986).
In each of these cases, it is possible to see taxation and
social security programs that mirror each other. But in
essence a program is not different because it is paid now by a
Social Security or Welfare Department, and in the future by the
Tax Office. For individuals who remain recipients, there is no
difference in their disposable incomes if they receive $5 a
week in a social security cheque or $5 a week through lower tax
liabilities. Nor in terms of effective marginal tax rates is
there any essential difference between an income test on a
social security payment for children and an income test on a
tax rebate for children.
Nonetheless, there can be important differences between the
administrative implications of providing a payment through the
Tax Office or through a Social Security Department, and the two
administrative systems can direct assistance to different
recipients, with consequent differing distributional effects.
Further, providing an income-tested payment as a tax credit
through employers may be presented as a reduction in the size
of the public sector, since some of the administrative costs
may be transferred to the private sector.
A third example, which also illustrates the differences between
the targeting capabilities of tax and social security
administrations, is provided by the recent history of general
assistance for children in Australia. Assistance through the
personal income tax system for each child was provided in the
form of concessional deductions (which were of greater benefit
to high income earners) up to 1974-75. The first crucial step
towards the current system was made in 1975-76. when tax
rebates (which were of equal money value to all but very low
income taxpayers with dependent children) were introduced.
Page 20
Throughout this period, cash assistance for families with
children was also provided through child endowment paid by the
Department of Social Security. In 1976, both cash rebates and
child endowment were replaced with the current system of family
allowances.
The two main advantages of providing assistance through cash
payments instead of through tax reductions were that payments
could be made to all families with children, not just to those
with incomes high enough to benefit from the tax rebates, and
assistance could be directed to mothers. Because of the change
from tax rebates to family allowances, both taxation revenues
and government outlays increased by some $700 million in
1976-77. While most taxpayers with children continued to
receive about the same amount of assistance as they had prior
to the family allowances reform, it was estimated at the time
that some 300,000 families (with 800.000 children) whose
incomes had been insufficient to take full or any advantage of
the tax rebates, received greatly increased assistance for
their children.(1)
Since their introduction, family allowances have been
criticised as "middle class welfare" because they are a cash
payment from the Department of Social Security, but are neither
income-tested nor taxed. Indeed, around 80 per cent of the
recipients of family allowances are not in receipt of any other
payment from the Department of Social Security. This could
indicate either that family allowances are not well targeted to
the poor, or that they are not intended to be reserved for the
poor. In fact, while family allowances are counted as
expenditures by the Department of Social Security, they can
still properly be viewed as serving equity objectives basic to
the income taxation system. This view is supported both by the
history of family allowances and arguments in taxation
literature that exemptions for family composition are essential
to the structure of any tax which bases itself on the principle
of ability-to-pay and by the practice of most other countries.
The Australian income tax system itself still recognises this
principle of horizontal equity through the dependent spouse
rebate and the sole parent rebate.
Family allowances now provide the major instrument for reducing
the effective income tax burden on all families with children,
in recognition of the fact that at any income level families
with children have a lower capacity to pay tax than similar
families or individuals without children. In addition, family
allowances also uniquely offer a means of providing greater
assistance according to the number of children in the family.
In contrast with other tax measures they also provide equal
assistance to families with low incomes who pay little or no
tax. Thus, rather than being a welfare measure that goes to the
rich, family allowances can be considered as a general taxation
measure which also provides additional assistance to the
neediest.
(1) Some other families whose children had income also received
increased assistance for these children because the separate
net income test applied to the child tax rebates was not
applied to family allowances.
Page 21
3. OBJECTIVES OF FAMILY ASSISTANCE
3.1 Ability-to-pay and horizontal and vertical equity in the
tax system
A key objective of the tax system is to collect the revenue
required to fund public sector activity. But a further
and critical objective is that the distribution of the tax
burden should be equitable - everyone should pay their "fair
share". (1)
How the term "fair share" should be defined, however, is
subject to debate. Two strands of thought can be distinguished:
the benefit principle, under which taxpayers should
contribute in line with the benefits they receive from
public services; and
the "ability-to-pay" principle, under which a given
total revenue is required and each taxpayer is asked
to contribute in line with his or her "ability-to-pay"
(a further definitional problem).
There are advantages and disadvantages to each alternative, and
neither approach is easy to implement in practice. The benefit
principle implicitly assumes that a proper state of
distribution already exists, and on this basis will allocate
tax burdens according to the incidence of public benefits. As
such, the benefit principle fails to recognise taxation as a
means of financing transfers or as serving redistributional
objectives.
As noted by Allan:
The benefit rule cannot provide a universal rule of
taxation if we accept that the government has to support
the poor. There will always be some people who would earn
nothing in a free market and many more would earn amounts
which would be considered inadequate on humanitarian
grounds. These people have to be given income and this
must be paid for by taxation (of those who have higher
incomes) according to some other principle than that of
benefit.
It can be argued that the rich derive benefits from
redistribution...but the point here is that the benefits
accruing to the poor as a result of redistribution cannot,
by definition, be subjected to taxation (1971. p.107). (2)
(1) Apart from equity, the two major qualities sought in tax
systems are simplicity and efficiency. For discussions of
these concerns, see Taxation Review Committee (1975,
pp. 15-17) and Department of the Treasury (1985. pp. 14-17).
(2) This is not to say that social security benefits should not
be taxable, but simply that low income groups cannot
reasonably be expected to pay taxes in line with the
benefits they receive.
Page 22
The alternative principle, that people should contribute to the
cost of government in line with their ability-to-pay.
complements the principle of helping those in need, which is
often seen as the basis of the social security system. In this
sense as well, the taxation and social security systems can be
considered as one integrated system providing for income
redistribution. As someone's financial position worsens they
can depend more on the community for help, and as their
finances improve their contributions to the community in the
form of taxes should increase. Just as the social security
system structures benefits according to the needs of
recipients, the ability-to-pay "principle requires that equal
amounts of tax should be paid by taxpayers with equal
abilities-to-pay (horizontal equity) and requires different
amounts of taxes when abilities-to-pay differ (vertical equity).
There are therefore three major issues associated with the
ability-to-pay principle. These are:
How should ability-to-pay be defined?
By how much should the amount of tax vary as
ability-to-pay varies?
When do people have equal abilities-to-pay?
These three concerns are very closely interrelated:
The 1966 Canadian Royal Commission on Taxation, for example,
argued that ability-to-pay should be measured in terms of gains
in "discretionary economic power". That is. some part of each
person's income must be spent to provide food, clothing,
medical expenses and other necessities including the basic
costs of working. The discretionary economic power of the
individual is that which is available to spend or save after
meeting these non-discretionary expenses. This implies that
over some basic level of exemptions (the tax threshold), all
real resources (eg. including capital gains, employment fringe
benefits, etc) should be subject to tax.
The vertical equity concern that the amount of tax should vary
as ability-to-pay varies is usually taken to support a
progressive rate structure above this basic threshold.
Similarly, it has been argued that horizontal equity can be
achieved when individuals and families with the same gains in
discretionary economic power pay the same amount of tax. Since
larger families generally have greater requirements for
necessities, it follows that the level of exemptions should be
structured to reflect family needs, eg. there should be
allowances for children and other dependants. Likewise, since
two income couples at any given income level will have higher
work costs than single income couples, it follows that, for
example, two income couples should have the benefit of two
thresholds.
The distinction commonly made between horizontal and vertical
equity is useful for analytical purposes, but the reality is
that they are inseparable parts of the one principle of equal
treatment. For example, it is commonly argued that vertical
Page 23
equity is frustrated by the lack of capital gains taxes. But,
similarly, horizontal equity may also be considered to require
capital gains taxes, since taxpayers whose resources are
concentrated in assessable income (eg. wage and salary earners)
are treated more harshly for tax purposes than those with the
same overall level of resources concentrated in capital gains.
The ability-to-pay principle in the tax system is recognised in
the social security system by the "needs" principle. As
already discussed, features of the tax system which seek to
recognise horizontal equity such as dependant rebates are
paralleled in the social security system by allowances for
dependants, such as wife's pension, additional pension and
benefit and mother's/guardian's allowances. Features of tax
systems which seek to recognise vertical equity such as
progressive personal income tax rate structures are paralleled
in the social security system by income tests.
Vertical and horizontal equity, therefore, can be considered as
complementary aspects of a fair tax-transfer system in that
both are required if the principle of ability-to-pay is to be
recognised. In this sense, it can be argued that recognition
for dependants, either children or spouses, should not be
regarded as a concession or departure from normal taxation
practice (i.e. a "tax expenditure"), but as a basic component
of an equitable tax system (Ingles et al, 1982).
3.2 Criteria for assessing social security policies
As noted previously, it is convenient to make some distinctions
between taxation and social security policies for analytical
purposes. Nevertheless, just as an evaluation of taxation
policies requires consideration of the objectives of those
policies, an assessment of social security policies requires a
consideration of fundamental goals. A number of criteria have
been suggested for evaluating alternative social security
arrangements (Harmor. 1971. Jackson. 1982; Whiteford and
Stanton. 1983). These criteria include:
Adequacy - is the current or proposed level of
income support sufficient to allow individuals and
families to achieve an adequate standard of living?
Adequacy may be judged by reference to a poverty line
or relative to other standards of living in the
community. An example of the first type of standard
is the Henderson poverty line. An example of the
second type of standard is provided by the
Government's commitment to raise the single rate of
pension to 25 per cent of Average Weekly Earnings.
Equity - A concern with horizontal equity implies
that people in like circumstances should be treated
alike. In practice this is taken to support different
treatment of people with the same income but differing
calls on that income, particularly differing family
responsibilities. Vertical equity is the concern that
those who are more well-to do should shoulder greater
burdens than the less well-off, or that the poor
should receive greater assistance than those
Page 24
better-off. In practice this implies varying social
security payments according to income and/or capacity
to earn income.
Incentive Effects - What effects do programs have on
work, savings and investment, family size and
composition or family formation and dissolution,
economic growth and national productivity?
Efficiency - There are four basic concepts of
efficiency - target efficiency, technical efficiency,
administrative efficiency and economic efficiency.
Concern with target efficiency, which is usually taken
as the most important of these issues, leads to the
consideration of what proportion of the benefits of a
program go to the non-poor as well as the poor
(vertical efficiency), and what proportion of the poor
or other target groups actually receive the intended
benefits (horizontal efficiency).
Stigma - What degree of stigma is associated with
the source, form or administration of social security
programs, and what effect does this have on take-up of
benefits?
Cost - What are the total expenditures at all-levels
of government, taking into account savings in other
programs, tax clawbacks, and costs due to changed work
effort or other behavioural changes in the population?
Political Support - What is the nature and extent of
approval for a given program?
These criteria are reflections of varying but interrelated
objectives. For example, most people would probably agree that
it would be desirable to have social security programs that
provided adequate support for the poor, that treated different
individuals equitably, that did not have unfavourable effects
on incentives for self-provision. that were efficiently
designed and as low cost as possible, that attracted widespread
political support and did not stigmatise recipients. The fact
that no existing social security program in Australia or
elsewhere could claim to attract universal commendation in
relation to all these criteria is a consequence of two
factors. First. different people will interpret these
objectives in different ways and will give differing priorities
to specific objectives according to their own views of what
will maximise the welfare of the community. Second, these
objectives overlap and interact, and the achievement of any one
goal may either entail the achievement of others or may
conflict with these other objectives. For example, on the one
hand, very high levels of payments and very high withdrawal
rates in income tests to achieve adequacy, vertical equity or
vertical efficiency may conflict with concerns about
incentives. On the other hand, adequacy and equity are in
practice inseparable, since the achievement of an equally
adequate standard of living for all social security recipients
implies that horizontal equity is satisfied. In this sense the
Page 25
distinction commonly made between horizontal and vertical
equity is also no more than a convenient distinction for
analytical purposes.
Consideration of these criteria requires some method of
analysis by which the achievement of objectives can be
evaluated. For example, the framework of labour supply theory
in economics provides a method for analysing the effect of high
effective marginal tax rates on incentives to work. Poverty
lines are usually derived in order to judge the adequacy of
pensions and benefits. One type of measure for assessing the
extent to which horizontal equity concerns are satisfied is
provided by equivalence scales.
Equivalence scales or ratios are measures of the relative
incomes required by different types of families to attain a
similar standard of living. These scales are usually expressed
as a set of numbers - some arbitrarily chosen household type is
taken as the base and its value is set equal to 1.0. Other
household types are then expressed as proportions of this
base. For example, if the benchmark is taken to be a married
couple without children, then to determine that the figure for
an individual is 0.60 implies that a single person requires
only 60 per cent of the income of a couple to be as well off as
they are. Similarly, if the figure for a couple with two
children is estimated to be 1.40, say, then that family will
require 140 per cent of the income of a couple without children
to attain the same standard of living. It follows that
individuals with annual incomes of $6,000, say. couples without
children and with incomes of $10.000 and couples with two
children and incomes of $14,000 should all on average be able
to attain a similar standard of living.
Equivalence scales are necessary as complements to poverty
lines in analysing income distribution data. As well, because
the relativities in rates of pensions and benefits and in the
relationship between the tax treatment of different family
types directly affect the disposable incomes of different
families, equivalence scales can be very useful tools in
evaluating the extent to which existing policies satisfy the
objectives of adequacy, horizontal and vertical equity and the
like.
This is most clear in relation to the criterion of horizontal
equity, for an equivalence scale is simply a practical attempt
to define like circumstances. Since an equivalence scale may
also be used to rank families in the distribution of income it
is also a guide to vertical equity, e.g. a couple with two
children and an income of $6.000, say, is likely to be actually
poorer than a single person with an income of $4,000. and
analysis of income data should reflect this. Again a judgement
about the adequacy of pension and benefit rates can scarcely be
made without relating the differing levels of payment to
differing needs of families of different size and composition.
It is also axiomatic that work incentives and incentives to
form or dissolve families will be affected by the relativities
in the rates of pension and benefit. For example, the
Page 26
Commission of Inquiry into Poverty, while arguing that it would
be preferable to treat each adult as a separate income unit for
social security purposes, concluded that such a system would
result in inadequate pensions for people who live alone. As a
result "what some would call a positive incentive to live in
social groups would become in practice a ruthless compulsion"
(1975, p.24). It should also be clear that the financial cost
of any income security scheme will be directly affected by
decisions about the relative payments to be made to different
types of families. Finally, the political acceptability of the
social security system and of proposals to reform it will
depend on public perceptions of how fairly the system treats
different kinds of families. Some of the most significant
debates in social security in recent years have concerned
assistance to families, the appropriate income unit for income
security purposes and the appropriateness of assistance for
sole parents. All these involve making judgements about
relative family needs.
Equivalence scales can be derived in a number of ways - either
by specification of nutritional and other budgetary
requirements by experts, by surveys of the attitudes of
different types of families to their requirements, or by a
variety of methods of econometric analysis applied to data on
household incomes and expenditures. None of the methods can be
regarded as entirely satisfactory (Whiteford, 1985) and there
is no agreement as to what are the most suitable estimates for
use in the Australian context. Some applications of
equivalence scales are discussed in Section 4.3 and some
research questions in this area are suggested in Section 5.
3.3 Private choice and public support
It should not be surprising. however, that there is
considerable debate about the relevance of the concept of
horizontal equity and the importance of equivalence scales.
Arguments about choice form an important element in many of
these debates about tax-transfer policies and the priority to
be given to horizontal equity. In fact, choice is a
fundamental issue. It can be argued that the size, composition
and activities of families are expressions of their "revealed
preferences", and it is these preferences that should be taken
into account when comparing the needs or abilities-to-pay of
different family types. According to Pollak and Wales:
Thus, in a perfect contraceptive society, if a family
chooses to have three children and $12.000 when it could
have had two children and $12,000 then a revealed
preference argument implies that the family prefers the
alternative it chose (1979. p.219).
On this basis, it can be argued that no allowances at all need
be made for the costs of children in either the income tax or
the social security system. For example, the Centre of Policy
Studies notes that "while it is certainly true that the
presence of dependants does indeed reduce ability to pay, it is
debateable whether this should be regarded as a reason for
Page 27
reducing tax liability any more than should the buying of a
boat which likewise reduces the ability to pay Since the
decision to have children, however, is usually one of choice,
it is arguable whether the tax system should recognise such
costs" (1985. p.26).
As the comparison of children to boats suggests, it is
customary (and can be useful) in certain sorts of economic
analysis to think of children as "durable goods". McCloskey
points out that this idea can be translated as follows: "A
child is costly to acquire initially, lasts for a long time,
gives flows of pleasure during that time, is expensive to
maintain and repair, has an imperfect second-hand market ...
Likewise, a durable good, such as a refrigerator ..." (1983,
p.503) - or a boat. The main behavioural assumption of this
approach is that children are planned - that parents make
long-term decisions about their housing, their life style and
its material components, the way they spend their time, and the
number of children they want to have, in a rational and
optimising way. and then to the best of their ability attempt
to fulfil those plans.
It should be noted that this line of argument is relevant not
only to children. The Centre of Policy Studies, for example,
also states that "there seems to be no convincing rationale for
allowing a rebate to married couples without dependants, simply
because one of the couple chooses not to work" (1985. p.27.
emphasis added). This argument can potentially be extended
even further to argue, for example, that people may choose to
be sole parents or may choose to be unemployed.
A further modification is to argue that low income may
constrain choice, but high income groups have the freedom to
choose and are therefore undeserving of assistance. This
suggests that horizontal equity concerns may stop or at least
become weaker above a certain income level. If this is so. the
practical problem is to decide what that level of income is.
As the Centre of Policy Studies notes: "It can be argued that
once income reaches a certain level, all income above that
level becomes 'discretionary' and it is largely a matter of
choice as to how it is spent. Above this level, the amount
spent on children will vary according to the standard of living
their parents are able to choose and need not therefore be
subjected to tax relief. On this basis. tax relief for
children would be provided only to those with very low
incomes" (1985. p.26).
It it is worth noting that the claim that spending can become
discretionary at a low level of income is simply an assertion.
Nor is it recognised that non-discretionary spending presumably
varies with family composition. Moreover, the Centre of Policy
Studies makes no suggestion as to how discretionary and
non-discretionary incomes could be determined in practice.
There are. of course, alternative views about these issues and
the proper basis of tax-transfer policies. Cass, Keens and
Wyndhara (1983, p.17). for example, identify an alternative
approach to policies for children, in which children are seen
Page 28
as a social investment and national resource, thereby providing
justification for public expenditure on their care and
development. Parker (1978) also provides a discussion of this
approach.
The distinction between alternative approaches may ultimately
be regarded as a matter of personal preferences and values.
Nevertheless it can be very seriously questioned whether or to
what degree the issue of choice is actually relevant to family
policies.
One major problem with the revealed preferences argument is the
assumption that children, for example, are purely objects of
choice. Many children are unplanned and not only in relation
to timing. Children are irreversible. Before deciding to have
children, people may make judgements about their incomes and
opportunities for periods of up to twenty years ahead. There
is considerable uncertainty involved in these judgements and
parents' information may be faulty. Economic conditions can
change, particularly for persons who become unemployed or
become sole parents or invalids. The incomes of the poor are
typically subject to fluctuations. Indeed, poverty can be
defined as a condition of constraint on choices - in the case
of low income families, the assumption of free choice is
therefore simply inappropriate.
Yet. even in regard to higher income groups it can be argued
that there is a false dichotomy in the belief that choice is a
relevant concern, for this implies that the alternatives are
not choices. The concern underlying this argument appears to
be that it is unfair for people who do not have children to
provide support for people who do have children, with a
consequent increase in their tax liabilities. But just as
there are differing circumstances in which people have
responsibility for children, there are a number of obvious
reasons why, at any point in time, people are not responsible
for children. People may have had children who are no longer
dependent, the family may be in the early stages of formation
and will have children later, or they have delayed having
children but plan to do so in the future, or they wish to have
children and cannot, or they plan not to have children.
In the first three circumstances, the provision of general
assistance for children can hardly be regarded as unfair, since
these families will benefit in the future or already have
benefited from such assistance themselves. Consequently, it
can also be argued that for these groups it is inappropriate to
regard family assistance as some sort of subsidy for childbirth
(1). since the provision of assistance to all families amounts
(1) The view that cash transfers are subsidies for children is
arguable in any case, since the amount of assistance is
usually much lower than the costs of raising children. An
example of a fairly unambiguous subsidy for children is.
however, provided in the French tax-transfer system, where
the disposable income of a "typical" married couple family
with two children exceeds their pre-tax. pre-transfer
earnings by nearly 1O per cent. See OECD. 1983. p.34.
Page 29
to a redistribution of resources over the life cycle rather
than a simple redistribution between individuals. While, as in
all cases of redistribution over the life cycle, an individual
may or may not have chosen to have saved a similar amount if
the choice was free, it is incorrect to say that there are no
offsetting benefits for those persons currently without
children.
Even when looking at the circumstances of people who will never
have children, the relevance of the issue of choice is not
clear-cut. In fact, some people may choose not to have
children in exactly the same way that other people choose to
have children. That is, the judgements involved are not only
about the direct expenses of raising children, but also about
the activities preferred by the adults involved, and their
long-term decisions about lifestyles and the ways in which they
wish to spend their time. Moreover, it is once again incorrect
to overlook the benefits accruing to persons who never have
children because other people have children. Put simply,
nearly all of the public services that those without children
will enjoy in retirement will be funded from taxes on the
generation then of working age. i.e. other people's children.
Most importantly, there is a crucial difference between having
children and buying boats. As Muellbauer notes. "very
fundamentally, children are individuals too. This means that
the real consumption levels of children should themselves be
part of the measurement of the overall distribution of income,
irrespective of whether they are a positive part of their
parent's standard of living" (in Diamond, 1978. pp. 337 - 338).
Similar arguments can be advanced in the case of the
tax-transfer treatment of sole parent families and families
with and without dependent spouses.
The crucial issue once again is the degree of constraint
imposed on whatever choices are involved with having dependent
children or being dependent spouses or sole, parents. The
'choices' are of course inter-related - generally the
dependency of spouses or sole parents accompanies the presence
of children. This might seem to suggest that public support
for dependent spouses through the taxation system should be
limited to those with dependent children. However, this
conclusion should be qualified, since a large proportion of
dependent spouses without children are likely to be older women
whose lack of work experience and labour market disadvantages
are a direct result of the former presence of children.
Indeed, this is one of the rationales for the Class B widow's
pension, which provides assistance to older women who do not or
no longer have dependent children. In addition. when
considering public policies for dependent and working spouses,
account needs to be taken of factors such as the costs of child
care, the costs of working, and the contribution of all family
members to their joint standard of living. How these factors
balance out is not at all clear. Overall, it would appear
unrealistic to treat all children or dependent spouses purely
as an economic burden, but it is also unrealistic to treat
either purely as if they were objects of choice without
effective costs.
Page 30
4 CURRENT CONCERNS
4.1 Adequacy of Payments

Once it is accepted that public income support for families is
appropriate, a range of further issues arise. In recent years
there has been a variety of concerns about the adequacy of
payments for children provided through the tax and social
security systems. It is difficult to make definitive
statements about the adequacy of tax-social security
arrangements, since the measurement of adequacy like the
measurement of poverty is at least in theory a controversial
matter. Nevertheless, there are some obvious points that can
be made, since all the indicators point in the same direction.
Concern with adequacy has two components - concern with the
situation of families generally and concern about the
particular circumstances of low income families with children.
The most important general program for families is family
allowances. Current rates of family allowance range between
$22.80 per month for the first child and $45.55 per month for
fifth and subsequent children. While it is arguable whether
the family allowances program should meet the full costs
associated with raising children, it is clear that these levels
of payments do not provide anything like such assistance. In
effect, the family allowance program provides no more than a
payment of between 25 cents and 50 cents for each meal that a
child has in a week.
Assistance for children of parents with average earnings is
also low by international standards. In 1978 in Australia the
level of assistance for dependent children of a taxpayer who
was an "average production worker" was the fourth lowest of 19
of the OECD countries. This is shown in Table 6.
Concern with the situation of low income families has been
prompted by the increasing number of children whose parents are
reliant on social security payments. As Table 7 shows, between
1976 and 1985 the number of children for whom income-tested
payments were made more than doubled from nearly 370,000 to
nearly 855,000, increasing from 8.6 per cent of children to
19.8 per cent of dependent children. The issues involved in
this development are complex and are discussed in some detail
by Cass (1983b). In brief, the main influences have been the
increasing numbers of sole parent families (1). very greatly
increased unemployment amongst families with children, and the
introduction of the new Family Income Supplement program in May
1983 to provide assistance to low income non-pensioner/
non-beneficiary families with dependent children (2).
(1) See Development Division (1982) for further details.

(2) For a discussion of the introduction of FIS, see French
(1984).
Page 31
TABLE 6 : THE VALUE OF TAX RELIEFS AND CASH TRANSFERS GIVEN TO FAMILIES WITH TWO CHILDREN - 1978
Assistance given to Additional assistance given to families with children

married couples
Tax reliefs Tax reliefs Cash transfers Total
APW's Twice APW's Twice APW's Twice APW's Twice
wage APW's wage APW's wage APW's wage APW's
wage wage wage wage
Expressed as a percentage of gross earnings

(i) (ii) (iii) (iv) (v) (vi) <iii)+(v) (iv)+(vi)
Australia 5.4 2.7 0 0 3.8 1.9 3.8 1.9

Austria 1.7 1.9 1.5 1.7 15.2 7.6 16.7 9.3
Belgium 0.8 0.6 2.5 1.8 12.7 6.4 15.2 8.2
Canada 4.6 3.3 4.0 0.5 4.2 2.1 8.2 2.6
Denmark 5.2 2.6 0 0 3.8 1.9 3.8 1.9
Finland 3.5 2.3 2.8 1.4 5.3 2.6 8.1 4.0
France 5.3 7.9 2.8 3.6 8.6 2.8 11.4 6.4
Germany 7.0 11.0 0.4 0.3 5.3 2.6 5.7 2.9
Ireland 6.8 5.8 3.8 2.8 1.7 0.9 5.5 3.7
Italy 1.2 0.6 0.5 0.3 6.0 3.3 6.5 3.6
Japan 1.9 1.4 3.4 2.7 - - 3.4 2.7
Luxembourg 7.2 11.4 6.0 4.5 7.2 3.6 13.2 8.1
Netherlands 2.2 2.8 1.3 - 6.8 3.4 8.1 3.4
New Zealand 1.7 0.9 2.9 1.5 3.5 1.7 6.4 3.2
Norway 5.5 6.4 2.1 1.0 3.9 2.1 6.0 3.1
Portugal 0 1.2 0 0.4 5.1 2.6 5.1 3.0
Sweden 3.1 1.6 0 0 7.7 3.8 7.7 3.8
Switzerland 3.5 3.7 1.2 1.1 3.5 1.7 4.7 2.8
United Kingdom 4.1 2.1 1.5 0.8 6.1 3.1 7.6 3.9
United States 4.1 6.5 3.3 2.4 - - 3.3 2.4
NOTE: APW stands for average production worker
SOURCE: OECO, 1980, p. 64.
Page 32
TABLE 7: SOCIAL SECURITY PAYMENTS FOR DEPENDENT CHILDREN - 1976 TO 1985
Number of Children ('000s)
Additional Additional FIS* Total Family Income Tested

Pension Benefit Income- Allowances as % of Total
Tested
At 30 June
1976 283.9 86.0 369.9 4,292.4 8.6
1977 309.4 117.5 - 426.9 4,302.0 9.9
1978 338.0 137.0 - 475.0 4,304.3 11.0
1979 361.2 133.0 - 494.2 4,230.6 11.7
1980 379.8 145.0 - 524.8 4,223.9 12.4
_
1981 431.4 145.0 576.4 4,227.2 13.6
1982 449.2 179.0 - 628.2 4,254.5 14.8
1983 472.5 309.3 48.2 830.0 4,303.3 19.3
1984 494.5 274.9 74.0 843.4 4,326.0 19.5
1985 519.4 259.8 74.9 854.1 4,323.5 19.8
Family Income Supplement (FIS) was introduced in Nay 1983.
The introduction of FIS is of course a benefit to low-income

families and indicates an improvement in their circumstances
rather than a worsening. In addition, the growing number of
pensioners with children is partly a result of positive
Commonwealth Government actions such as the extension of
Supporting Parent's Benefit to sole fathers in 1977 and the
abolition of the six month waiting period for supporting parent
beneficiaries in 1980 with transfers of certain budgetary
committments previously the responsibility of State
Governments. The increase also reflects unfavourable labour
market conditions, most notably with the growth in additional
benefit between 1982 and 1983. In any case, the fact that the
parents of around one in five Australian children receive an
income-tested payment for them makes the issue of adequacy
important.
By international standards and from indicative research,
assistance for children through family allowances and the
social security system is particularly low. Current rates of
additional pension, benefit and FIS amount to an additional
subsidy of 76 cents per meal per week, and nothing more.
Further, current total payments for a child amount to thirteen
per cent of the social security payments for an adult couple,
whereas, on average, research into the costs of children
suggests that payments should be around 20 per cent, or more
than 50 per cent higher than they now are. The relativities
suggested by the OECD in its social indicators program would
suggest a relative payment of 29 per cent, or more than twice
what is now paid (Whiteford. 1985. pp.108-109).
Page 33
There is also evidence that the inadequacy of social security
payments for children affects different families
differentially, particularly because the costs of children
appear to vary significantly by age. Table 8 summarises the
results of recent research on how the costs of children vary as
they grow older.
The table should be interpreted with some caution. As far as
possible, the table shows how costs increase with the age of
the single child in a household made up of a couple plus one
child. The table does not show the effects of economies of
scale or of the rank of children in the household. For
example, the Garganas scales in Table 8 indicate that a child
less than 4 years of age adds 13 per cent to the costs of a
couple. However, two children under 4 years of age will add 21
per cent, rather than 26 per cent to the costs of a couple,
primarily because of economies of scale. Again, with the
Van der Gaag and Smolensky scales, a child under 6 adds 24 per
cent and a child 6 to 11 years adds 32 per cent to the cost of
a couple but going to the original source will show that a
household with two children needs only 28 per cent more income
than a couple without children. Thus Table 8 shows the "pure"
effects of age, not of household size.
At first glance there appears to be considerable variety in the
results reported - estimates of the costs of a child under 4
range from 12 to 24 per cent, and of a 16 or 17 year old from
31 to 52 per cent. Nevertheless, the general patterns are very
similar, indicating significant increases in costs by age. of
the order of 150 to 200 per cent.
It should also be noted that this table only provides measures
of direct costs - purchases of food, clothing, and the like.
The indirect costs in terms of the income lost by persons,
usually women, who give up work cannot generally be dealt with
in equivalence scale analysis. In the case of young children,
these costs in the form of forgone income may be significantly
greater than the direct costs.
One of the most important points to note in regard to adequacy
is the trend in the real values of different payments. Since
their introduction in 1976. family allowances have effectively
been increased only once - rates for third and subsequent
children were increased by 50 per cent in January 1982. and
rates for first and second children were increased by 50 per
cent in November 1982. These money increases, however, have
not been as great as the increases in inflation since that
time, and as a consequence the value of family allowances has
declined by 29 per cent in real terms since 1976-77. (l) In
contrast, the dependent rebates in the tax system (especially
(1) The choice of the base year can of course affect the
apparent trends. See Raymond and Whiteford (1984, p. 3)
for reasons why 1976-77 was chosen.
Page 34
TABLE 8 : DETAILED EQUIVALENCE SCALES OF THE COSTS OF CHILDREN BY AGE (COUPLE WITHOUT CHILDREN = 100)
SOURCE ESTIMATES SOURCE ESTIMATES SOURCE ESTIMATES SOURCE ESTIMATES
1. McClements, Age 0-4 18 2. McClements, Age 0-1 9 3. Piachaud, Age 4. Lovering, Age
United Kingdom, 5-10 21 United Kingdom, 2-4 18 United Kingdom, 2 23 Australia, 2 12
1971-72 11-12 26 1971-72 5-7 21 1979 5 27 1983 5 15
13-15 32 8-10 23 8 32 8 17
16-18 38 11-12 25 11 35 11 22
Average 26 13-15 27 Average 30 Average 17
16-18 36
Average 24
5. Townsend, Age 0-10 17 6. Muelbauer, Age 0- 4 12 7. Garganas, Age 0-4 13 8. Van Der Gaag Age
United Kingdom, 11-15 25 United Kingdom, 5-16 25 United Kingdom, 5-14 29 and Smolensky, 0-5 24
1968-69 Average 20 1975 Average 22 1971 Average 24 United States, 6-11 32
1960-61 12-17 43
18 + 31
Average 34
9. Supplementary Age 0-10 21 10. EEC Expenditure Age 0-2 11 11. Department of Age 0-4 15 12. Henderson, Age 0-5 15
Benefit Rate 11-15 31 Survey 3-4 17 Health, 5-15 37 United States, 6-15 22
Scale, 16-17 38 5-6 22 Education and 16-18 52 1954 16 + 31
United Kingdom, Average 26 7-8 28 Welfare, Average 35 Average 22
November 1983 9-10 33 United States,
11-12 39 1976
13-14 44
Average 28
13. Severidge, Age 0-4 16 14. The Amsterdam Age 0-14 27
United Kingdom, 5-9 22 Scale 15- 17 (male) 52
1942 10-13 26 15-1 7 (female) 47
14-15 28 18 + (male) 53
Average 22 18 + (female) 47
Average (male) 33
Average (female) 31
SOURCE: Whiteford, 1985.

those for taxpayers who have dependent children) have fared
much better - the dependent spouse rebate for those with
children has declined by about 3 per cent in real terms since
1976-77, while over the same period the sole parent rebate has
increased by about 5 per cent in real terms. Table 9 provides
details of these trends.
As well, additional payments for children and mother's/
guardian's allowance within the social security system have
also declined substantially in real terms - by between 4 and
19 per cent - thus further disadvantaging the poorest families
with children. The problems of pensioner and beneficiary
families with children have been addressed to some extent by
substantial real increases in these payments in the last three
Budgets. Nevertheless, the loss of real value of family
allowances and of income-tested payments would have tended to
widen the gap between families with and without children and in
particular between the poorest families and other members of
the community. (1)
While in the last three Budgets the Government has placed
priority on increasing the income-tested payments for children
of pensioners, beneficiaries and low-income workers and has
provided general tax cuts, significant problems remain for all
families with dependent children. This is shown in Table 10.
All sole parent pensioner families and pensioner/beneficiary
couples with four or more children have suffered actual
declines in the real value of their total social security
payments over the past decade. Higher income families with
children have experienced real increases in their disposable
incomes, but for all persons not entitled to FIS. these
increases have been smaller for families with children and
decline with increasing family size.
Because family allowances are paid at a flat rate, they form a
higher proportion of the incomes of low income families with
children than they do of the incomes of high income families.
It follows then that in relative terms it is the poorest
families with children, particularly pensioners and
beneficiaries, who have been most disadvantaged by the fall in
the real value of family allowances. For example, for a sole
parent pensioner with three children, family allowances when
they were introduced represented around 17 per cent of their
total disposable income. The decline in real value of family
allowances alone therefore represents a cut in their real
disposable incomes of about 4 per cent.
4.2 Family assistance and social change
Discussion of current family assistance arrangements also
involves consideration of a number of complex questions of
social and personal preferences in a period of profound changes
affecting families. The following discussion attempts to
highlight some of these questions without pretending to answer
them.
(1) See Raymond and Whiteford (1984). Whiteford and Moore

(1986) and Saunders (1982) for further details.
Page 36
TABLE 9 ; REAL CHANGES IN COMPONENTS OF INCOMES BETWEEN 1976-77
AND 1985-86 (1)
Percentage Change
Income Component(2) since 1976-77
in Real Terms
Pensions and Benefits %

. Additional pension/benefit for children - 4
. Mother's/guardian's allowance (3) -19
. Standard rate of pension and sickness benefit (4) .... +6
. Married rate of pension and benefit (4) + 6
. Single adult (21 years and over) rate of unemployment
benefit (for those without children) - 2
. Single junior (16 and 17 years) rate of unemployment
and sickness benefit:
- standard rate -37
•- for those in receipt of benefit for
6 months and longer -35
Single pension free area -29
Family Allowances 29
Tax Measures
. Dependent spouse and daughter-housekeeper rebates:
- for those with children - 3
- for those without children -22
. Sole parent rebate + 5
. Basic tax threshold -24
. Single pensioners' tax threshold - 7
. Single beneficiaries' tax threshold -13
Wages
. Gross Average Weekly Earnings +10
1. Average Weekly Earnings and consumer price index values for

the June 1986 quarter have been estimated.
2. Family Income Supplement is not included in this table

because it was introduced only in 1983.
3. Based on movements in higher rate of mothers/guardians
allowance.
4. These increases are effectively overstated because of
declining inflation rates and the Medicare effect. See Raymond
and Whiteford (1984. pp. 3. 30) for further details.
Page 37
TABLE 10: PER CENT CHANGES IN REAL DISPOSABLE INCOMES(I) OF VARIOUS FAMILY TYPES. 1976-77
TO 1985-86(2)
Pensioner Beneficiary with Nil Private

with Nil Income
Private Adult Adult Junior
Income Sickness Unemploy- Unemploy- Wage and Salary Earner with
ment ment and Private Income of
Sickness 50% AWE 75% AWE 1001 AWE 150% AWE
SINGLE PERSON +6.1 +6.1 -2.0 -36.8 +4.9 +7.6 +7.5 +5.0
-34.6
SOLE PARENT:
- One Child +0.4 +11.5 11.5(3) +6.4 +6.5 +4.4
_ _
- Two Children -2.1 +6.7 +16.9(3) +5.0 +5.4 +3.6
_ _
(3) (3)
- Three Children -4.1 +3.0 +21.3 +4.8 +4.1 +2.7
- Four Children -5.6 +0.4 - -
+25.1(3) +8.4(3) +2.9 +1.8
HARRIED COUPLE, WITH ONE SPOUSE WORKING:

_
- No Children +6.3 +6.3 +6.3 +2.2 +5.3 +5.6 +3.8
_
-One Child +3.9 +3.9 +3.9 +10.7(3) +5.8 +6.0 +4.1
(3)
- Two Children +1.6 +1.6 +1.6 —
+16.0 +4.4 +4.9 +3.3
_
- Three Children -0.5 +0.5 +0.5 +20.3(3) +4.2(3) +3.6 +2.4
(3) (3)
- Four Children -2.1 +0.5 +0.5 - +24.1 +7.8 +2.5 +1.5
MARRIED COUPLE, WITH BOTH WORKING (Income Split 60:40):

- No Children - - - +4.8 +3.1 +4.8 +7.6
_ _ _ (3)
- One Child +11.4 +2.3 +4.1 +7.1
_
- Two Children _ _ +16.6 (3)
+1.1 +3.1 +6.3
_ _ _ (3)
- Three Children +20.9 +1.0 +2.0
(3)
+5.4
(3)
- Four Children - - - +24.7 +4.6(3) +0.9 +4.5
1. Based on average tax scales applying in 1976-77 and 1985-86. Includes all rebates,
family allowances and family income supplement. Excludes health levies.
2. Average weekly earnings and consumer price index values for the June 1986 quarter have
been estimated.
3. At this income level, FIS would be payable and is included in 1985-86 disposable
incomes. Sole parents however, would be financially better off claiming supporting parents
benefit instead of FIS.
Page 38
One important issue is the appropriateness of the assumptions
about behaviour underlying the programs, particularly the DSR.
On the one hand, the DSR appears to be based on the assumption
that women are or should be dependent upon their husbands, both
when they have children and after. This view is reinforced by
the fact that the payment goes to the main income-earner
(usually the male) rather than to the qualifying spouse. Given
increases in female labour force participation over past
decades, the underlying assumption may be seen as increasingly
inappropriate. (1)
It can be argued, on the other hand, that many married women,
particularly some older persons, may have had considerable
interruptions to their labour force activity in past years and
would be disadvantaged in the current labour market. For those
with limited work opportunities and whose husbands have modest
or average incomes, recognition of the fact that (at least) two
persons are dependent upon one income may be regarded as
appropriate.
This general issue is less salient in the case of family
allowances, which contains no implicit assumption about female
work patterns, since it is paid to all mothers (usually),
irrespective of their labour force activities.
A related concern is with the value of home activity.
Proponents of the DSR and of increases to it argue that this
program is the only current recognition of the important
economic and social contribution made by women at home. They
suggest that the value of the rebate is low compared to the
value of the second tax threshold available to working wives,
and should therefore be increased. Currently, the tax
threshold is $4595 per year, while the DSR for those without
children is equivalent to $3320 per year of taxable income for
the husband, and $4120 per year where there are children.
While the second tax threshold is of greater money value than
the DSR, this can be justified by the costs that must be met
when persons seek work, costs that are even greater where there
are child-care expenses. There are only a very small range of
equivalence scale studies which have sought or which can be
used to estimate the additional income required by a family
where both spouses work in the market if they are to achieve
the same standard of living as a family where one spouse works
in the market. These estimates of additional income
requirements range widely, however - from between 2 and 30 per
cent where there are no children, between 5 and 32 per cent
where there is one child, and between 5 and 25 per cent where
there are two children (Whiteford. 1985. pp. 113-114). While
this range of estimates may appear too wide to be of much
practical assistance, the very low estimates were derived from
poverty studies, in which it could be expected that there would
(1) Between 1933 and 1983. the labour force participation rate
of married women of working age rose from around 6 per cent
to around 47 per cent (Ross, 1984. p.227).
Page 39
be comparatively few families where both spouses worked
full-time. The only study specifically designed to estimate
the costs of full-time work for a secondary income earner
provided an estimate of a 30 per cent differential (Lazear and
Michael, 1980). The differential in disposable incomes
provided by the second tax threshold vis-a-vis the dependent
spouse rebate is currently a maximum of some 3.5 per cent for
families whose incomes fall in the 25 cent rate step. The
differential increases as taxable income increases, but this is
because of the effects of the higher rate steps rather than the
level of the threshold and the DSR.
It has also been argued that the home activities of dependent
spouses should in fact be treated as enhancing a family's
income, so that a dependent spouse rather than being a drain on
resources and thus deserving support, can be considered as an
addition to the family's resources. For example, families
where both spouses work must pay for child care, buy more meals
outside the home and generally pay for other household services
which single income families receive from the dependent
spouse. Thus, at any specific income level, the single income
family will have greater free resources and therefore a greater
capacity to pay tax than the two-earner family. In addition,
it has sometimes been argued that because two-income families
must still carry-out many of these household tasks, their
leisure time and thus their overall standard of living is
further depressed. Moreover, at any specific income level the
hourly wage rate of the earner in a single income family must
be higher than the hourly wage rate of either worker in a
two-earner family, and it is therefore argued that the earner
in a single income family will have a greater capacity-to-pay
than either spouse in a two-income family.
While it appears undeniable that at any specific income level,
a single income family is better off than a two-income family,
there are a great number of practical and conceptual
difficulties with this approach. As noted by proponents of
this approach, it is not feasible to tax the imputed income
from home activities or from leisure, and they therefore
suggest that this problem should be resolved by the abolition
of the DSR and/or by the more favoured tax treatment of
secondary income earners. However, the degree to which there
should be differentiation between single and two-income
families has not been comprehensively quantified. Such
quantification would require detailed consideration of the
household activities and leisure time of two-income as well as
single income families. There is also a need to determine
whether income can be imputed to leisure at all income levels
and in all circumstances. eg. the unemployed cannot
realistically be said to derive imputed income from their
enforced "leisure"; a spouse who is caring for children or
handicapped relatives or is himself or herself handicapped may
not be a source of imputed income, except to the extent of the
costs avoided by the private provision of these services. It
is necessary to be careful to avoid double-counting in these
cases. The situations involved are very complex. In general,
these problems do not arise in respect of the family allowances
program, which makes no distinction based on home oc work
activity.
Page 40
A further area of argument is whether tax-transfer arrangements
should provide support for marriage or neutrality between
family types. Proponents of the DSR argue that it should be
increased in order to bolster "traditional" family
relationships, i.e. generally families where the husband works
in the market and the wife cares for children at home. Others
argue that Governments should be neutral in dealing with family
relationships and should therefore neither discriminate for nor
against any type of family. This issue is fundamentally a
matter of social preference, but it should be noted that
neutrality does not necessarily imply that all families are
treated exactly alike in terms of levels of assistance. Once
again, it is necessary to determine the equivalent needs or
equivalent capacity-to-pay of different families and proceed on
that basis.
A number of proponents of increased family allowances argue
that they should be increased in order to offset, albeit to a
minor extent, the unequal pattern of resources within the
family unit, both where spouses do and do not work. Evidence
on income-sharing within the family unit is scant (but see
Edwards, 1981, 1984), but there is general agreement that
resources are often very unequally shared. Family allowances,
paid to mothers, tend to offset this inequality, while the DSR.
being paid to the primary income earner, may reinforce this
inequality. If there is concern with this issue, consideration
could be given to placing greater emphasis on family allowances
or to replacing the DSR with a cash payment to mothers.
A very important issue is the effect of current arrangements on
work incentives. The DSR is income-tested on the dependent
spouse's income, and therefore it can be argued that married
women seeking work effectively start paying tax once their
income exceeds $282 per year. This may constitute a barrier to
labour force participation of married women. It should be
noted, however, that for the withdrawal of the tax rebate to
actually affect the dependent spouse, there is necessarily a
presupposition either of income-sharing in the family or of the
husband forbidding the wife to work, and/or reducing
housekeeping money in line with the loss of the DSR. A further
policy dilemma is that if there is considered to be
justification for some public support of dependent spouses,
then an income test is required in order to establish
"dependency". It is difficult to quantify the effect of the
income test on the work behaviour of spouses, although there is
considerable evidence from the U.S. that married women,
particularly those with low incomes, are more sensitive to
increases in EMTRs than any other group except sole parents.
A related concern is that the effects of the social security
system on incentives to work should generally be more salient
in the area of assistance for families than in other areas of
social security. First, many of the group about whom there is
great concern with work incentives are more likely to have
children than other groups of social security recipients, e.g.
sole parent pensioners who by definition have children, married
unemployment and sickness beneficiaries and invalid pensioners
(who are far more likely to have children than do age
Page 41
pensioners), and FIS recipients (who again by definition have
children). That is. people who are of an age to have the care
of children are also generally of prime working age.
Second, the presence of children means that the family faces
greater costs in absolute terms than do those without
children. But the inadequacy of payments for children means
that their social security incomes are insufficent to meet
these needs. Therefore, those with children need to make
greater efforts than others to make good this shortfall. But.
third, when they therefore seek work those with children face
greater structural barriers than do many of those without
children. The interaction of the taxation and social security
systems means that persons with children often face higher
effective marginal tax rates than do other social security
recipients. For example, some of the highest effective
marginal tax rates faced by social security clients are
included in the following cases:
married beneficiaries with children can face EMTRs of 125
per cent over certain income ranges, where their additional
payments for children are withdrawn dollar for dollar under
the benefit income test, but because these additional
payments are not taxable, they must still pay 25 cents in
income tax on the dollar of private income they didn't get
the benefit of; and
sole parent pensioners in certain income ranges for an
additional dollar of private income can lose fifty cents of
non-taxable pension for children. pay 30 cents of income tax
and pay 20 cents for the Medicare levy phase-in.
While these two situations are obviously uncommon, it should be
noted that they are among the comparatively few situations
where the structure of the social security and the tax systems
alone combine to such an extent that people are no better off
from working. A further example is that of FIS recipients, all
of whom face an effective marginal tax rate of at least 75 per
cent when other individuals in their income ranges face only 25
or 30 per cent.
Fourth, many forms of assistance other than social security
cash payments are concentrated on families with children, e.g.
income-tested education allowances, child care relief or
priority of access. Loss of these benefits can "stack" on top
of the tax-social security interaction and further reduce the
benefits of work. To a very large extent, these sorts of
problems arise because many different levels of Government and
a range of Departments at the same level of Government wish to
concentrate their assistance on families with children and in
particular on low income families. That is. this is a
consequence of concentration on tightly-targeted. selective
welfare programs.
In conclusion, it should be noted that this discussion has been
undertaken within a narrow framework. Current arrangements
recognise and support only some forms of dependency, and in
particular are mainly directed towards dependencies that arise
Page 42
in the context of "traditional" family relationships, as
discussed earlier. It is also arguable that current
arrangements reinforce the relationships that produce
dependency. While it is desirable to recognise immediate
financial needs, alternative strategies such as emphasis on the
provision of child care and other services may be regarded by
some as a more appropriate long-term strategy. Longer term
rationalisation of these arrangements should also be considered
in a broader context. For example, if unemployment benefit
payments for couples were split between spouses, then their
need to receive the DSR would be reduced. However. the
splitting of this payment raises complex issues about the
purpose of the unemployment benefit program, which would then
need to be addressed. Similarly, some current concerns could
be resolved if the income unit for social security purposes
were the individual rather than the family unit. However, such
proposals also subsequently raise complex issues of vertical
and horizontal equity and of the relative priority to be placed
in spending on general family assistance programs or selective
programs.
4.3 Universal or selective support
While vertical and horizontal equity concerns are closely
inter-related, conflicts can arise between these and other
goals.
There is a general. "triangular" conflict (Whiteford and
Stanton. 1983. p. 53) inherent in the consideration of social
security policies because of the inter-relationships between
the level of income support offered. the rate at which
assistance is withdrawn, and the cut-out point at which
assistance effectively ceases. For example, in order to ensure
adequacy of income support for low income groups. it is
generally desirable to have a high level of basic payments.
But in order to ensure that people are not discouraged from
providing for themselves or are not penalised when they work,
it is also desirable to have low withdrawal rates in the income
test in order to minimise any poverty traps. A high payment
level and a low withdrawal rate, however, are simply
incompatible with a low cut-out point, and consequently the
number of people receiving benefits will be increased, as will
the overall cost of the program. Moreover, benefits will be
paid to people who might not be considered to require income
support.
Specific conflicts between vertical and horizontal equity
concerns usually arise when it is considered necessary to
redirect assistance away from expenditures that serve
horizontal equity concerns even at high income levels to
programs of greatest assistance to the needy. For example,
both family allowances and the dependent spouse rebate are
sometimes viewed as "middle class welfare", particularly family
allowances, since it is a cash payment from the Department of
Social Security. but is neither income-tested nor taxed.
Because of the similarities between the objectives of family
allowances and those of the DSR, the spouse rebate has also
been criticised as favouring better-off households. In periods
Page 43
of tight budgetary restraints it appears reasonable to argue
that improvements in assistance for low income families with
children should be financed out of cuts in these "middle class
welfare" programs.
One point that is not commonly appreciated when these
recommendations are made is that there is already considerable
assistance specifically directed towards low income families
with children. Table 1 showed that as well as the $1,500
million spent on family allowances, some $575 million was
outlayed on additional pension and benefit for children and
family income supplement. Adding this figure to the share of
family allowances that low income families receive (nearly $300
million) shows that of the total spending on these programs of
$2,080 million, more than $870 million or 42 per cent goes to
the low income families who have responsibility for around 20
per cent of dependent children. If spending on sole parent
pensions and the mother's/guardian's allowance was included in
these figures, then the concentration of spending on low income
families would become even more pronounced.
This should not be taken to suggest that there is some sort of
imbalance in spending on low income families and families in
general, nor that it may not be desirable to increase the
concentration of assistance on low income families. This could
of course be achieved by increases in income-tested payments
just as well as income-testing of general payments, or some
combination of both. The point is that the balance between
universality and selectivity that is currently struck is often
not appreciated if the analysis looks only at family allowances
or the dependent tax rebates and not the tax-transfer system as
a whole. Once again, there is an issue of perceptions. The
income-tested programs for children are less visible, in part
because their public presentation is not the same as that shown
in Table 1. Rather, the Budget Papers include spending on
additional pension and benefit and mother's/guardian's
allowance in the relevant categories, either "Assistance to
Widows and Single Parents", "Assistance to the Handicapped" or
"Assistance to the Unemployed and Sick", while expenditures on
family allowances and the family income supplement are
separately categorised as "Assistance to Families". It is
arguable that this presentation disguises the similarity
between the goals and natures of these programs.
The view that these general family assistance programs are not
progressive instruments in themselves is. moreover, based on a
misperception of the role and effects of these programs.
Family allowances and the dependent spouse rebate provide
support to persons in the high expense phases of their family
life cycle, that is. when they have children. Families with
children may appear better-off than other types of income units
because many of the "other" groups are made up of older persons
who are still in the workforce or who have retired and of
younger groups who have less workforce experience. Many of
these people will have lower incomes, but could be expected to
have fewer needs relative to those incomes. In addition, they
may have already received the benefits of these payments or
could be expected to later in their lives, when they have
Page 44
children. The proper perspective in which to look at these
issues, therefore, is in terms of the distribution of the
benefits of these programs over the life cycle and the
distribution in terms of equivalent incomes.
Even a point in time analysis suggests that these programs are
more progressive than commonly conceded. Analysis of 1975-76
Household Expenditure Survey data suggests that family
allowances are progressive in their incidence, accounting for
1.1 per cent of the income of the lowest income group in that
survey and 0.2 per cent of the income of the highest income
group. (Harding. 1984, pp 55-57). However, these figures
assessed the distributional impact of family allowances against
the incomes of all households, rather than just those with
children. Excluding households without children (such as the
very large number of aged households who are typically on low
incomes) provides a more appropriate base for analysis of the
incidence of family allowances. It is also necessary to take
account of the relative income requirements of different family
types.
As discussed previously, equivalence scales can be derived from
the application of econometric methods to data on household
incomes and expenditures, but there is considerable debate
about different approaches and no one method has attracted
universal support (Whiteford. 1985). The OECD, however, have
proposed the use of a set of scales for "countries which have
not established their own equivalence scales," (1982) as part
of its social indicators program.
Recent research using these OECD equivalence scales has shown
that family allowances are progressive. (Harding and Seymour.
1986). Once income is adjusted to reflect family
responsibilities, more than 75 per cent of all outlays on
family allowances in 1984-85 went to families with equivalent
incomes below $20.000 (about the level of average weekly
earnings). (1) Less than 7 per cent of outlays on family
allowances went to families with adjusted incomes above
$30.000. These results are illustrated in Table 11.
Other recent work has assessed the distributional impact of the
dependent spouse rebate. Helen Brownlee of the Institute of
Family Studies (1985) has shown that 60 per cent of the male
taxpayers receiving a full or partial dependent spouse rebate
and without dependent children had incomes less than $20,000
per year and a further 32 per cent had incomes between $20.000
and $35.000 per year. Of couples with dependent children and
where the male received a full or partial DSR, 45 per cent had
incomes less than $20,000 per year and a further 46 per cent
had incomes between $20,000 and $35.000 per year. If we take
persons with incomes in the top tax bracket as well-off, then
it is apparent that more than 90 per cent of the recipients of
the DSR could not be so classified. Nevertheless, the DSR is
(1) It should be noted that the base for this analysis is a

couple without children.
Page 45
TABLE 11: FAMILY ALLOWANCES: DISTRIBUTION OF BENEFITS BETWEEN DIFFERENT FAMILIES AT VARIOUS
INCOME LEVELS.
Percentage of families with

Percentage of families incomes adjusted to reflect
Number with original incomes family size
of
Children under $20,000 under $30,000 under $20,000 under $30,000
1 44 69 58 83
2 35 68 71 93
3 34 66 83 95
4 40 70 89 97
5 37 70 94 100
6+ 74 94 100 100
All families
with children 37 68 76 93
Note: All figures estimated from data from the 1981-62 Income and Housing Survey and
rounded to the nearest percentage point.
Source: Harding and Seymour, 1986, p.27.
less progressive in its incidence at very low income levels

than family allowances. The main reason for this is that low
income groups pay limited income tax and therefore can take
little advantage of the rebate. It is important to note,
however, that the DSR is of great importance to some low income
groups, particularly married beneficiaries. Since benefits are
usually paid entirely to one spouse, married beneficiaries
generally take full advantage of the DSR. ie. if it was not for
the rebate they would be liable for an additional tax bill of
$830 or $1030 per year.
Additionally, it should be noted that proposals to income-test
the DSR or to income-test or tax family allowances involve a
redistribution of income, but only from the population who are
married or who have children. For example, a cut in family
allowances through their income-testing or taxing is no
different in effect from an increase in the tax liabilities of
those with children. If it is considered appropriate to
increase the tax burdens of middle and higher income groups
with children, horizontal equity would suggest that the tax
burdens of high income individuals without children should be
similarly increased. In fact, as previously discussed, the
decline in the real value of family allowances since their
introduction has constituted an effective shift in the tax
burden away from individuals on to families with children.
This effect would be accentuated if cuts in family allowances
or the DSR were used to finance reductions in general income
tax rates.
Page 46
From this example it follows that income-testing of a program
does not unambiguously imply an improvement in vertical
equity. This depends on how the expenditures saved are then
spent. For example, the reduction of family allowances for
persons with incomes above 150 per cent of AWE, say, could be
used to finance an increase in the base rate of the allowance,
an increase in income-tested payments, a general tax cut or a
simple reduction in the Budget deficit. The first two
alternatives are likely to improve progressivity. the third is
not, while the last is more difficult to determine. Once
again, it is important to look at the overall context in which
a proposal is made.
Page 47
5. SUMMARY AND CONCLUSIONS - RESEARCH QUESTIONS IN FAMILY
INCOME SUPPORT
This paper has attempted to identify and discuss some of the
horizontal and vertical equity considerations relevant to
family assistance policies. The paper has described the
extensive nature of current programs, which cover some
2.5 million families with 4.3 million children at an annual
cost in excess of $4.000 million. It has been argued that when
considering current arrangements or proposals for change, it is
important to look at the system as a whole. The tax and social
security components of the system overlap in terms of the
population of recipients and interact to affect the disposable
incomes and the rewards of work enjoyed by nearly all
Australians. Only by considering the two systems together is
it possible to provide a consistent analysis and to avoid
unintended consequences of policy proposals.
The paper briefly discussed the objectives of family assistance
in terms of allowing for the differing abilities-to-pay of
different types of families in the taxation system and in
providing for the differing needs of families in the social
seurity system. The paper discussed the proposition that the
presence of children is a matter of choice and that therefore
families with children do not require any distinct or special
treatment. The paper argued that the issue of choice is
outweighed by broader welfare and social concerns, and that in
any case the relevance and meaningfulness of the idea of choice
is uncertain in this area.
The paper then discussed some concerns with current family
assistance arrangements, in particular, the adequacy of payment
levels, the continuing relevance of some programs in a period
of profound social changes, and the balance to be struck
between universal and selective income support. It was argued
from an analysis of social and economic research and from
international comparisons that assistance for low income
families with children is inadequate, and from international
comparisons that Australia is relatively ungenerous to average
and higher income families with children. This conclusion was
supported by an analysis of trends in the real value of family
income security programs and in real disposable incomes over
the last decade which suggested a shift in effective tax
burdens away from persons without children on to families with
children and also showed real declines in the disposable
incomes of some low income families with children.
The conclusions drawn in regard to the continuing relevance of
current arrangements were more tentative. The central issues
here are the appropriate income unit for social security and
taxation purposes and the effects of the current system on the
labour force behaviour and opportunities of women. These
issues are closely inter-related and their resolution is in
part a matter of personal values. All the family income
support programs under consideration, in one way or another,
provide support for persons in specified circumstances of
dependency, usually somewhat narrowly defined. There are many
persons concerned for differing reasons with the possibility
Page 48
that these arrangements promote dependency, either. for
example, of social security recipients on the rest of the
population or of women on men and the State. What should be
recognised is that current dependencies reflect conceptions of
need and that any sweeping proposals for change may have
implications that are not easily recognised.
In discussing the priority to be given to universality or
selectivity in family assistance, the paper argued that current
arrangements are significantly more progressive than is often
conceded. Whether individuals consider that family allowances
or the dependent rebates should or should not be income-tested
or taxed in some way is, however, ultimately a matter for
personal preferences and priorities. It is important,
nevertheless, to accept these programs for what they are;
simply instruments through which certain objectives can be
achieved to varying degrees. These programs should be judged
by the extent to which they achieve these goals or the desired
balance between goals. In making an appraisal of horizontal
and vertical equity, adequacy, maximising incentives and
reducing costs, perceptions about these programs should not be
mistaken for reality. It is also important to bear in mind
that the achievement of any one objective must to some extent
be at the expense of others.
As discussed in Part 1. this paper has raised these issues for
consideration in the context of the current Review of social
security programs. The issues raised are by no means the only
concerns that will or should be addressed in the Review, since
the paper has concentrated rather narrowly on horizontal and
vertical equity concerns in relation to general family
assistance programs. Nor should the arguments raised or the
conclusions reached be thought to be definitive or
unassailable. In this context, it may be useful to conclude
the paper with a brief discussion of research and policy issues
that could be explored further in the Review.
Further research would be useful in a number of areas. There
is a need for more up-to-date, reliable and comprehensive
information about the costs of children, the financial
circumstances of low income families and the economic position
of families generally. In addition more detailed analysis of
policies and practices in a range of overseas countries would
be likely to indicate whether some proposed policy alternatives
are feasible or whether familiar problems arise in differing
forms. Finally, continuing detailed analysis of specific
policy issues and alternatives would be valuable in its own
right.
Research on the costs of children could involve either the
analysis of available statistics, the review of existing
literature or small-scale studies or surveys. One priority
would be the derivation of indicative equivalence scales from
the 1984 Household Expenditure Survey. Previous analysis has
been carried out by the Australian Bureau of Statistics (ABS)
and the then Social Welfare Policy Secretariat, but on data
from the 1974-75 and 1975-76 surveys. While it could not be
expected that any new set of equivalence scales would not share
Page 49
some of the problems of earlier estimates, the analysis of
up-to-date data using a variety of methods would be a valuable
input to considerations of the adequacy of social security
payments for children.
A closely related but even more complex issue is the costs and
effects of disabilities on children. There is a good deal of
overseas, particularly British, literature on this subject, but
Australian research is scant. A similarly complex area is the
impact of long term unemployment on families, where once again
more research has been undertaken overseas than in Australia.
The major concern here is with the effect of adult's
unemployment on their children, not only in relation to
financial impacts, but also social and psychological effects.
A complementary area is the costs of working for families with
children, and women and sole parents in particular. The debate
on all these issues could profit from more detailed analysis of
the available evidence and the attempt to verify that
conclusions reached in other countries are relevant to
Australia.
Over the past twenty years there has been a significant growth
in data on the distribution of income in Australia, as income
surveys have become available - for example, these surveys
include the Macquarie survey of 1966-67. the Income
Distribution Surveys of the ABS in 1968-69. 1973-74. 1978-79
and 1981-82. the Household Expenditure Surveys of 1974-75.
1975-76 and 1984. the National Survey of Income for the Poverty
Inquiry in 1973, the 1975 General Social Survey, the censuses
of 1976 and 1981, and the 1982 Family Survey. At the current
time, therefore. Australian social researchers are fortunate to
have a variety of fairly recent data on income, expenditure and
family patterns, as well as a series of income surveys, albeit
a series in which the definitions and results of the surveys
are not always comparable. Nevertheless, these and other data
sources provide a base at least for attempting to determine
aggregate trends in the distribution of income, as well as
trends in family and household composition. labour force
activity and unemployment, the growth in the numbers of sole
parents, and trends in family formation and dissolution. One
focus of such analysis could be the changing vulnerabilities of
different types of families to economic and social stress and
changes in dependency over this period. These data or
particular sources among them would also provide a useful base
for a review of the concept of the family life cycle and how it
varies for different types of families in different
circumstances. Such a study could throw light on how the needs
and costs of children develop over time.
An analysis of policy and practice in overseas countries would
appear to be an indispensable part of the research to be
undertaken in the Review. While there are great difficulties
in making any sort of international comparison. such
comparisons are often very illuminating. Evaluation of the
effects of programs used in other countries is one of the few
ways available of assessing the likely consequences of
proposals for changes to current arrangements in Australia.
While objectives and circumstances may vary markedly.
Page 50
international comparisons for the social sciences are analogous
to experiments in the natural sciences. With due care, such
comparisons could complement some consideration of specific
policy issues.
The sorts of issues that could be analysed include alternative
mechanisms for assisting families through the tax system as
well as the social security system, looking at the advantages
and disadvantages of tax credits and direct expenditures as
alternative forms of support. The question of the appropriate
income unit in the tax and social security systems requires
further investigation as, more specifically, does the treatment
of women in the social security system. While considerable
.research has been .undertaken in the past few years on poverty
traps in the social security and related systems, further work
is required on their practical significance. Such research
would also provide an input into the debate on universality and
selectivity in family assistance. The Australian discussion of
the advantages and disadvantages of universality and
selectivity would also benefit from a discussion of the British
literature on means-tested benefits.
This suggested range of research is itself only tentative. It
has been suggested because the discussion of issues in the body
of this paper should only be taken as one introduction to the
issues to be considered in the Social Security Review. The
Review process has itself only just commenced, and the
determination of research priorities is properly a part of that
process.
Page 51
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Page 56
DEVELOPMENT DIVISION: SERIES OF RESEARCH PAPERS
RESEARCH PAPER NO 1 UNEMPLOYMENT BENEFIT RECIPIENTS IN

AUSTRALIA. 1970-1980; AN ANALYSIS
(REVISED) (NOVEMBER 1981)
RESEARCH PAPER NO 2 REVIEW OF THE CHARACTERISTICS OF LONG-TERM
UNEMPLOYMENT BENEFIT RECIPIENTS IN
AUSTRALIA. 1970-1977 (NOVEMBER 1978)
RESEARCH PAPER NO 3 CHANGING FAMILY PATTERNS AND SOCIAL SECURITY
PROTECTION: THE AUSTRALIAN SCENE
(MARCH 1979)
RESEARCH PAPER NO 4 UNEMPLOYMENT STATISTICS IN AUSTRALIA
(JULY 1979)
RESEARCH PAPER NO 5 A REVIEW OF THE CHARACTERISTICS OF SOLE
PARENTS ASSISTED UNDER THE SOCIAL SERVICES
ACT (MARCH 1980)
RESEARCH PAPER NO 6 RESEARCH QUESTIONS ON INCOME SECURITY FOR
SOLE PARENTS (MARCH 1980)
RESEARCH PAPER NO 7 CHARACTERISTICS OF SOLE MOTHERS RECEIVING
STATE ASSISTANCE SUBSIDISED UNDER THE STATES
GRANTS (DESERTED WIVES) ACT (MARCH 1980)
RESEARCH PAPER NO 8 ADDITIONAL DATA REQUIREMENTS OF THE
DEPARTMENT OF SOCIAL SECURITY (APRIL 1980)
RESEARCH PAPER NO 9 THE RELATIONSHIP BETWEEN THE AUSTRALIAN
SOCIAL SECURITY AND PERSONAL INCOME TAXATION
SYSTEMS - A PRACTICAL EXAMINATION
(DECEMBER 1980)
RESEARCH PAPER NO 10 SURVEY OF INVALID PENSIONERS OCTOBER 1979:
DATA ON MAJOR CAUSES OF INVALIDITY AND ON
OTHER IMPAIRMENTS 2ND EDITION (OCTOBER 1981)
RESEARCH PAPER NO 11 THE FINANCE OF SOCIAL SECURITY: SOME
IMPLICATIONS OF THE INTERACTION BETWEEN
SOCIAL SECURITY AND PERSONAL INCOME TAX
(DECEMBER 1980)
RESEARCH PAPER NO 12 WORK INCENTIVE EXPERIMENTS IN THE UNITED

STATES AND CANADA (JUNE 1981)
RESEARCH PAPER NO 13 WORK TEST FAILURE - A SAMPLE SURVEY OF

TERMINATIONS OF UNEMPLOYMENT BENEFIT
(JUNE 1981)
RESEARCH PAPER NO 14 STATISTICS ON THE DISTRIBUTION OF INCOME AND
WEALTH IN AUSTRALIA (OCTOBER 1981)
RESEARCH PAPER NO 15 POPULATION PROJECTIONS AND SOCIAL SECURITY
(NOVEMBER 1981)
RESEARCH PAPER NO 16 AS HIS WIFE; SOCIAL SECURITY LAW AND POLICY

ON DE FACTO MARRIAGE (DECEMBER 1981)
RESEARCH PAPER NO 17 TAXATION EXPENDITURES; SUBMISSION BY THE

DEPARTMENT OF SOCIAL SECURITY TO THE INQUIRY
INTO TAXATION EXPENDITURES BY THE HOUSE OF
REPRESENTATIVES STANDING COMMITEE ON
EXPENDITURE (MARCH 1982)
RESEARCH PAPER NO 18 SOLE PARENTS ON PENSIONS: A SAMPLE SURVEY
OF CLASS 'A' WIDOW PENSIONERS AND SUPPORTING
PARENT BENEFICIARIES (JUNE 1982)
RESEARCH PAPER NO 19 FINANCING SOCIAL SECURITY: AN ANALYSIS OF

THE CONTRIBUTORY 'SOCIAL INSURANCE' APPROACH
(JUNE 1982)
RESEARCH PAPER NO 20 DEVELOPMENTS IN SOCIAL SECURITY; A

COMPENDIUM OF LEGISLATIVE CHANGES SINCE 1908
(JUNE 1983)
RESEARCH PAPER NO 21 SURVEY OF MORBIDITY CHARACTERISTICS OF

CHILDREN RECEIVING HANDICAPPED CHILD'S
ALLOWANCE. 14 MARCH 1982 (DECEMBER 1983)
RESEARCH PAPER NO 22 SOME IMPLICATIONS OF THE INTERACTION OF THE
PERSONAL INCOME TAXATION AND SOCIAL SECURITY
SYSTEMS (MARCH 1984)
RESEARCH PAPER NO 23 PERMANENT INCAPACITY: INVALID PENSION IN
AUSTRALIA (APRIL 1984)
RESEARCH PAPER NO 24 GOVERNMENT SUPPORT OF RETIREMENT INCOMES IN
AUSTRALIA (APRIL 1984)
RESEARCH PAPER NO 25 THE ECONOMIC AND SOCIAL CIRCUMSTANCES OF THE
AGED (APRIL 1984)
RESEARCH PAPER NO 26 RETIREMENT INCOME PROVISIONS OVERSEAS (APRIL
1984)
RESEARCH PAPER NO 27 A FAMILY'S NEEDS: EQUIVALENCE SCALES.
POVERTY AND SOCIAL SECURITY (APRIL 1985)
RESEARCH PAPER NO 28 EQUITY. TAX REFORM AND REDISTRIBUTION (APRIL
1985)
RESEARCH PAPER NO 29 ISSUES IN ASSISTANCE FOR FAMILIES -
HORIZONTAL AND VERTICAL EQUITY
CONSIDERATIONS (AUGUST 1986)
SOCIAL SECURITY REVIEW
BACKGROUND AND DISCUSSION PAPERS SERIES
No 1 B Cass, The Case for Review of Aspects of the

Australian Social Security System/ June 1986
No 2 0 Donald, Social Security Reform, June 1986
No 3 K Ogborn, Social Security and the Labour Force

Looking Ahead, June 1986
No 4 A Harding, Assistance for Families with Children and

the Social Security Review, June 1986
No 5 P Whiteford, Issues in Assistance for Families -

Horizontal and Vertical Equity Considerations, August
1986

Policy Research Paper No 29

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Policy Research Paper No 29

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The Social Security Review

Background/Discussion Paper No.5

Issues in Assistance for Families

Social Security Review

Research Paper No.29

This paper builds on previous work carried out in the

ISBN 0 642 51636

The Australian system of income support for families with

HORIZONTAL AND VERTICAL EQUITY CONSIDERATIONS

"The effects of a tax depend upon what it is.

1. INTRODUCTION - THE SOCIAL SECURITY REVIEW 1

2. THE INTERACTION OF THE TAXATION

2.1. Current provisions affecting families 4

3. OBJECTIVES OF FAMILY ASSISTANCE 22

3.1. Ability-to-pay and horizontal and vertical

4.1. Adequacy of payments 31

5. SUMMARY AND CONCLUSIONS - RESEARCH QUESTIONS

In November 1985 the Minister for Social Security, the Hon.

PROVISION ELIGIBLE GROUP LEVEL OF ASSISTANCE NO OF RECIPIENTS COST INCOME TAXED

Dependent Taxpayers with a

PROVISION ELIGIBLE GROUP LEVEL OF ASSISTANCE NO OF RECIPIENTS COST INCOME TAXED

(1) As part of its tax reform measures, the Government has

MAJOR TAX REBATES

Income Unit Type Pensioner or Beneficiary Non-Pensioner/Beneficiary

Individuals Standard rate pension Tax threshold

Sole parents Standard rate sole parent's

Both working One working

Both working One working

security and private income. Those taxpayers who received some

A. Sole parent with one dependent child

Non-DSS Income Total Pension Disposable Income EMTR

($wk) ($/wk) ($/wk) (%)

* Plus loss of Fringe Benefits after $85

B Sole parent with two dependent children

* Plus loss of Fringe Benefits after $105

($wk) ($/wk) ($/wk) (%)

0.00 - 16.09 179.30 184.55 - 200.64 0

D. Unemployment or sickness beneficiary couple* with two

($wk) ($/wk) ($/wk) (%)

* Where the beneficiary is the only one of the couple earning

Non-DSS Income FIS Disposable Income EMTR

($wk) ($/wk) ($/wk) (%)

F. Couple receiving FIS. one person in employment. two

Non-DSS Income FIS Disposable Income EMTR

($wk) ($/wk) ($/wk) (%)

0.00 - 167.60 32.00 44.75 - 212.35 0

(1) See Section 4.1 for details of recent trends in the

4.1 Adequacy of Payments

(1) See Development Division (1982) for further details.

Assistance given to Additional assistance given to families with children

Expressed as a percentage of gross earnings

Australia 5.4 2.7 0 0 3.8 1.9 3.8 1.9

NOTE: APW stands for average production worker

SOURCE: OECO, 1980, p. 64.

Number of Children ('000s)

Additional Additional FIS* Total Family Income Tested

Family Income Supplement (FIS) was introduced in Nay 1983.

The introduction of FIS is of course a benefit to low-income

SOURCE ESTIMATES SOURCE ESTIMATES SOURCE ESTIMATES SOURCE ESTIMATES

SOURCE: Whiteford, 1985.

(1) See Raymond and Whiteford (1984). Whiteford and Moore

Pensions and Benefits %

1. Average Weekly Earnings and consumer price index values for