When politics is dressed up as economics, the
result is generally bad policy. Worse,
John Howards $1.2 billion baby bonus is likely to make for bad obstetrics.
Put simply, Howard wants to pay mum to stay at
home to look after the kids. However,
because conservative gender roles are out of step with the views of most young
voters, the policy is not marketed as social engineering, but rather as a pragmatic
response to an economic problem.
Many commentators have pointed to the
inequities of such a system. The baby
bonus is not uniform: a child born into a poor household is apparently worth
only $500 annually, while children from high-earning households are worth
$2,500. Single mothers - who have no other way to support their children - will
go back to work, and hence miss out on most of the benefit. The biggest payout
will go to couples where he earns enough to support the family for five years,
and she made over $50,000 in the year before they had the baby.
Beyond equity, the details begin to reveal what
a wayward policy this really is.
According to the Coalition, families suffer
because the arrival of a child generally leads to a large fluctuation in the
familys income. Fluctuating income,
in turn, leads to higher taxes because the tax-free threshold may not be fully
utilized in the leaner years. In each
of the five years after childbirth, Howards new policy allows women to claim
back to $2,500 of the taxes they paid in the year of their pregnancy - ensuring
that their tax-free threshold is not wasted when looking after the kids.
In practice, this means that the way in which
women will maximise their benefit is by boosting their earnings in the year
prior to childbirth, and then not working for the next five years.
Such a policy creates some quite bizarre
incentives. When deciding how hard to
work, people typically consider how much of each extra dollar that is earned
will be pocketed by the tax office. For
most of us, this is about one-third. By
contrast, during the year leading up to childbirth, these women will be facing
potential tax rates of zero.
What would you do if John Howard offered you
one year of tax-free earnings? If youre like most people, youd probably work
more overtime, put in extra hours in the hope of getting a promotion, or
perhaps even take a second job. Many would sacrifice some sleep, and those
doing piece-work might even take a few more risks on the job.
For pregnant women, this is a recipe for
disaster. Countless studies show that work stress raises rates of premature
birth, foetal anxiety, and infant illness.
Do we really want to be using the tax system to
encourage sixty-hour work weeks, second jobs, and greater exposure to workplace
hazards among women who will soon give birth?
But this is only part of the story. After
junior enters the world, Howards baby bonus acts as a disincentive to work.
Not only would these women have to pay tax, but they would also be missing out
on up to $2500 of baby bonus annually.
In effect, they are faced with a double disincentive preventing them
from returning to the workforce.
As a result, some couples will likely respond
to this double disincentive by cramming their child-bearing into this five year
window. Not surprisingly, decisions on the timing of pregnancies depend on
individual circumstances and are best informed by a trusted doctor rather than
tax incentives. Indeed, medical
research shows that the tight child spacing induced by this policy may increase
the incidence of problems ranging from low birth weight to schizophrenia.
While the law of unintended consequences is no
stranger to economics and politics, in this instance political expediency comes
full circle, transforming family-friendly intentions into pregnancy-unfriendly
consequences. This is not a policy for which the babies of the future are
likely to thank the Coalition.
Dr Justin Wolfers is an Assistant Professor of
Political Economy at Stanford University. Andrew Leigh is a Frank Knox Scholar
at the John F. Kennedy School of Government, Harvard University.