The Caring Tax: Why Do We Rate Minding Sheep Ahead Of Raising Children?

Listener: 21 May, 2005.

Keywords: Regulation & Taxation; Social Policy;

There is no consensus as to whether mothers should or should not go out to paid work and put their young children into childcare. The research says that it depends on family circumstances and the availability of care, together with the culture of the society. The policy conclusion must be that we should leave the decision to the primary carer and her or his family. But if we pursue a strategy of such neutrality, we should ensure that other aspects of public policy do not bias the family decision.

Does not the taxation regime do that? For the carer who goes out to “earnwork” (as economic Nobelist Robert Fogel calls it) seems to be double taxed. She (or he) pays taxation on earnings including the part paid for childcare. There would be an outcry if sheep farmers were treated the same, unable to deduct the cost of their shepherds when their income tax liability was calculated. Sheep care is deducted because it is a cost that enables the production of the farmer’s income. But is not childcare a cost incurred in enabling the parent to earn an income? Should it also be deducted? Even if looking after children is less important than looking after sheep – a view I certainly do not hold – the logic of equal tax treatment for shepherding and childcare remains.

Our tax system is a broad-based one, so deducting the cost of childcare would narrow the tax base, raising average rates. Were a wide tax base the only criteria, sheep farmers would be taxed on their gross turnover, rather than on their net income – where production costs are deducted from gross turnover. Income taxation should be imposed on a theoretically rigorous notion of income. I cannot see how purchase of childcare to enable one to work is a part of one’s income.

There is an argument that perhaps we should also deduct other costs of earnwork, like the food, clothing and travel to work. But since all earnworkers experience such costs in roughly the same proportion, the deduction is not worth the compliance costs. Not all earnworkers purchase childcare, so its omission has a grossly unfair impact.

There would have to be some restrictions on how much could be deducted. The childcare would have to be registered, and pay taxation and ACC levies and so on. Some argue that only public agencies should provide childcare, but private provision can be perfectly adequate, although there has to be a system of quality checks. Sometimes the best childcarer may be the neighbour. Providing she (or he) is registered and paying tax, why not?

Sometimes the best carer is the parent at home. In which case the other parent could purchase the childcare for his or her child from the homeworker who, it is to be recalled, would pay taxes and ACC levies and all. That would maintain the neutrality of the system between earnworkers and homeworkers, as well as between parents and sheep farmers (and other earnworkers).

Such a change in the tax regime would represent a substantial transfer of the nation’s income to families, since whether they were earnworking or homeworking the family would be paying less tax. (Some of the loss of tax revenue would be offset by the child-carers paying tax, too.) Given the amount of child poverty, that need not be a bad thing.

This proposal is conceptual, based on rigorously defining the income of parents. To implement it would require a lot of detailed analysis, including integrating it with the benefit system. I would not support the proposal in practice until I had seen this detail.

But if the deduction for childcare were implemented there would be an odd outcome. A lot of homeworkers looking after their own children would suddenly become earnworkers. The Government Statistician would calculate the value of their contribution to market production, and add them into the total production of the economy, its Gross Domestic Product. Even if everybody kept to exactly the same childcare arrangements they currently practise, GDP would increase, perhaps even raising our place in the international per capita GDP stakes. Which says something about how useful GDP is for measuring what we are actually doing.