Sunday, June 17, 2007

Sunday dollars+sense: The tax system already discriminates, so let's discriminate in favour of women

It started as something of a joke. A fortnight ago I wrote that women should be taxed less than men.

My thinking was that women are much more responsive to changes in income than men. Really. Think about it. What man do you know who is going to be more likely to take up a job (or more likely to stay in work) if his tax rate is lower?

Despite all the talk about Australia’s “punishing” high rate of personal taxation, I’ve yet to meet a man for whom the tax rate makes much difference when it comes to staying in or getting into work. Having a job is just too important to most men’s identity.

But for women things are much more finely balanced...

Often at home with children, or knowing that they could be at home with children and avoid childcare fees, the after-tax rate of pay matters. Women are much less likely to be in work regardless.

So if we want to design a tax system that will get people to get into work without scaring away people who are already in work, why not tax women less than men.

We do sillier things. We tax money made from capital (capital gains) at half the rate of money made from wages on the more-or-less plausible assumption that capital is footloose and will be frightened away overseas by a high rate of taxation, but that work will not be.

But people rort the system by finding ways to convert income into capital gains.

The only way to rort a gender-based concession would be by a sex change, and changing sex isn’t easy.

It turns out that I am not the only person thinking along these lines. Economics professors Alberto Alesina from Harvard and Andrea Ichino from the University of Bologna have just have put forward the idea seriously in a 30-page academic paper and in a persuasive article in the London Financial Times.

They have even worked out the optimal difference in tax rates, based on the sensitivity of each gender to take-home pay. They say that in Italy the female rate should be 32 per cent less than the male rate; in the US at least 20 per cent less.

If you find the idea unfair, bear in mind that in Australia after decades of equal pay leglislation, most women are still paid less than most men. Think of it as a way of evening things up.

Alberto Alesina and Andrea Ichino, Gender based taxation: A 100 euro bill left on the table? Fleshed out version of FT article, Vox (beta) blog 8 June 2007

Alberto Alesina and Andrea Ichino, Gender Based Taxation, Harvard and Bologna University paper in progress 2007