Under the income shares model, separated parents have their income pooled for the purpose of calculating child support. Effectively, the parents are treated as a married couple who still live together. Because the parents are actually apart, often divorced, the calculation method creates tensions.
To understand how it works, we’ll look at how support increases as the income of the payer parent goes up. We’ll also use examples from the Australian income shares system. Right now, there’s a big push in that country for extensive child support reform.
Under income sharing, a rise in payer income generally increases the amount of child support payable (as you’d expect). The manner of increase is what’s interesting. Payers have limited child support obligations at low income levels. However, child support rises steadily at medium to high income levels.
Mathematically, the child support response to an income rise is the cumulative impact of an income share effect, a cost of children effect, and a complex set of cost tables.
A. Income share effect
According to the child support formula, the amount of child support rises in proportion with a payer’s share of combined income. Combined income is the sum of each parent’s child support income (which is taxable income minus a self-support amount).
Because of factors such as the self-support amount, fixed minimum child support rates, credit for any care time, and the other parent’s high income, the income share effect may not be felt until the payer’s income reaches $40k, $50, $60k or more. It also doesn’t apply if the other parent has an income below the self-support amount (since the payer contributes 100%).
B. Cost of children effect
For payers with <50% care, child support obligations go up when their income rises due to a cost-of-children effect. Higher combined income is assumed to increase the cost of children broadly. This works against the parent with <50% care because each parent gets financial credit for direct care.
The cost-of-children effect generally adds to the income share effect. It helps keep child support down for low-income payers. And, when a payer’s income rises, it further adds to the child support increase.
C. Cost tables
The amount of child support is finally decided by cost-of-children tables. To illustrate, by using the tables, we can work out that the cost of a child under 13 who has 2 parents earning $50k each (taxable income) is $8,587 annually.
The tables are constructed so that the cost of a child increases with income but at a declining rate. It starts at 17 cents per extra dollar and drops progressively to 15 cents, 12 cents, 10 cents, 7 cents and zero (at a combined child support income just over $180k).
The relationship between a payer’s income and the amount of child support is complicated not out of sophistication but by poor design. The system routinely produces unfair and inefficient outcomes.
Problem A: Demoralizing effective tax rates
The child support system must balance the need to collect support against the cost of discouraging payers from earning a good income. For many payers, but especially those with little contact time, the system imposes demoralizingly high effective marginal tax rates. Consider this example where, at almost any income level, a payer must give up over half of any extra income.
Children: 2 (mixed age groups)
Care: 100% of time with recipient
Recipient taxable income: $60k p.a.
Payer effective marginal tax rate: 55% – 60% over $30k to $150k income range
Here the payer foregoes 57% of extra income in tax and child support when income rises from $30k to $150k.
- At $30k, the payer pays $2,780 in support and $2,397 in tax.
- At $150k, the payer pays $27,776 in support and $46,132 in tax.
- Over each $30k interval in between, the marginal effective tax rate doesn’t drop below 55%.
Calculation tools: Child Support Calculator (2017), Pay Calculator (2017)
Problem B: Excessively high or low payment rates
A useful child support measure is the nightly cost of extra care above 50:50 care. It asks the question: how much does the recipient receive for each night of care they provide above their fair share? Applying the measure, it is easy to see where child support amounts are too high or low. Here’s an example where the amount is too high.
Children: 2 (mixed age groups)
Care: 8 nights with recipient per fortnight, 6 with payer
Incomes: $60k for recipient, $150k for payer
Dollar rate per night: $505.38 per night ($13,176 per year)
The care arrangement is quite even, with the recipient providing 1 extra night of care per fortnight above an even split. For having a lower income and doing essentially 26 additional nights of care per year, the recipient receives $13,176.
A big potential problem with over-payments is that it discourages the recipient from agreeing to a balanced co-parenting timetable. Children should see both parents often. But a flawed formula creates financial incentives for the recipient parent to dominate care time in order to boost support payments received.