Should government transfers to families with children be means-tested? We revisit this question and provide new insights from the unique Australian policy settings where means-testing rules are widely adopted to determine eligibility and benefit of child-related transfers. Using the Australian household survey data HILDA 2001-2020, we first document the significant role of child-related transfers and distinct life cycle patterns of labor supply and earnings of women in Australia. Next, we build a dynamic general equilibrium overlapping generations model of single and married households and quantify the aggregate implications of means-tested child-related transfers. Our results demonstrate the significant adverse effects of means-testing rules on work incentives and the development of human capital among female workers. A structural reform that replaces the status quo means-tested system with a universal system not only improves efficiency and overall welfare but also enjoys majority support. Despite these benefits, the new regime increases tax burden and leads to unintended welfare consequences for single mothers—the intended beneficiaries—by reducing their lifetime take-home income and consumption. Incremental reforms to the current means-tested system, on the other hand, can enhance efficiency and achieve a more equitable distribution of welfare gains, albeit with a relatively small overall welfare improvement. Hence, our findings highlight the complex trade-offs among efficiency, overall welfare, and equity when designing an effective child-related transfer system.

Darapheak Tin is currently a PhD candidate at the Research School of Economics at the Australian National University. His research primarily focuses on the intersection of Macroeconomics and Public Finance, with a keen interest in understanding macroeconomic phenomena through the lenses of life cycle factors, demographic structures, and government policies. His empirical investigations examine earnings risk over the life cycle, family insurance, and government insurance in Australia. Recently, his work has centered on using quantitative models in economics to explore means-tested child-related transfer programs in Australia, including the potential outcomes of both radical and incremental reforms, as well as optimizing the interaction between these transfers and the tax system.