Social welfare has gone the wrong way over the past two decades. For the very best of reasons, governments, particularly Labor, have targeted welfare to the most needy.
It has meant that only those on lower incomes get help from the government. Very admirable. But it has had a debilitating side-effect. It needs looking at in the up-coming tax debate, because it is perhaps as important as a GST. And it probably needs some radical surgery to fix.
Typical means tests for social welfare benefits work on a sliding scale so the benefits gradually decreases as your income rises. The scale is usually about 50 cents of lost benefit for every dollar earned over a certain amount until the benefit disappears at an income level the government thinks is enough for people to live on without help.
The means tests apply to age, unemployment, education, sickness and child-rearing payments.
Usually the people affected are on incomes under $600 a week, or about $30,000 a year. Those on between more than about $100 a week and $400 a week (excluding their social welfare benefit) are paying income tax on every extra bit of income of 21.5 per cent. Those between $400 and $600 are paying tax 35.5 per cent on every extra bit of income.
But they are also losing 50 cents in the dollar in deductions from their social-welfare payment. This means for every extra dollar they earn they are losing either 71 cents or 85 cents in tax or lost social-security. They pay the highest effective marginal tax rates in Australia.
It is the debilitating side-effect of our social-welfare system. Why bother working or working extra if you lose up to 85 per cent of what you earn to the Federal Treasury? It gets worse for single mothers. Invariably any extra work involves extra child-care costs and extra costs in take-way food or cleaning because there is less time to do them yourself. Some welfare recipients go backwards if they go to work.
The system discourages work. It causes people to lose work skills and often the will to work. Perhaps it is a major reason for unemployment rates of 8 per cent during an economic upswing, compared to 2 per cent in the 1960s. Children of welfare recipients see this and before long it becomes endemic.
In short, our welfare system, through the best intention in the world, has trapped a huge number of people into workless lives. The economic costs of getting out of the trap are too high. The costs to the nation must be immense.
It should and could be fixed. But it means a radical rethink that is alien to the minds of most of Australia’s timorous politicians who are fearful of the short-term consequences of opinion polls rather than willing to take of the task of explaining something new.
But this is what could be done.
We could scrap all the means tests for all the allowances. Consolidate the allowances and pay them to everyone.
But that is mad, I hear you say. Hear me out.
At present the Commonwealth pays about $52 billion in welfare every year. More than a billion of that is on administering all the means tests and processing the claims. It represents about $3800 per adult. Or about $3000 per person.
There is a better way. We should pay everyone in Australia $6000 a year, about 20 per cent of present average weekly earning. Everyone, including your Packers and Murdochs. It could be a bit more for people over 65 and a bit less for children under 16. It would cost about $100 billion, against the present $52 billion.
But then you substantially restructure the tax rates and broaden the tax base (to include goods and services) to recoup it. Perhaps the lowest marginal rate would be about 15 per cent coming in at $6000 and remaining at that for several thousand dollars.
The result would be that everyone would get to keep 85 per cent of the first several thousand dollars they earned. There would be no disincentive to work.
There are other benefits. There would be no welfare cheats or welfare bludgers because everyone would be paid the money.
The removal of the disincentive to work could have a profound effect on revenue. Sure, some people might be content to take the money and do nothing, but it is a pretty paltry amount to live on. But in general it is a negative tax that would cause the system to apply more smoothly without the present poverty traps.