The best element of Labor’s tax package is its dealing with of welfare traps and disincentives to work. The worst element is its failure to tax services. As it happens, both elements involve problems of Labor’s making.
When in government Labor, quite properly, changed the social security system so that benefits were more targeted to those who needed them. That required strong means-testing based on income. The unforeseen outcome was that as people attempted to return to the workforce or earn more income than the means test permitted they got hit with both income tax and a reduction in benefits such that it was hardly worth their while (in monetary terms) going out to work or working extra hours to earn more income. They might lose 50 per cent of what extra they earned in reduced benefits and a further 34 cents in tax — an effective marginal tax rate of 84 per cent. They were getting just 16 cents in every extra dollar earned and all plus more was going in costs of going to work — transport, work clothes, lunch on the run and so on. This acted as a welfare trap, particularly for families earning between $25,000 and $30,000. They needed a sudden leap of earned income to something like $45,000 to $50,000 to get to where they were with the earlier lower earned income combined with social security. It is likely that this is a significant contributor to higher social security outlays and to underemployment if not unemployment.
This is a major structural flaw in Australia tax and social security systems which must be addressed urgently whichever party is in government. Indeed, the issue transcends the mere tax debate. Australia must be a place that gives incentive and opportunity to work and prosper, not a place which encourages welfare dependency.
The Coalition has attempted to redress this in its tax package by slightly tapering the cut-out rate of family allowances. Labor’s package does it better with three changes: tax credits; tax rebates and a similar tapering plan as the Coalition’s. Moreover, Labor’s tax credit and tax rebate systems help overcome one of the weaknesses of the Coalition’s package: that too much benefit goes to people earning over $50,000. The Coalition lifts the tax-free threshold and the cut-in rate of all the new tax bracket, this has the effect of reducing everyone’s tax no matter how high their income. It means people on $75,000 and above get the biggest tax cut at $4472.
The tax rebate, in effect, is a negative tax for people earning under $5400. Instead of paying tax, they will get a cash rebate from the Government of up to $750 for singles and $500 for each income earner in a double income family. The rebate is phased out from $38,000 to $60,000. It has the effect of raising the tax-free threshold for people earning under $60,000 without giving any benefit for people over $60,000. It also gives more help to single-income families than double-income families. The rebate will not apply to people with unearned income at certain levels.
The tax credit gives taxpayers 10 cents in the dollar for every dollar earned up to $30,000 (or more if there are children). It then plateaus and tapers until there is not credit at $60,000 (or up to $70,000 if there are children). This is more effective than changing tax rates because the credit goes up with income, giving incentives to join the workforce or work more hours.
Labor proposes only minor changes to the tax scales, to ensure inflation does not push people on $40,000 into the 43 cents in a dollar rate.
The main trouble with Labor’s proposals is that they could merely push out the heavy marginal tax problem and the problem of disincentive from people on $30,000 to people on between $60,000 and $70,000. Indeed, under both the Coalition and Labor’s proposals when combined with various present provisions, these people will find lots of government support falling off (as it should at that level) and lots of extra government nasties coming in, like superannuation and health-insurance extras. It will not be long before inflation and wage growth makes these wages levels more common. Would either major party promise (and stick to it) the indexation of tax rates. No; every adjustment that brings taxpayers back to where there were several years before is trumpeted as a “”tax cut”.
That said, it validates the point that Opposition Leader Kim Beazley made that tax requires constant attention because economic and social conditions are constantly changing. This Government has not made anything but the tiniest adjustment to tax in its two and half years. Labor in the 1990s adjusted the rates and as a result there was virtually no bracket creep.
Labor’s big problems is its failure to tax services. Despite Labor’s protestations, the wholesale sales tax is defective because it is has a shrinking base. Services are an expanding part of the economy. The WST is also administratively inefficient and is easy to avoid. A GST is not a panacea, but Australia should have one. It is more efficient and gives government a more stable revenue stream to do the sorts of things that governments should do. And it is a better weapon against the black economy.
Politically, Mr Beazley has been fairly shrewd. He has neutralised the fist-full-of-dollars tax cuts promised by the Coalition for the vast bulk of voters. He can now concentrate on other matters so that tax does not dominate the election campaign. In particular, the Government is weak on its record: the waterfront, nursing homes, the jobs network, ministerial propriety, unemployment, Aboriginal reconciliation and dealing with Pauline Hanson’s One Nation.
It may be that the Government’s Charter of Budget honesty will reveal its budget bottom line is wonky in the face of changing economic circumstances. If that happens, Mr Beazley’s more prudent, less deficit-sapping tax proposals will look better, even though they fail to take the much-needed step of a broad-based goods and services tax.