After the 1961 election when Prime Minister Robert Menzies was chided by a Cabinet colleague for taking up some Opposition policies, he is reputed to have responded, “”Well, 50 per cent of the people voted for the Labor Party.”
Much the same could be said now if the Government borrowed a critical element of the tax plan that Labor took into the last election – the tax credits system. But the Government should borrow the policy not because 50 per cent of the people voted for Labor, but because it is a good policy.
The tax credit system was a way of dealing with effective marginal tax rates of up to 70 per cent faced by people going from welfare to work. Typically the income earned from work results in rapid reductions in child support, dole and other welfare in addition to the tax on the income earned. These people also have to meet transport and clothing costs of going to work. It is a major disincentive.
Labor’s plan was in effect a sliding negative tax that meant people leaving welfare and going to work were not hit with such disincentives.
Yesterday the Business Council of Australia supported the measure, suggesting it be integrated into the government’s tax package.
So it should. No-one moving from welfare to work should have a greater effective marginal tax rate than that paid by the top-bracket earners of 48.5 per cent.
Of course, the council has another agenda. It says tax credits would be better than increasing minimum wages because increased wages deterred extra employment. The council would like to see the taxpayer subsidise wages that its members would otherwise have to pay.
There would be little point, however, in a tax credit system which ran to the benefit of business. It might be better to have both a tax credit system and some modest increases in minimum wages.
The important thing is to end the huge disincentives to work that are in the present system.