The laudable aims of the 1970s and 1980s tax changes are now a mess of inefficiency and political corruption, as the Budget highlights.
The Government will bombard households with cheques in the next few months.
“Look what a wonderful Government we are. Vote for us before you realise it is all a mirage.”
What were these laudable aims?
The way the Government treated families with children changed.
Before, a taxpayer with a dependant child got a tax deduction. Usually, the higher-earning member of a couple (usually the man) took the deduction. The theory was that because it was controlled by the man it did not go to children, or at least not without a fuss, so it should go directly to the mum – sorry, principal carer.
The Government also recognised that sole parents had special difficulties which the tax system should provide for.
Nowadays both these benefits have been directed to the person (usually the woman) who does most of the bringing up of children – more accurately directing the help. Very laudable.
So we now have Family Tax Benefit A and Family Tax Benefit B.
The B version took over from the old sole-parent allowance. All sole parents get up to about $3000 regardless of income. Also FTB can be paid to stay-at-home mums (or more rarely stay-at-home dads). It tapers out as the stay-at-home mum earns above $1800 and ends when she earns about $11,000.
The A version goes to nearly all parents. It is roughly $3000 a child. Again it tapers out, ending at $82,000.
The Treasurer has tampered with these in this Budget and added a more generous maternity allowance. But their essential structure remains the same: no tax deductions for children and allowances paid to mums which taper with income.
This has had several appalling results. Families are taxed too much in the first place. It is hopelessly inefficient to take money in tax and then pay it back after a whole lot of bureaucratic eligibility tests. People getting the allowance have to estimate their income accurately at the beginning of the year or cop a bill at the end.
Further, it provides the Government with the wherewithal to be seen to be doing something to help families when the families would not need the help if they had not been stung with so much tax in the first place. It also builds up a dependency mentality that the Government must do something for families by giving them cash.
Worse, they way the allowances taper provide a disincentive to work. In an extreme case if you earn an extra dollar you lose up to 48.5 per cent of it in tax and up to 30 per cent in lost – a marginal tax rate of 78.5 per cent. Why bother working? In many cases the marginal tax rate is 50 per cent at quite low levels of income where the hassle and cost of going to work – particularly child care – makes the whole exercise worthless.
Let’s leave families with children and turn to low-income earners. In the 1970s the tax-free threshold was a little above the poverty line – what it takes to support yourself. Above that you paid tax; below it you did not.
Since then, the tax-free threshold has not moved much. It is now about $7000. That is well below the poverty line. People earning only that amount are often eligible for welfare payments. So we now have the absurd situation of paupers paying tax and then government handing it back in welfare after spending a fortune on the bureaucratic application of eligibility tests. Why take the money in the first place if you are only going to hand it back?
How much does the Government waste in this family-benefit and welfare churn? The Budget papers reveal (after spading through great amount of self-promoting bumpf and exaggerated largesse) that the Government spends $25 billion on family payments – nearly all to people who are paying tax. The total social security bill of $82 billion costs about $2.4 billion to administer. On that ratio, the family allowances would cost about $730 million to administer. Next year the Government will spend an astonishing $21 million in promoting and educating and informing people about the changes to these allowances – blatant electioneering and propaganda.
Let’s turn to other income earners. Inflation and higher average weekly earnings push people into higher tax brackets. The Government then gives them a notional “tax cut” and propagandises about it. It never publishes the real tax increases caused by inflation and higher earnings. It quietly snaffles them. The whole thing is a deception.
The Government should stop taking money tax and handing it back again in family allowance, welfare and “tax cuts”.
The charade should end. People on welfare should not pay tax and people who pay tax should not be on welfare.
The tax system should be indexed to average weekly earnings. People under the poverty line of, say, $25,000 should not be taxed. People with dependant children should not be taxed as heavily as those without – say, a deduction of $4000 or $5000 per child. Child care should be tax deductible. Most people would just tell their employer how many kids they have got and declare that their partner is not claiming them as well and amounts would be adjusted each pay.
Where will the money come from? Out of the $82 billion welfare budget, which, incidentally, has grown as a portion of GDP under Howard. Even the small-government conservatives cannot resist using welfare as a bribe.
Also, the money can come from the inevitable tax windfall that result when more people have the incentive to start work, get more skills and earn more.
But can either side of politics bear the thought of losing their bribe money?
The present tax system has been a deadly combination of ideology – Labor’s feminist empowerment theory and the Coalition’s barefoot and pregnant mentality.
The Treasurer has the wrong idea about patriotic duty. We know what his present tax system is doing to the country. He should provide incentives to work, not lie around in bed.