Opinion & Commentary
Tax is the key to welfare reform
Tony Abbott wants to reform tax and welfare so that it pays to work. His recent speech did not go into detail, but he wants to replace the existing system of pensions and allowances for working-age adults with a single payment and to change income tax to avoid penalising people who move from welfare into employment.
The case for reforming the welfare system is overwhelming. In 1965, only 3 per cent of working-age adults relied wholly on welfare; today it is about 14 per cent. In the mid-1960s, there were 22 workers for every working-age person dependent on welfare benefits; today there are just five. This system is unfair and unsustainable.
Abbott and Amanda Vanstone think part of the answer lies in abolishing the distinction between pensions and allowances. The present system, they say, is too rigid and claimants in similar circumstances get treated very differently according to how they are classified. Workers classified as unemployed, for example, are subject to mutual obligation requirements while those classified as disabled are not.
But the solution to this is not to abolish the distinction; it is to improve the way people are classified.
Blending pensions and allowances into a single payment would massively increase welfare spending, for allowances are less generous than pensions and the commitment is to level up.
Removing the distinction between people deemed capable of supporting themselves and those who are not also sends out the wrong signals, for we need to emphasise that support for the former group is strictly temporary.
Some working-age people cannot earn an income, and they should receive generous, and unconditional, pensions. They include people with severe disabilities and those with full-time caring responsibilities. This group must be distinguished from claimants who are capable of supporting themselves and whosesituation is therefore transitional.
The problem with the present system is that we define incapacity too broadly. There were 230,000 disability pensioners 20 years ago; today there are more than 600,000. This number should be halved. Similarly, single parents with very young children should not be expected to work, but under current arrangements they can stay on a pension until their children reach 15. Again, we need to tighten up rather than abolish the pension altogether.
Unlike those who cannot work, people who are capable of working but who do not have a job should receive temporary and conditional assistance. Half of all job seekers find work within eight weeks, but attention needs to be paid to those (about one-third of the total) who have been out of work for a year or more. The Americans have shown that time limits coupled with a rigorous work requirement can dramatically cut the numbers on welfare.
What about tax reform?
In his speech, Tony Abbott was rightly sceptical about earned income tax credits. Overseas experience is that they are expensive and susceptible to fraud. Furthermore, they have disturbing disincentive effects.
Tax credits for low-income workers taper off as household incomes rise. While encouraging unemployed people into work, this means they discourage people from working longer hours or getting a higher-paid job, and they penalise second earners in low-to-middle income households.
Despite their name, tax credits are really one more welfare handout, and they discourage personal initiative just as other welfare benefits do. If we go down this road, we will end up spending even more on income support than we do now.
To make work pay, it might make more sense to increase personal tax thresholds to take low-paid workers out of tax altogether. Governments are taking a higher proportion of GDP in tax than ever before, and it is absurd that tax liability starts at an income well below subsistence level. The current tax threshold of $6000 is less than half what a single unemployed person gets in income support and rent assistance ($12,370), and it is just over a quarter of the federal award minimum wage ($22,400).
In his speech, Abbott referred to findings by the Centre for Independent Studies that in 1960 a worker earning the average weekly wage and supporting a family paid no income tax at all. What was possible then is possible now. Tax reform should aim to relieve those on the lowest incomes from paying income tax rather than locking them into dependency on another welfare transfer payment. There is no better work incentive than keeping hold of every cent you earn.
Peter Saunders is Director of social policy research at The Centre for Independent Studies.
