Opinion & Commentary
Threshold issues for a tax system that creates jobs
An important debate is taking place in Australia about the future of welfare, taxation and award wages. The outcome of this debate will influence the shape of social policy for years to come.
We might expect huge political arguments on such fundamental issues as welfare, tax and wages policy, yet nearly all participants in this debate agree on at least three key objectives.
First, everyone agrees that the main cause of poverty in Australia is joblessness. No matter how we define it, poverty is overwhelmingly concentrated among people of working age who do not have full-time paid employment. It follows that any strategy should encourage employers to create jobs and jobless people to take them.
Secondly, there is widespread agreement that people who work full-time should take home enough money at the end of the week to keep their heads above water.
Thirdly, everyone agrees on the importance of creating and maintaining work incentives. This means that the lowest take-home wages need to be significantly higher than the highest welfare benefits, otherwise it will not pay people to work.
How are these three objectives to be realised?
There are three strategies on offer in the current debate. The first emphasises increased minimum wages. The Australian Council of Social Service (ACOSS), for example, has backed the ACTU in arguing that an increased minimum wage is essential to protect the living standards of low-paid workers. The main problem with this strategy is that raising minimum wages destroys jobs. Some economists deny this, pointing to American evidence, but the American minimum wage is much lower than ours. Australia's minimum wage is already one of the highest in the OECD, and there is little doubt that forcing employers to pay even more will result in significantly fewer jobs being offered.
The second strategy, advocated by the so- called "five economists", would freeze minimum wages at their current levels and compensate by topping-up those on low wages with a 'tax credit' paid by the government.
This idea has been attracting a lot of support of late, but it too has problems. It locks full-time workers into dependency on yet another government hand-out, thereby undermining their self- reliance.
But its biggest drawback is that it creates new work disincentives. Although they boost the earnings of those on the lowest incomes, tax credits must eventually taper off. This means that workers further up the income scale start to lose substantial proportions of any additional earnings they accrue, for as they pay more tax, so they also lose their tax credit.
This leaves us with the third strategy, which is to reduce the taxes that low income workers pay by raising everybody's personal tax threshold. The logic here is that if we stopped taking so much money out of people's pockets, we would not need to raise minimum wages (as ACOSS demands), nor to top-up wages with tax credits (as the five economists suggest).
Critics say raising the current $6,000 personal tax threshold would be too expensive. But it was not too expensive in 1980. Then, the threshold was $4,441. Had it kept pace with earnings, it would now be over $14,000.
A strategy of reducing taxes on low-income workers by raising the personal threshold meets all three objectives outlined earlier. Full-time workers get to take home a reasonable wage, but we do not destroy jobs (by raising minimum wages), nor undermine work incentives (by topping up incomes with tax credits).
It is the most radical solution on the table.
Given that it supports the dignity of the self-reliant worker, it is also the most desirable.
Peter Saunder is Director of Social Policy Research at The Centre for Independent Studies.
