Opinion & Commentary
Means testing doesn’t solve the problems with
Yesterday’s budget introduced income tests on two family payments: the Baby Bonus (paid to new mothers) and Family Tax Benefit (FTB) Part B (paid to single parents and couples with one main earner) for families earning over $150,000 per year. The Treasurer justified these changes as an attack on wasteful ‘middle class welfare.’
Middle class welfare reflects the fact that less than half the money spent by government on social programmes is redistributed from richer to poorer households. Most of it is ‘churned’ as high and middle income people finance social expenditure through their taxes and then claw the money back as benefits or services.
Wayne Swan is right that this is wasteful, for it is inefficient for the Tax Office to take people’s money only for Centrelink or Medicare to give it back again. Churning also creates work disincentives by keeping taxes higher than they need be, and there are serious social costs as even middle class households become habituated to receiving government hand-outs rather than providing for themselves out of their own earnings.
All this suggests we should welcome Wayne Swan’s attempt to reduce middle class welfare with tighter means tests. However, there are five key objectives for family support policies to address, and three of them are likely to be made worse by more means testing.
This first objective is to ensure parents have enough money to meet the necessary costs of raising their children. The government does this (albeit rather clumsily) by handing out an array of payments to millions of families. The new means tests will not affect most of these families, and those who lose out will not suffer hardship as a result, for they are relatively affluent already. This first objective will therefore still be met.
The second objective is efficiency. Ideally, we only want to give money to families that need help. Swan’s new income tests will help achieve this, for millionaires’ wives will no longer qualify for FTB Part B or be eligible for a Baby Bonus. This is a clear efficiency gain.
The third objective, however, is to reinforce positive incentives (or at least, avoid creating negative ones). On this criterion, more means testing is a step backwards. Means tests penalize success and reward failure. You qualify for payments if you cannot provide for yourself, and if you start to provide for yourself, payments get withdrawn. Australia’s welfare system is already more heavily means tested than elsewhere, which is why we suffer bigger problems of perverse work incentives than other countries. The budget will make this worse.
The fourth objective is to maintain horizontal equity. If two workers earn the same wage, but one lives alone while the other has a family to support, horizontal equity demands that the latter should have a larger net income than the former, since the money is spread more thinly. This principle holds at all levels of income. A millionaire with children should enjoy a higher net income than a millionaire without, just as a poor family should have a bigger income than a poor person living alone. Swan’s means tests undermine this principle.
The fifth objective is policy neutrality. Most parents know better than the government how to raise their children, so governments should not reward one style of parenting over another. FTB, Part B attempts to treat working and non-working mums evenly by compensating those who stay home to raise their children for the tax-free allowance foregone by not working. Means testing this payment destroys this balancing act and biases parental choices.
But if more means testing is problematic, what should the government be doing to tackle middle class welfare?
Churning arises from the interaction of the tax and welfare systems. We are taxed as individuals, and government then recognizes our family responsibilities by giving us welfare payments. Inevitably, middle Australia ends up paying too much tax and relying heavily on benefits as compensation.
The obvious solution is to tax people on the basis of their family circumstances. If you have children, you should pay less tax than if you don’t. Retaining a bigger proportion of your income, you can then meet more of your family’s needs from your own resources without looking for government assistance. Churning is dramatically reduced.
Means testing millionaires represents good, populist politics for a new Labor government’s first budget, but it is not the solution to middle class welfare. For that, we need serious tax reform. This is the real challenge facing Wayne Swan.
Professor Peter Saunders is Social Research Director at the Centre for Independent Studies
