Opinion & Commentary
When is a welfare payment not a welfare payment?
Everyone who earns more than $6,000 per year pays income tax. The zero-rate or ‘tax-free’ threshold has for years been fixed at $6,000, which means workers have to pay tax long before they have earned enough to support themselves and their families. Having taken tax away from low income families, the government then has to give them welfare payments to keep their heads above water.
It would probably make more sense to raise the tax-free threshold to take low-income people out of the tax system and avoid the necessity of giving them welfare. But the government disagrees. It is reluctant to raise the $6,000 threshold because of the cost, and it claims that many working families already enjoy an effective threshold much higher than this.
This latter argument depends on treating Family Tax Benefit (FTB) as part of the tax system, rather than as a welfare payment. FTB is claimed by 1.8 million Australian families to help with the cost of children. It is means-tested (the more you earn, the less you get), but even families earning over $100,000 get something.
Ministers want the ‘real’ value of the tax-free threshold to be calculated by deducting the FTB people receive from the tax they pay. In a speech last May, Mr. Howard explained: “Some dual income families with two children now enjoy the equivalent of a combined tax-free threshold of up to $43,000 a year. In other words, for many families all of the tax they would have paid is rebated by the Family Tax Benefit. Although family tax benefits appear on the expenditure side of the budget, in reality they represent tax relief.”
But there are at least three reasons why this is unconvincing as an argument against raising the tax-free threshold.
The first is that 5.5 million taxpayers do not receive any FTB payments. For the great majority of workers, the ‘equivalent combined’ tax-free threshold is exactly the same as the actual one – just $6,000.
The second is that 90 percent of FTB recipients claim the money as a fortnightly payment from Centrelink. It does not feel to them as if they are paying no tax. Rather, it looks and feels like they are paying a lot of tax and are then having to depend on government hand-outs being churned back to them.
Thirdly, if it were really true that families with two children enjoyed a tax-free threshold of $43,000, then any family earning below this amount would retain the whole of any additional dollar they earn. In reality, however, they lose half or more of it, for they have to pay 30 cents in income tax, and they lose 20 cents in reduced FTB payments. Clearly they are not in a ‘tax-free’ earnings zone.
This third problem has attracted a lot of criticism. The government has repeatedly been attacked for its failure to reduce the high ‘effective marginal tax rates’ (EMTRs) faced by low and middle income families when they simultaneously pay tax and lose FTB as their incomes rise.
Pushed on this point on the 7.30 Report last month, the Treasurer denied that families face high EMTRs because loss of FTB entitlement should not be equated with payment of a tax. “Under our welfare system,” he explained, “when you start earning income, you begin to lose welfare. It’s not a tax rate at all.” Claims of high EMTRs involve “adding a tax rate to a welfare entitlement and calling it a tax rate.”
Mr. Costello has a point, for FTB is clearly a welfare payment. But this contradicts the government’s earlier arguments.
When discussing the tax-free threshold, ministers want to treat FTB as part of the tax system and to include it when calculating people’s liability to tax. But when discussing the problem of high EMTRs, they deny that FTB is part of the tax system, and want to regard it instead as a “welfare entitlement.”
They cannot have it both ways. If FTB is a welfare payment, then it is misleading to argue that families enjoy tax-free thresholds higher than $6,000. If, however, FTB is part of the tax system, then it is impossible to deny that millions of families are getting slugged with high EMTRs.
It’s one or the other – the devil of a low tax-free threshold, or the deep blue sea of high EMTRs. The government needs to get its story straight.
Professor Peter Saunders’ new book, Taxploitation, was published this in March 2006 by The Centre for Independent Studies.
