Opinion & Commentary
Two cheers for Labor's welfare reform
LET'S give a muffled cheer for Labor's family tax policy - or maybe even two, but no more.
Both Labor and the Coalition are failing to give us the fundamental and wide-ranging tax
reform we need.
But at least the pernicious interactions of the tax and welfare systems are being realised.
Labor, to its credit, is reducing the tax burden and making a move, through the "working tax
bonus", to attack welfare dependency and attract people into jobs. That's the forward-looking
right hand working. Unfortunately, the left hand is promising a backward-looking labour
market and industrial relations policy that will work against the right hand.
Coalescing Family Tax Benefits A and B into a single payment makes a small step towards
simplifying a horrendously complex pattern of benefits that baffles thousands and commits a
multitude to paying back money if they underestimate their annual income. Coalescence
removes the disincentive inherent in Tax Benefit B to mothers joining the workforce.
The final significant element in the tax proposals is the enlargement of the tax-free threshold
for single-income families. This, however, reveals a failure to establish coherent principles
within the tax system. If this is fair and reasonable for one group of families, why not for
others? And the further we look,incoherence keeps cropping up.
The reason is that both Labor and the Coalition use family tax policy to manipulate the
choices of different family types in widely differing situations rather than establishing a few
simple principles applying to all families. One objective is to manipulate benefits to influence
mothers to work or stay home.
The Coalition used Family Tax Benefit A to induce mothers to stay home. Labor is removing
this inducement and encouraging mothers to work.
The way these benefits and subsidies are paid and withdrawn under means-testing leads us
to one of the fundamental problems of the tax system -- high effective marginal tax rates that
help create welfare dependency and lock people into it.
Few people realise how much the value of child benefits has been whittled away during the
past 50 years. For incomes two to three time above average wages, child benefits in the
1960s were effectively universal, much higher in relative value per child and not
means-tested. Labor will raise the level of income at which benefits are withdrawn, but this
simply moves a problem up the scale. A family with a total income of less than twice
average earnings loses its benefits. At lower levels of income, the effective marginal tax rate
on additional income may exceed 60 per cent to 70per cent as benefits are withdrawn. This
creates a strong disincentive to work.
Means-testing child benefits is not fair. Reasonably enough, the welfare system recognises
"horizontal equity" in fixing the size of welfare payments according to the number of people,
including children, the payments must support. It recognises that the costs of supporting a
child simply have to be met from the parents' total income. The taxation system, on the
other hand, abandons this principle in relation to earned incomes because it means-tests
child benefits, which therefore disappear entirely at certain levels of family income. The
unavoidable, legally enforced costs of supporting the child or children nevertheless remain.
Children must have a subsistence income to survive. For adults, this imperative is
recognised, but very inadequately, by the tax-free income threshold of $6000. Logically,
therefore, every child should be entitled to its threshold survival income (from its parents) free
of tax and not means-tested in relation to the parents' total income. This should be not less
than $3000 per dependent child per annum, paid as an allowance or tax rebate. Apart from
some special welfare cases, it should be the only child benefit and be used as the parents
see fit, including for child care.
Abolishing the means test on a single, all-encompassing, universal and non-means-tested
child benefit would solve the problem of high effective marginal tax rates and the present
waste of time and confusion involved in parents underestimating their income and having to
pay back some of the child benefits. It would also remove a strong work disincentive for
able-bodied welfare claimants. Neither Labor nor the Coalition has proposals for solving
these problems.
Additionally, a universal benefit would more simply, fairly and efficiently help solve the
marginal rates problem than a suggested earned-income tax credit. The credit would just be
another welfare measure. Overseas experience has shown that it gradually spreads to gather
up more and more of the workforce in the net.
Finally, a single, universal, constant-value child benefit would end the competing and often
ideologically driven manipulation of incentives for or against mothers choosing to work. It
would be completely neutral on this issue. Either choice is legitimate and should be treated
equally in the tax system. From an economic perspective, mothers who take jobs in the
market and mothers who stay home to build the human capital of children who will eventually
enter the workforce are both doing valuable things.
Barry Maley is a senior fellow at the Centre for Independent Studies and co-author, with
Professor Peter Saunders is the author of the paper 'of Tax Reform to Make Work Pay' which was published by CIS in 2004.
