Opinion & Commentary
Fine time for a tax and welfare overhaul
With the prospect of being able to get its legislation through both houses, the government has a golden opportunity to reform the tax and income support systems to get more working-age Australians off welfare and into work.
To start with, policies that have been stalled in the Senate can now be implemented. Repealing unfair-dismissal laws for small businesses will generate as many as 70,000 new job opportunities for people on welfare to go after, and changes to the eligibility rules for the disability pension will help ensure that people who are capable of working remain in the labour force rather than exiting permanently onto a pension. But much more is needed.
In the May budget, the government promised to raise the top-rate income tax bracket to $80,000, but the rate itself (47 per cent) needs cutting. In an increasingly international labour market, our punitive tax rates are badly out of line with our competitors', and there is a yawning gap between the 30 per cent company rate and the 47 per cent personal top rate. Ideally, we need a flat-rate income tax of about 30 per cent, but reducing the top marginal rate to 40 per cent should be a minimum target for this parliament.
We must also address the disincentives facing low-income households when they try to raise their earnings. When people earn more, they not only get hit with higher tax; they also start to lose means-tested benefits such as the family tax benefit (FTB). Moving from welfare or part-time employment into full-time jobs, workers commonly see 60 ? or more disappear from every additional dollar they earn, and this undermines the drive to self-reliance.
The budget reduced the FTB taper from 30 per cent to 20 per cent, but in the election campaign the coalition had little more to say about tackling this problem. It should take on board some of what Labor and the Democrats were proposing, for between them they began to sketch a solution.
The Democrats suggested raising the tax-free threshold to $10,000 and indexing it to inflation. Excellent proposals both, although the threshold needs to be at least $12,500, for its value has withered alarmingly. Since 1980, wages have increased by 350 per cent but the amount you can earn before you pay tax has increased by only 50 per cent (from $4041 to $6000 a year). Had the threshold been indexed in 1980, it would now be worth about $14,000.
The threshold has fallen well below the subsistence income (about $12,500 for a single person) guaranteed by the welfare system. But individuals should be allowed to earn above subsistence income before paying tax. Furthermore, by taxing incomes below the welfare floor, we have to return the money via means-tested payments such as the low-income rebate and the FTB. This churning is bureaucratically costly and it creates the disincentive problem at the heart of the tax and welfare systems by squeezing people's incomes from both ends.
The government can also learn from Labor's program. Mark Latham suggested combining parts A and B of the FTB into a new family payment that would not be means tested until households earned above $50,000. This proposal had real merit, for it sought to reduce means testing. It would have increased rewards for low-income working families, although work disincentives would have crowded back in again once family incomes exceeded $50,000. To solve this problem, we would need to scrap means testing of FTB altogether and move to a single flat-rate-per-child family payment.
Labor also suggested compensating single-earner families for the loss of FTB (part B) by allowing working spouses to claim their partner's tax-free threshold in addition to their own. Again, an excellent proposal, for families should be allowed to merge their tax-free income allowances if they choose.
Labor would have funded these reforms partly by scrapping the $600 lump-sum child payments that the government introduced in the May budget. These ad hoc payments never did make much sense, and the government should get rid of them.
Finally, the government must continue overhauling the income support system. There are few votes in this, which is why no party seriously addressed it during the election campaign, but with one in six working-age Australians now dependent on benefits for 90 per cent or more of their income, we need a target for reducing the overall dependency rate.
The proposed changes to disability support pension eligibility rules will help, but this is not enough. Rather than allowing single parents to linger on welfare for an average of 12 years while their children grow up, we should adopt Continental European practice, where single parents are required to find part-time paid employment once their children start school.
And rather than leaving several hundred thousand people on employment benefits for a year or more, we should introduce time limits so that nobody stays on benefits for more than six months without being given work to do in return for their payments.
There is much that could be achieved in the next three years. Hopefully John Howard wants to be remembered not only as one of our longest-serving prime ministers, but as the leader of the government that finally reversed our debilitating slide towards a high-tax, high-dependency society.
Professor Peter Saunders is the social research director at the Centre for Independent Studies
