I agree that it is somewhat misleading to present tax cuts as weekly amounts when a fair chunk of them comes as an end of year refund. However, I am reasonably sanguine about the incentive effects, as I said earlier in my response to DD. Don’t forget that the wonderful US earned income tax credit has apparently made all the difference to work incentives there even though for most people it is all delivered at the end of the financial year. Doesn’t make intuitive sense I know, but there it is.

One thing I’m glad about is that I haven’t seen anyone complaining yet that these tax cuts are regressive because people earning below $25,000 only got $150 a year. Perhaps that’s still to come.

Today’s papers have a plethora of tables showing how much per week people will be better off with the tax cuts, presumably sourced from Treasury. Despite what they say, no-one with an income under $25,000 will see any tax cut at all until the second half of 2008. The LITO does not deliver tax cuts in the form of reduced pay-as-you-go deductions, but only as somewhat larger tax refunds. Delaying it this way must surely rely for any incentive effects on people actually understanding what is going on.

If people don’t understand the tax system (and LITO in particular) where does the incentive boost come from? Not the hip-pocket. A taxation placebo effect? That may be a new and cheap way to boost incentives to increase work – constantly announce tax cuts you never deliver. Some would argue that already happens.

On the other hand, there is also a fairly continual clamour for higher income people to pay more in a progressive system kind of way.

I suspect all this reveals is a desire to have someone else pick up the tab.

But all that’s a bit irrelevant – the argument here is that, given the revealed preference of the bulk of the electorate for progressivity, what is the best way to implement it. It seems to me that if you were designing a coherent system to do this you wouldn’t include a LITO – which is the point I was making to Nicholas, who seems to think otherwise.

On the tax/welfare distinction I think you are very confused, but then we have had a lot of pollies over the years who have found it very convenient to blur that distinction in people’s minds for short-term presentational gains.

The only non-welfare system that didnt reduce taxes on low income earners would be a flat rate without a threshold.

I agree. I have reluctantly come to the view that a threshold is necessary, not on principle, on pragmatic grounds.

As Spog points out in comment 11 (corrected a bit in 12), you could abolish the LITO and have the tax scale he describes. Most people would think this was on odd scale since the marginal rate drops after 48,750, but nevertheless it would be the income tax scale and have nothing to do with any welfare payments or withdrawal of family payments.

Now if you want to argue that a targeted tax credit is a welfare measure, then it seems to me that any progressive tax scale would then qualify as welfare on this definition. The tax threshold gives a zero rate to low income earners and even if it is not explicitly targeted it produces lower marginal rates for low income earners. The only “non-welfare” system that didn’t reduce taxes on low income earners would be a flat rate without a threshold.

I still wonder how you would think about this if indeed we had the alternative tax schedule as outlined by spog, which gives you exactly the same result in terms of tax liability but just doesn’t look like a classic progressive income tax schedule.

Spog, I’m not sure I’m following your point. Refunds occur when you over-pay tax, so getting that money back isn’t welfare. I do understand the point about EMTRs and I agree they create perverse incentives etc. etc. Where I disagree is calling them a tax problem (see previous para).

I agree with your point but it’s only a point. In fact all of the first three points are in some tension. Regarding LITO, it’s phase out does not co-incide with the top marginal rate which is where I’m supporting lifting thresholds (if we must keep cutting taxes for the well off) as opposed to lowering the top rate.

My apologies.

0 – 11,000 0%
11,001 – 30,000 15%
30,001 – 48,450 34%
48,451 – 75,000 30%
75,001 – 150,000 40%
150,001 + 45%

It is effectively the scale we will have for 2007-08, except that some of it only comes via a tax refund. Does getting it as a refund change its complexion from tax to welfare in your eyes?

It’s done this way because it’s cheaper than raising the threshold generally. It could be done as a tax scale (as above) but then it would be obvious that it’s not progressive. Does a government ruse to hide what it’s really done make it welfare?

Is the top rate 45% or 46.5%? Costello would say 45%.

I dare say he would. While I believe there may be a small group of people who don’t have to pay the medicare levy (armed forces?), the medicare levy is an unavoidable part of the tax system for most of us.

And you would have to acknowledge that Costello likes to have it both ways. I heard him say that due to the LITO the real tax threshold is now $11,000 pa and the Budget site has a big table showing what the ‘real’ tax threshold is for all kinds of different family situations (counting FTB as a tax measure, not the welfare measure most people think it is). So I don’t think our friend Derrida Derider was too far off the mark pointing out that he was gilding the lily somewhat.

(You can consider the LITO and the Medicare thresholds as welfare measures of course, but nevertheless they are part and parcel of the tax system.)

If it was just an increase in the LITO I would be more worried, but don’t forget that the lift in the 30% tax bracket will be felt straight away. (For people earning over $30,000 more than two thirds of the total tax cut comes from that cut in the marginal rate.)

When the two measures are put together, I think the 4 percentage point increase in EMTRs between $40,000 and $48,750 may be a reasonable price to pay for the 15 percentage point reduction in EMTRs between $25 and $30,000. So overall I would hope the work incentive effects will be positive.

I also note that there was a sizeable increase in the Dependent Spouse Tax Offset (snuck that one through under the radar, didn’t they)- I’m not so happy about that but some people will be I guess. Do you think they are trying to restore the old relativity between the DSTO and FTBB?

80% of Australian workers will have a tax rate 30% or less is just untrue BTW

How is this untrue? The co-called EMTR may be higher than 30%, but that is not a tax problem. That is a targeted welfare problem. There is a big difference between paying tax and receiving welfare.