Progressivity of transfers, around 2000: Ratio of benefits received by poorest quintile to benefits received by richest quintile, total population
There’s a new crusade on against tax churning – that’s the state taking with one hand (taxation) and giving back with another (welfare and other benefits like ‘family payments’.)
Peter Saunders of the CIS published three “Issues Analysis” papers on this last year and the memes are well and truly running. Here’s his claim.
At least half of the $175 billion of tax revenue spent on the welfare state last year will probably find its way back to the people who paid the money in. If we could eliminate this churning, it would release $85 billion which could fund spectacular tax cuts without making anyone worse off. We could, for example, raise the tax-free income threshold to $20,000 and combine it with a flat 10% income tax
ALP figures Chris Evans and Craig Emerson have said what a bad thing it is. This is what Senator Chris Evans said. “The cost of this massive recycling of cash is enormous for absolutely no economic gain.”
But a lot of churning is the result of the fact that our tax system targets individual earnings, whilst the payments system is targeting household income. So what Chris Evans is reporting – that a family on a single income of around $50,000 pa with a couple of kids and a spouse is getting back in payments roughly what they pay in tax is no surprise. Of course none of it would be ‘churning’ according to most definitions if it were provided as tax credits rather than payments. But leaving that fact aside, the churning is a direct result of our system supporting families with kids.
I’ll have more to say on this soon, but until I do, have a look at the graph above. Impressive non? The graph is from a very impressive presentation given by Peter Whiteford in the middle of 2005. And this is what Whiteford says “Australia has the lowest level of churning of any country, [in the OECD] at around 5.5% of disposable income”.
None of this goes directly to the merits of the arguments for and against churning. But it’s worth a mention in the debate wouldn’t you think?