Music to my ears

The Dark Lord chats to the Parrot

The engine room of Australian economic reform has always been the quality of our bureaucrats. Now John Howard is trotting out the logic that has driven Australia’s welfare system to be the most economically efficient in the world. Where targeting is everything, and where we even have our very own tax credit, the Low Income Tax Offset (LITO), though we can’t call it a tax credit because that’s what Labor has been calling it for several elections now. The LITO is a very small scale affair, but could be cranked up into a working tax credit of real benefit to low and middle income families. Here is the PM in his interview with Alan Jones yesterday.

JONES:. . . [L]et me just ask, I promised a listener this morning I’d ask you this, because one listener rang up to talk about the tax free threshold and said the 6000 figure had not been changed for a long, long time and would there be any chance that the Government would consider a tax free threshold, not for everybody being increased but say for those people on $100,000 or less. What would be wrong with raising that threshold from say $6000 to $10,000 to give relief at that bottom end?

PRIME MINISTER: Well it was last increased in 2000 when we brought in tax reform, if you lifted it for everybody under $100,000 that is about 90 per cent of taxpayers. So that is not just, that is virtually giving it to everybody. The problem Alan with lifting the tax free threshold is that a lot of the people who earn small amounts of money are not poor, it is just that they are either part-time workers or alternatively their income is from investments. The other problem with lifting the tax-free threshold is that it is not a good way of targeting assistance to low income earners because everybody gets it. If you’re earning $500,000 a year and the tax free threshold is increased by $5000, you get the same dollar benefit.

JONES: Oh no, I’m saying it shouldn’t be available to anyone with an income over $100,000.

PRIME MINISTER: Over $100,000 alright. But even if it’s for somebody on $98,000 a year, he gets the same benefit as a bloke on $10,000 a year. There are better ways of delivering help to people right at the bottom. Paying people what’s called a low income tax offset that we have done for quite a number of years now; it cuts out at a certain level of income, that is a far better way of delivering assistance to very low income earners. I’m not speculating about that, I’m just giving an illustration of how you better deliver that”¦

Immediately following this the PM is asked about the absence of a means test on Family Tax Benefit B (actually there is a means test, but unlike other benefits its means tested against the income of the individual receiving the benefit, not the household) and the PM changes the argument. I think he’s got a reasonable point though because the Family Tax Benefit B seeks to introduce horizontal equity between two families one of which has a single earner and the other which has two earners. Its a more constrained and targeted way of doing it than full income splitting.

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12 Responses to Music to my ears

  1. spog says:

    The LITO is proof that our supposed liking for progressive tax scales is not borne out in practice. It is universally available, in the sense that you don’t have to be in a special group to pick it up. This makes it exactly the same as a non-progressive tax scale: instead of a 0, 15, 30, 42, 47 scale which we allegedly have, it’s actually 0, 15, 34, 30, 42, 47. Notice the hump in the middle there?

    If someone were to actually suggest a scale like this, it would be shouted down as non-progressive, but by burying it in the language of offsets, it’s what’s been achieved.

    Treasury seemed to ignore the LITO for years, but cranked up it’s value from $150 to $235 a couple of years back, suggesting that it’s come back into favour as a device to target tax cuts to the low end (and remove progressivity in the process). It means the tax free threshold is really $7,566.67 by way, not $6,000.

  2. spog says:

    I was also going to comment on FTB B, but I thought two subjects in one post might be a bit much.

    I think the problem with FTB B is not that it is available to high income households (in respect of low income individuals), but that low income households that don’t pay tax get it at all!

    This FTB B criticism by Labor is a lark. They introduced it back in 1994 (as Home Child Care Allowance) and guess what? It wasn’t income tested on household income either.

    It’s a poorly designed horizontal equity measure, but just because its design is crap we shouldn’t throw out horizontal equity altogether. Labor’s thinking is always lazy on this.

  3. Thanks for comments Spog,

    Could you elaborate on your point about FTB B being poorly designed as a horizontal equity measure – and also compare it with income splitting as a horizontal equity measure.

  4. spog says:

    I hope I don’t exceed my daily quota with this!

    Traditionally, the thing that schemes like FTB B (and the dependent spouse tax offset) are trying to address is that a two income couple on $x of income will pay less tax than a single income couple on the same income. If you imagine a graph of disposable income, for any given income level, the highest disposable income without any interventions (eg, FTB B) occurs at a 50/50 split. If the X axis was showing the % split from 100% to partner one at all splits across to 0% to partner 1, and the Y axis showed disposable income, the shape is an inverted U.

    An intervention that sought to correct this would, if successful, produce a flat line. Income splitting produces a flat line. In contrast FTB B gets massively over-enthusiastic and produces a shape that is almost the opposite – a U shape, where, at lower incomes, single-income (or more correctly single and a bit incomes) have higher disposables than two income couples.

    The underlying reason for the distorted outcome is that, as a cash payment, FTB B is provided to household without income. They are therefore being pumped with money to compensate them for a tax liability they don’t have. It’s a bit like people having been fined incorrectly for traffic offences, and then being reimbursed. No problem with that, but what we’ve done is say that yes, we’ll reimburse the incorrectly fined group, but also people who weren’t fined at all.

    There was very little good reason to go to a cash based assistance for the tax-equalisation measure in Labor’s Home Child Care Allowance (and it’s progeny, basic Parenting Allowance, basic Parenting Payment and then FTB B), and what reason there might have been disappeared in 1995 with the “One Nation” changes to welfare. Since then, the cash payments have just been a blight that unnecessarily impacted on second earner incentives in couples.

    It’s a shame this type of blogging comment process doesn’t allow for pictures. Otherwise I could draw the graphs I mentioned.

  5. Youie says:

    Howard: “The other problem with lifting the tax-free threshold is that it is not a good way of targeting assistance to low income earners because everybody gets it.”

    Does this statement not sum up Howard’s attitude to non-high-income earners completely? I have to assume this is why tax cuts for high-income earners are important – such cuts, at least, don’t go to everybody! Equality, Australian style…

  6. Peter Whiteford says:

    Actually, the original precursor (for couple families) to the Family Tax Benefit Part B was the higher (with child) rate of the Dependent Spouse Tax Rebate, which was introduced in 1983 in the final Fraser/Howard Budget.

    The first Fraser budget in 1975 had replaced tax rebates for children with Family Allowances, but kept the Dependent Spouse Rebate (which was the same for families with and without children).

    Lone parents got a lone parent tax rebate, but those on benefits received a Guardians allowance in cash.

    The higher rate of DSR metamorphosed over time into the home Child Care Allowance, Basic Parenting Payment etc, and was then “simplified” into the Family Tax Benefit Part B, which also incorporated the tax rebate for lone parents and the Guardian’s allowance (plus another payment introduced in 1996.

    Some history can be found at:
    http://www.aifs.gov.au/institute/pubs/fm2001/fm60/pw.pdf
    and

    http://www.natsem.canberra.edu.au/publications/papers/dps/dp8/dp8.pdf

  7. Homer Paxton says:

    Nicholas is both right and wrong on means testing of FTBb.

    to all extent and purposes the income of the main income earner is irrelevant thus making for no means testing of the main income earner however there is income testing of the lowest income earner of the household.
    Thus for those families whilst FTBa may vary FTBb won”t a great deal.

    I believe FTB should only go to those families that are in dire financial straits and 90 % of families doesn’t meet that test particularly after 15 years of sustained economic growth.

    This is middle class welfare pure and simple and it is no surprise that john howard is defending it mainly against if you read his speech carefully against internal critics and critics from the business community who want to introduce income tax cuts and get rid of FTB.

    Howard is saying ,rightly, that FTBs cost much less than income tax cuts and a better vote winner

  8. It’s not middle class welfare. It’s a middle class tax cut. Well, it’s both – just depends on definitions. Funny how different they sound isn’t it.

  9. Glenn T says:

    In reality the low tax rate applied below $21,600 can be replaced with a tax offset or standard payment of around $3,800 – that is pay every income earner $3,800 and apply a 30% tax rate from $0.
    This is all that FTBB does – the exit rate totals/averages 30% when a families second income reaches $20,000. The problem is that this 30% is created from 0% for the first $4,000, 20% for $4,000 to $7,500 and 35% between $7,500 and $21,000 and this leads to the distortions mentioned by sprog.
    A graphic showing the U shape mentioned by sprog is shown on my website – simpeff.com.

  10. spog says:

    Making horizontal equity measures as cash payments is a recipe for disaster, as people only ever seem to be able to think of them in vertical equity terms.

    You don’t see the same hullabaloo about the dependent spouse tax offset, even though it’s for exactly the same thing as FTB B, but for childless couples.

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