More on churning

From today’s Crikey.

As an admirer of Christian Kerr, I’m disappointed in his lack of responsiveness to a fabulous debate in September that he helped to kick off in Crikey it was then adjourned to Club Troppo. It was blogging at its best with experts dropping in from the bureaucracy in Canberra and world authority Peter Whiteford helping out from Paris!

But most of it seems lost on Christian, who’s still promoting the idea that reducing churning (the way governments tax people and then return the money as benefits) will stop Governments “playing favourites”. (As if they don’t play favourites with the taxes.)

So here’s my three point summary of the issues.

1. High effective marginal tax rates (EMTRs) arising from the simultaneous imposition of tax and benefit reductions as people’s earned income rises aren’t pretty. But the alternative is worse the European approach of universal benefits and higher taxes a European path last seriously promoted in our climes back when Gough was PM. We’ve got the world’s best social security system not because it’s neat (none are!), but because as our policy makers have chosen between evils, they’ve chosen the lesser ones. We keep far more of our benefits out of the hands of the rich than any other country.

2. Peter Saunders’s proposals to reduce churn also reducing targeting. His higher tax free thresholds for those with children ape existing benefits that target children. The difference? Saunders’s benefits don’t generate such high EMTRs but that’s simply because the benefits are universal. Saunders extends the favour from needy and middle class children to children of the wealthy. So others get less.

3. The spread of cash benefits may encourage the spread of a “handout mentality”. If so, let’s copy the Americans who pay tax credits rather than benefits to families and (like we do with our cash benefits) claw them back as incomes rise. Playing favourites for most kids but not for millionaires.

Christian, when anyone tells you they’re against churning and high EMTRs ask what trade-offs they want to make how the evils they choose are the lesser ones. To paraphrase what someone once said, trade-offs weren’t meant to be easy.

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glenn T
glenn T
15 years ago

Australia currently provides $72 bil of the $80 bil required to provide every one of our 20 million men, women and children with a $4,000 advantage (plus existing additional welfare entitlements).
Th administrative savings from just saying pay everyone $4,000 would account for a goodly proportion of this shortfall. When a family’s situation changes they wouldn’t have to go cap in hand to get their FTBA increased and to get their “low tax rate advantage” (which, if they don’t claim welfare, they have to wait until they lodge their tax return to get), so some family’s would wait before claiming, providing some saving in welfare outlays. It also takes some pressure off a wife walking out of the home, she would always have some basic albeit small income, and the delay in having to make a public declaration that she has separated may be sufficient to save some marriages.
$4,000 is the minimum marginal cost of support for a person in an existing household, be it a grandmother who has immigrated from a dysfunctional country with no pension or a child. It is just so much more simple, more efficient, more effective and more fair to pay this to all rather than having to assess, categorize, recover debts, deal with interactions etc etc.
After this $4,000 is supplied to all a heavy stick can be applied, and I would suggest the stick should be very heavy. Without this $4,000 base the system will remain complex, impossible for most people to understand and fraught with unintended interactions.

GMB
GMB
15 years ago

Nick are you focusing on ruthlessly slashing non-defense government spending?

If not why not?

I cannot make your argument out. If you tax low-income earners you are hurting them.

If you have high rates or marginal tax for business and the wealthy you are destroying massive amounts of wealth.

You don’t want either.

Yes its true if you are going to pump up blood-sucker-central to gigantic proportions there is no good way around it.

But its blood-sucker-central is where the evil starts. So thats what you have to reduce.

Andrew Elder
15 years ago

It’s ridiculous to tax people whose income is at a level where they are largely, or wholly, dependent on various forms of welfare. Millions of dollars sloshes from Treasury to Centrelink and back again without ever getting spent or invested, like that dirty water at the bottom of a boat. Lift the tax-free threshhold above the poverty line, lift it again if you must do this family transfer thing (instead of taking tax from middle-income earners, processing it then sending it straight back with a lot of political hoo-ha), but recognise that the TFT is the line below which it’s not worth goverment’s time and effort to collect revenue. That line is well above the current TFT.

sivle-ised
sivle-ised
15 years ago

Nick,

In each of your summary points, you mistakenly refer to, respectively: “the rich”, “the wealthy” and “millionaires”, when actually you are referring to people who have high assessable income after deductions, as defined by the Income Tax Assessment Act.

The difference is not subtle.

I could be extremely wealthy, and have next-to-no assessable income. In fact, were I extremely wealthy I would employ a very good tax accountant to *ensure* I had next-to-no assessable income!

D+

sivle-ised
sivle-ised
15 years ago

“when anyone tells you they’re against churning and high EMTRs ask what trade-offs they want to make”

First you have to change your paradigm and go beyond thinking just in terms of income…

spog
spog
15 years ago

I don’t think Andrew’s “commonsensical objection” needs to be dismissed quite that quickly. In the earlier round of comments on this subject I pointed out that churning is not limited to family payments, but has become endemic. It was not so long ago (or maybe I’m just way too old) that the maximum rates of income support were less than the tax free threshold. There was no need to have the complex array of tax offsets (aka rebates) we use today to overcome the fact that without them everyone totally dependent on welfare would have to give back a significant amount in tax.

The fact that these offsets then have to clawed back on top of welfare withdrawals and income tax adds to the EMTRs people have in the welfare-to-work transition.

They didn’t exist at all, once upon at time, and our payments were more tightly targetted then than now. Mind you, we didn’t much concern ourselves with the idea of a welfare to work transition back then.

spog
spog
15 years ago

Nick, I’ve read your first para-in-reply quite a few times now, and while there are many things that I could say, I find that in summary I’m not able to disagree with you. Which doesn’t make for a very entertaining discussion really.