Work and Income and tax reform

Work and Income and tax reform Grant Belchamber ACTU 26 February 2009

Fair and efficient Tax treatment of employees cf ‘contractors’ • Tax actually paid • Super contributions • Workers comp / insurance • Expenses Company & trust income cf personal income Hypothecation – partition the schedule to link sources and uses of tax revenue

Marginal rates and thresholds Focus is bottom of the income distribution • Income adequacy • Work incentives and rewards • Dignity Consider single adult person with no dependents

Real tax cuts since July 2000full year cost = $24.5 bn

Tax cuts 2009 and 2010

Rates and thresholds from 1 July 2010

The Low Income Tax Offset [LITO] LITO from July 2010 is $1500 / yr, withdrawn at 4 cents in the dollar over $30,000 Effective TFT = $16,000 / yr, not $6,000 Raise LITO to $2400 and abolish TFT delivers identical result for low paid workers, but • Med-high and top end earners pay more tax • Saves govt revenue

Budget neutral LITO • Is ~ $2565 with withdrawal at 4 cents in the dollar on incomes above $30,000 pa • The effective tax-free threshold is $23,100 • Tax cut rises by $3pw at bottom end, falls by $17pw at the top end

Future tax cuts plus means tested LITO

Raise the LITO withdrawal threshold to $37,000(parity with the full-timers tax threshold)

Implies this real tax cut since July 2000

What about efficiency? How effective is our tax-transfer system in promoting productivity growth? Does it smooth the passage to work for those supported by the social safety net? Skills programs are vital; but look at the income tests

Current nominal and effective marginal rates

Efficiency? What efficiency?

Memo item – minimum wage rates Fed Min Wage = $14.31 per hour Shop assistant rate = $15.86 per hour Trades rate = $16.78 per hour Add say 50c per hour for next increase and the annual equivalents for full-time work are: Fed Min Wage $29,343 Shop assistant $32,414 Trades rate $34,237 With 25% casual loading, the minimum rate range is 30-40 Kpa for full-time work

The Low Income Shandy No Newstart if other income exceeds $421 per week Min income is $225 per week

Let’s get real Newstart income tests reflect antiquated thinking, that • Work is a full-time thing • Dole is for no work • Social security is not for workers But today many social security entitlements accrue to full time workers • LITO, FTB, …

Transition to work • A Newstart recipient can work 2 hours a week as a shop assistant before their benefit is withdrawn at 50% per dollar earned; more than 8 hours a week and the withdrawal rate is 60% • A person working 5 hours a day (25 a week) as a shop assistant gets no Newstart at all • The return from working between 2 and 25 hours a week is $7.25 an hour after tax – half the minimum hourly rate at the FMW, before costs of work (fares, clothes)

Alignment Step 1 Double the Newstart threshold for ‘other income’ from 2 to 4 hours work per week • From $62 per fortnight to $125 per fortnight. • Aligns with the effective tax-free threshold at $15,000 Puts an extra $31.50 a week into the pockets of Newstart beneficiaries who work four hours a week, and $13 a week for recipients who work 4 hours a day NB Age pension rate is already $60 a week more than Newstart

Alignment step 2 Abandon antiquated thinking, integrate tax and transfer structures. Adopt new rule: no effective marginal rate greater than the top marginal rate for low income workers • ie withdrawal rate on Newstart = 45-MTR • Above total income of $15,000 (other income of $62.50pw)

This 2-step alignment delivers a big tax cut below average earnings

And makes a big difference to effective marginal rates on low incomes

Concluding thought Would be much better still using 37 – MTR for Newstart withdrawal Some savings available by combining this with the LITO change, and by changing other nominal rates and thresholds Still expensive – in order of $20 bn. But as a long-run goal, integrated with changes to tax rates, has a lot going for it

Work and Income and tax reform