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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
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Tax cuts 2009 and 2010
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Rates and thresholds from 1 July 2010
$ / yr MTR
Tax-free threshold 6,000 0
Part-time workers 37,000 15
Ordinary full-time workers 80,000 30
Med-high full-timers 180,000 37
Top end earners - over 180,000 45
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LITO from July 2010 is $1500 / yr, withdrawn at 4 cents in the dollar over $30,000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 TFTdelivers 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
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Raise the LITO withdrawal threshold to $37,000 (parity with the full-timers tax threshold)
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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
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wage and salary income
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Efficiency? What efficiency?
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f - t mi n wages
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Memo item – minimum wage rates
Fed Min Wage = $14.31 per hourShop assistant rate = $15.86 per hourTrades 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 $29,343Shop assistant $32,414Trades rate $34,237
With 25% casual loading, the minimum rate range is 30-40 Kpa for full-time work
The Low Income Shandy
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Pension Other income
Min income is $225 per week
No Newstart if other income exceeds $421 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
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And makes a big difference to effective marginal rates on low incomes
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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
