Reducing taxes for low-wage earners is more effective than increasing welfare

Tax credits for low-income workers taper off as household incomes rise. While encouraging unemployed people into work, this means they discourage people from working longer hours or getting a higher-paid job, and they penalise second earners in low-to-middle income households.

Despite their name, tax credits are really one more welfare hand-out, and they discourage personal initiative just as other welfare benefits do. If we go down this road, we will end up spending even more than we do currently on income support.

To make work pay, it might make more sense to increase personal tax thresholds to take low-paid workers out of tax altogether. Governments are taking a higher proportion of GDP in tax than ever before, and it is absurd that tax liability starts at an income well below subsistence level. The current tax threshold of $6,000 is less than half what a single unemployed person gets in income support and rent assistance ($12,370), and it is just over a quarter of the federal award minimum wage ($22,400).

In his speech, Mr. Abbott referred to Centre for Independent Studies findings that a worker supporting a family on Average Weekly Earnings paid no income tax at all in 1960. What was possible then is possible now. Tax reform should aim to relieve those on the lowest incomes from paying income tax rather than locking them into dependency on another welfare transfer payment. There is no better work incentive than keeping hold of every cent you earn.