Tame Senate could deliver tax reform

The notion of reform of the welfare system seems to strike fear into the collective hearts of many welfare organisations. However, the reality is that for many of these organisations, the greatest gift they can give their customers is to not have them on their books.

Reform as it affects people’s hip pocket need not carry the scare campaign of the 1998 GST proposal. For instance, if the mother returning to work knew of the high effective marginal tax rates she was paying due to the withdrawal of welfare benefits (what the experts call churning), would she be more likely to support wide-ranging reform of the income support system to produce a fairer outcome for her?

Or would the young unemployed person moving off Newstart and into the paid workforce embrace such reforms when he realises that he is only marginally better off once his benefits are cut and tax and welfare clawback has occurred?

The clumsy interaction between the taxation rates and the income support system often produces some highly dispiriting outcomes for low and middle income earners, and has the effect of sapping the incentive to work.

Barry Maley and Peter Saunders from the Centre for Independent Studies have offered a number of sensible options to address these structural problems. Maley, for instance, has advocated a single, all-encompassing family benefit, which would not be means tested. Saunders suggests raising the tax-free threshold and replacing means-tested family payments.

These approaches would go a long way to avoiding the arthritic traps and inefficiencies that arise from the interaction of means testing, welfare payments and tax rates.

Tax, welfare and labour market reform are undoubtedly costly ventures. Some of the costs would be offset through an increase in workforce participation and workplace productivity, and a reduction in the Government’s welfare bill.

As the Prime Minister said on election night, Australia stands on the threshold of a new era of great achievement. Australia is a prosperous nation, but nothing is forever. Low workforce participation rates, an ageing population and a bloated welfare bill are a stark reality check on the significant challenges that lie ahead.

The need for comprehensive reform has never been as strong. And the Government is in a position to deliver. We cannot afford to squander this opportunity.