Labor misses the point and the Liberals just don’t get it

The 2006-7 budget could have been an opportunity for bi-partisan agreement on real welfare reform, but, as Treasurer Peter Costello and Opposition Leader Kim Beazley will reveal, both major parties were distracted by other issues. The signs were clear from mid-April, when the treasurer received Peter Hendy and Dick Warburton’s 400-page report comparing Australia’s tax system with those of other OECD countries. The report concluded that Australia’s tax rate was comparatively low.

Hendy and Warburton are leading figures in the business world. They had five weeks to conduct their research. Following the release of the report, Peter Hendy, chief executive of the Australian Chamber of Commerce, did several interviews in which he proclaimed his support for lowering the 47 per cent marginal tax rate for top income earners and decreasing capital gains tax. This would go some way towards lifting the burden from the long-suffering rich.

The treasurer explicitly ruled out raising Australia’s relatively low GST rate or re-establishing death duties (which would bring us more into line with other OECD countries). There was little mention of tax relief for less affluent Australians - particularly the pressing need to address the effective marginal rate of income loss faced by low income earners moving from welfare to work. Many get hit by the double whammy: losing a minimum 60 cents in each extra dollar earned through combined tax and social security clawback. At different places in the income tax scale some lose well over 100 per cent of any extra earned income.

In mid-April, ALP Senator Chris Evans complained that 76 millionaires with non-working partners received the Family Tax Benefit B income support payment. He argued Family Tax Benefit “welfare” should be means tested. Labor’s preference would be that those earning more than $250,000 per annum are ineligible for Family Tax Benefit B. But Prime Minister Howard pointed out this would only save $6 million annually. That same day, the prime minister, in a speech to the Menzies Research Centre, argued that Family Tax Benefit B was part of the tax system and therefore not “welfare”. I’m sure that when his children were getting Child Endowment he claimed this was not “welfare” either.

Whether Family Tax Benefit can be semantically redefined as not “welfare” is unimportant - it is a form of income support. The Family Tax Benefit system evolved out of the 1941-76 Child Endowment, paid to all permanent resident families with children. Before the 1960s it was one of the few forms of social security paid to Aboriginal people. Unfortunately, many Aboriginal mothers did not see the money: it was stolen from them by mission and settlement superintendents.

If the Hendy and Warburton study was intended to address inequities in the tax and welfare systems, blocking some of the loopholes in the tax avoidance and evasion industry would net between $8 and $15 billion a year. The treasurer could then turn his attention to superannuation tax concessions, which result in the really affluent getting annual tax write-offs greater than the full pension paid to aged people without major assets or other income.

It is time Australians started to address some of the real issues in the tax and income support debate. The job of government is to raise enough tax to cover expenses. There are many equitable ways to do this. In the system of income support, we should, after 218 years, be mature enough to relinquish our arcane attachment to the English poor law system of welfare relief which assists only the “needy”.

The existing system of income support is overly complicated. Benefits, pensions, allowances and tax concessions are hedged around with separate eligibility requirements, means tests and obligations. Family Tax Benefit A has a means test. Family Tax Benefit B does not. Even the conservative McClure report in 2000 recommended one form of benefit to cover income support for all people of working age. It would be smarter not to discriminate on the basis of age. This is particularly so in a country where Aboriginal people die an average 17-20 years earlier than other Australians.

Australia is a rich country, and could afford to introduce a Basic Income for all permanent residents at $500 a year above the single age pension rate. This would cash out existing pensioner tax concessions. Most of the existing income support system could then be dismantled. The Australian Tax Office could administer the general system of income support (as it did until 1927). The treasurer would be in a position to abolish several tax concessions which are de facto welfare payments. Putting the Australian Tax Office in charge of paying income support and collecting taxes would, in and of itself, put a brake on some forms of tax avoidance.

A Basic Income is a form of income support paid to each individual permanent resident, irrespective of wealth, income, gender, race, age, place of residence or marital status. An equal amount is paid to those in employment and those not at work, thereby decreasing the potential for downward envy. The Basic Income is not taxed. All existing tax-free thresholds would be abolished, so that tax would be payable on each and every extra dollar earned. The only eligibility question to be determined is whether the applicant is a permanent resident of Australia. (Further details about Basic Income can be found at Basic Income Guarantee Australia or Basic Income Earth Network.)

Most of the extensive network of Centrelink surveillance activity would become an anachronism. Officers would need to be retrained to carry out socially meaningful activities. Those totally addicted to compelling people to “work for the dole” might find it hard to relinquish their compulsion to compel. Perhaps they could be encouraged to run volunteer “work for the dole” programs for their colleagues.

Other officers who get perverse pleasure out of breaching social security recipients for up to 26 weeks for failing to attend an appointment, or for refusing an unsuitable job, might be more difficult to place in employment. But even if they were to become long-term unemployed, they would be doing less harm than they are doing now to some of the poorest and most marginalised people in our community.

Major advantages would flow from introducing a Basic Income:

• it is a simple, understandable, easily administered income support system;
• the red tape which currently inhibits social security recipients would be removed;
• the system of income support would be deregulated;
• people would be free to pursue entrepreneurial activities;
• there would be less state intrusion into the lives of citizens;
• it would remove perverse financial disincentives to employment caused by the combined tax and social security clawback;
• because an individual would always be financially better off for each and every extra dollar earned, poverty traps would be abolished; and
• low income earners would be guaranteed a minimum liveable income.

Because a Basic Income is paid to all permanent residents, irrespective of employment or any other social status, it is superior to the existing targeted, means-tested income support system, which fails to pay many who are eligible while paying others who are not eligible. It is more efficient than Earned Income Tax Credit schemes such as those operating in Britain and New Zealand, which penalise families when their hours of employment drop below 20 hours per week. Because it is paid up front rather than in inverse proportion to other earned income, it is more streamlined than Negative Income Tax and Guaranteed Minimum Income schemes. A Basic Income is a simple, easy-to-administer scheme.

A smart treasurer would introduce this in the 2007-8 Budget.