Weaning off welfare

The harmonisation approach essentially tries to ameliorate the existing system by adjusting income tax and income tests to avoid the most serious conjunctions of withdrawal rates.

In terms of fundamental reform Ingles canvassed integration of tax and income tests. Separate means tests for welfare payments would be removed and replaced with special tax scales for those in receipt of payments. However he warns that the differing definitions of income used for income tax and for welfare may be too far apart for integration to be feasible except as a very long-term goal.

The opposite approach is to aim for full separation of the tax and welfare regimes. One model suggested involved adding family tax benefits, Youth Allowance and rent assistance to basic income-support payments in a family and subjecting them to a single withdrawal rate. A tax credit would be provided to ensure that no tax was paid until all income support and additional payments were exhausted under the income test. This would ensure the family was subject to only the taper on the income test for payments until they ceased and then taper on the tax credit plus the underlying tax rate.

All these approaches involve quite radical restructuring of tax and welfare systems, but government action to date has just modified EMTRs to some degree through reduced tapers and tax rates.

Without fairly fundamental recasting of tax and welfare interaction any further adjustments to the existing system may tend to shift the EMTRs to another income or benefit group, and like squeezing a balloon, it won’t get smaller but just bulge out in a different place.