The politics of 'empowerment'

Australians are committed to social mobility as a core value in economic life.

The obvious prescription is investment in people and skills, combined with incentives to work at all income levels. But as yet no leader (whether in public life, business or the union movement) has effectively outlined this position.

This position involves strong and deft political leadership. It requires an acceptance by the electorate that they may not be personally better off in the short term, but they will benefit by a combination of tax-incentives and education, with a strong economy delivering further opportunities. The following is a summary of policies that can deliver these medium-term benefits.

In his paper Tax Cuts for Growth (pdf file 1.14MB) Nicholas Gruen provides clear evidence that the best tax policy is aimed at improving the work disincentives of those who face the highest effective marginal tax rates (EMTRs). These are not people on the top marginal rate of 46.5 per cent (after the recent budget) but those at the low-end of the income spectrum who pay tax at the same time as having their benefits withdrawn as they move from welfare to work.

A single incomes policy - considering minimum wages and the net tax burden on low incomes together - is desirable for addressing work incentives and distributional effects of labour-market-flexibility.

Mark Wooden (pdf file 135KB) argues: “Effective incomes policy requires decisions about minimum wages be made in conjunction with income support and tax policy”. (Also see this research by Andrew Leigh (pdf file 373KB)

The success of wage-tax-trade-off policies has been considered. The estimates on employment growth vary between 2.1 per cent and 7.2 per cent resulting in a further reduction in the unemployment rate between 0.3 per cent and 2.1 per cent (Borland 1999, Will Lowering Wages Reduce Unemployment).

A further study by Chris Richardson (Access Economics) in 1999 for the Business Council of Australia quantified the employment uplift as an extra 169,000 jobs over a period of ten years, with two-thirds being delivered in the first six years.

Peter Dawkins, aware of incorrect claims by some that these policies may reduce unemployment at the expense of after-tax wage equality outcomes, outlines as a response (see page 16 (pdf file 297KB)): “… even without the employment effects, the policy redistributes income away from the top three income deciles to deciles two to seven. If the effect on unemployment … were also included in the distributional analysis it would further reduce inequality.”

Far from being expensive, policies delivering $3 billion in annual tax-credits produce an increase in economic activity delivering in excess of $3 billion in tax revenue, according to Dixon and Rimmer, in “A wage-tax policy to increase employment”. This affordability is confirmed in the Access Economics report.

Therefore tax credits create real employment incentives at minimal cost to the budget surplus. When aligned in an incomes policy they also produce significant employment benefits and long-term reductions in inequality.

These policies are so cost effective they leave substantial room for bracket uplift for the 30 per cent tax rate. This combination could well decide the next election.