Making tax fair and equitable

Last year, not long after their first budget in government, the Rudd Government called for a “root and branch” review of the Australian tax and transfer system. The review, which is due to report to the government at the end of 2009, provides a great opportunity to examine some of the major inequities and inefficiencies of our tax and transfer system.

In this article, three priority areas for reform are identified, which the review panel, and government policy following it, must consider if the equity and efficiency principles of good tax reform are taken seriously. These three areas are:

1. the adequacy of income support;
2. making work pay; and
3. taking a progressive lifelong savings approach to asset building.

Adequacy of income support

An essential feature of an equitable tax and transfer system is an adequate safety net to protect people from entering poverty. So what kind of safety net does the Australian income support system provide? Well let’s just say that if you’re unemployed, don’t have children and are in the private rental market, you’re stuffed.

Government support to age pensioners increased in the May budget, because of concerns about its adequacy. What the government has completely overlooked is that there is a group of Australians on income support that has to get by on even less than the pension; the unemployed. Prior to the recent increase in the Age Pension rates, there was a $56 a week difference in the payment rates for the Age Pension and Newstart Allowance, Australia’s unemployment benefit, for a single person. Now if the government acknowledged that pensions were inadequate to support basic living standards, increasing the basic single pension rate by $32 a week in the May budget, then what does that say about allowance rates?

If people were on income support for short periods of time this might not be such a problem. However, many current recipients of allowances are long term recipients. Also, rising unemployment rates mean that this is affecting more and more people.

Particular attention needs to be made to private renters on income support, as Rent Assistance has not kept pace with rising rents.

Make work pay

Another major problem of our income support system is that for many income support recipients, entering the workforce simply doesn’t pay. As people’s income support payments are withdrawn when they enter paid employment, effective marginal tax rates (EMTRs) for many income support recipients can be more than 50 per cent.

A particular problem occurs for those of working age eligible for the higher pension payments, as they risk losing their eligibility for a pension and having to claim the lower allowance if things do not work out in their job and they need to re-claim income support.

Individuals and families moving from income support into employment not only have their benefits withdrawn but also face the prospect of no longer being eligible for their Pensioner Concession Card or Health Care Card, which entitles them to cheaper medicines and a range of concessions (varying across states) relating to utilities, health, transport and education.

In addition individuals and families in public housing face an increase in their rent when their income increases until their rent reaches market rates.

The current Working Credit was introduced in recognition of these problems and allows working age income support recipients with little or no earnings to accumulate credits over time, up to a maximum of 1,000. For every credit accumulated, income support recipients can earn an extra dollar of income before their payment is withdrawn. For someone with 1,000 credits for example, they can earn up to $1,000 before their payment is reduced. Leigh and Wilkins (in Working Credits: A Low-Cost Alternative to Earned Income Tax Credits? 2009) find that the Working Credit has had a small positive impact on workforce participation. However, the maximum value of the credit is relatively small and it has not been indexed over time, so its real value is declining.