Labor's Tax Policy

So Labor’s long-awaited tax policy is finally out. You can download it from the ALP website.

The detail is complex, but the basic thrust of the proposal is the removal of Family Tax Benefit Part B (a benefit directed primarily at single-earner households), and the increase in the taper rate for Family Tax Benefit Part A. To understand this package, you have to understand why John Howard loves FTB Part B. In an ideal world, Howard would probably like to have couples file tax returns jointly (so-called “income splitting”). But instead, as Ross Gittins pointed out some weeks ago, he has opted to do it by the backdoor, giving families a benefit (FTB Part B) which is means-tested only on the secondary-earner’s income (usually the wife). In a married couple with children, FTB Part B effectively pays married women to stay at home. As a senior ALP figure told me last week “Howard has this obsession about FTB Part B. Scrapping it frees up a lot of money for us.”

A reasonable sense of the package can be gleaned from the cameos for different family types (see the section headed “Weekly Tables” at pages 38-43 of the PDF file). The big winners from this plan are those with family earnings from $40,000 to $60,000. Call them the battlers, working families or median voters, these families do well from Labor’s proposal. Overall, most family types do better, but the big losers are single-earning families – sole parents and couples with a single income. For example, a sole parent with two children earning $10,000 per year is $443 per year worse off under Labor. (NB. It’s important to note that they may be better off in the long-run – for example, if we think that high levels of welfare and high effective marginal tax rates were discouraging them from working.)

How will this package affect overall labour supply? For low-income single parents, the ALP package is more stick than carrot. If it succeeds in boosting labour supply, it will be primarily because it reduces welfare, by axing FTB Part B and its accompanying phase-out rate. That’s not to say it may not be effective. But it is disappointing to see that a negative income tax, or earned income tax credit, which was a part of Labor’s policy suite in 1998 and 2001, does not appear in this policy. In Imagining Australia, we point out that an earned income tax credit could go a long way towards boosting labour force participation.

There may be a bit of a scuffle in tomorrow’s papers over the estimated “participation dividend”. The Melbourne Institute’s costing is certainly ambitious – estimating that it will raise the labour force participation of partnered women with children by 0.6 percentage points (from a base of 57%), and boost the labour force participation of lone parents by 2 percentage points (from a base of 62%). But the bottom line is that the participation dividend is pretty small bikkies. For example, in the first year, it’s only $136 million in a $3.7 billion package. The rest of the money comes from 18 separate savings measures, ranging from a $12 increase in airport departure taxes to abolishing superannuation for temporary entrants. Most of the 18 savings measures, with the exception of higher clothing tariffs and higher cigarette taxes, appear to be either distributionally neutral or progressive. And apart from a slower phase-down of tariff rates (“Lord, make me chaste and pure, but not yet”), none strike me as especially problematic. But I must admit to being surprised that Labor managed to comb through the federal budget and pull together total savings of $3.5 billion per year.

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2 Responses to Labor's Tax Policy

  1. Iain Lygo says:

    While there are some positive announcements from the ALP, their tax policy really is a bit of a letdown.
    To be perfectly honest, it is solely aimed at the “whats in it for me” crowd with families.
    how can the ALP consider taxing people living below the poverty line only to redirect that money to middle class wealfare.
    There aren’t any modern eco-taxes.
    Labor could have addressed bracket creep and taken the courageous decision to introduce a CPI for essential goods (rather than all products) to protect lower income earners.
    After all prices for essential products such as water, electricity, pulic transport etc are rising much more rapidly than OS holidays and computers. This of course hurts low income earners way more than those on 80K+.
    Next time Labor should introduce their tax policies early and appeal to Australians who want a fair and decent society, rather than throwing money at swinging voters 4 weeks before they vote.

  2. Andrew Leigh says:

    Iain, interesting comment. I’ve heard the CPI problem discussed in different contexts (the last time it came up was at a conference on Chinese inequality), but I’ve not seen any good analysis proving your contention. Do you know of some? If true, presumably this affects unemployment benefits and FTB A&B, but not pensions (which are indexed to wages). Of course, if you thought our welfare benefits were too high, and were preventing the transition from welfare to work, then you might want to be indexing them to an overly low CPI……

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