Belated Budget Broodings

Sitting on the other side of the world, I’ve felt rather removed from budget commentary, though I’ve found much to agree with in Nicholas Gruen’s called for harsher cuts in middle-class welfare (can we means-test the first homeowners’ grant too?), Andrew Norton’s call for fewer cuts in basic statistical provision (would Lindsay Tanner mind if we took some of the higher education fund and used it to patch up his cuts to the ABS?), and Joshua Gans’ characterisation of the revamped Baby Bonus as parental leave lite (will those folks in the OECD now classify Australia as a country that provides 10 weeks’ paid leave at the minimum wage?). I also liked Peter Martin’s use of currency and bond prices to glean a revealed preference notion of how surprised the markets were by the budget. There must be a paper in this for an enterprising student.

Update: Gigi Foster draws my attention to Michael Baker’s discussion of how the ABS cuts will affect our ability to understand what’s going on in the retail sector.

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14 Responses to Belated Budget Broodings

  1. Sinclair Davidson says:

    My take on the Baby bonus being like paid maternity leave is here.

  2. backroom girl says:

    “will those folks in the OECD now classify Australia as a country that provides 10 weeks’ paid leave at the minimum wage?”

    Andrew – probably not, because the people in the OECD seem to have trouble recognising something if it doesn’t have the ‘right’ label on it. That’s why they seem to think we don’t have any in-work benefits in Australia – because we don’t have a specific program with that in the title.

    While some other countries (eg UK, USA) run parallel out-of-work and in-work benefit systems, we in Australia have chosen to provide in-work assistance from the same programs that we provide out-of-work assistance. So we use Newstart Allowance and other income support payments to top up the incomes of people in low-paid work as well as to provide a basic income for people without any work at all. And FTB, likewise, is for both working and non-working families.

    Sinclair – I largely agree with your take on the Baby Bonus and/or paid maternity leave as compensation for opportunity cost. It’s worth remembering of course that the Baby Bonus is what we got the last time someone suggested that we should have a system of paid maternity leave. If only I thought this government had the will to change it into what it should have been in the first place, I would be happy. But I don’t think that layering paid maternity leave on top of the Baby Bonus would be a good way to go.

  3. Andrew Leigh says:

    Sinc, you sound like you’re calling for a return of the ‘old’ Baby Bonus, which operated from 2002-2004, and was regressive in precisely the way you propose.

  4. Sinclair Davidson says:

    Means testing the BB is going to complicate the paid maternity leave debate. There are good and bad arguments for all the institutional arrangements (public, private, combo) and this sets the precedent for means testing any government payment. I also think the ‘savings’ are very overstated and the government should have waited for the PC report and then acted.

  5. spog says:

    I find the use of the $150,000 threshold for things like removing FTB B and dependent spouse tax offset interesting. The argument that they are removing the payment from the well-off made me wonder just how well off these people are.

    In the case of FTB B, a single earner couple at $150,000 with a young child currently has a little under 4 times the pre-housing disposable income of the same couple with no private income at all (ie, entirely welfare dependent). My beloved partner thinks that’s plenty, but I’m not sure that those characterising $150K as part of the wealthy end of the spectrum are considering the in-hand money rather than the gross numbers.

    This multiple will change from 1 July once the tax cuts and medicare surcharge threshold changes kick in, but I doubt it will move significantly.

  6. Thinking in old ways says:

    Spog

    The trouble is if the single earner on $150,000 is not a high income earner who is.

    Going back to my trusty tax statistics I see, in 2005-06, the range of gross income for the 98th percentile of tax payers is $126,203 to $151,376. Given a little bit of earnings growth since then it would seem reasonable to assume that the lower end of the band is quite likely to be around $150k.

    If the top 3% of tax earners are not considered to be “at the wealthy end” I don’t know who is.

    I know we can quibble about family trusts, etc etc and say that they are hiding all their income – but while I would love to believe there are all these rich people out there to carry my tax burden for me I just don’t think the evidence is there.

    If you have a personal income of $150,000 you are rich – and you should be able to look after yourself (you should also be able to take a decision whether or not the utility of having children outweighs the cost).

  7. Patrick says:

    but while I would love to believe there are all these rich people out there to carry my tax burden for me I just don’t think the evidence is there.

    Trust me, they are!

    But I do think $150k is high enough. It’s f**ken welfare for pete’s sake, not a moral entitlement. And if it sets a precedent for means-testing every government payment, well, cry me a river. Can it do so faster?

  8. spog says:

    I’m not convinced it is welfare, any more than having a tax free threshold that applies to everyone is welfare.

    For couples, the basic principle behind FTB B (and the without child equivalent, the dependent spouse tax offset) is that a household with 2 adults should pay less tax than a single person on the same income. In other words, having two mouths to feed, etc, gives the couple household less “leftover” money to pay tax with. There are other ways of characterising it, but I think this is the basic gist.

    That line of argument holds true at any income level, so the “concessional” tax treatment was previously available at any income level, provided you paid tax.

    Labor well and truly cocked this up in 1994 when they decided to turn a reduction in tax liability into a cash payment. From then on the goose was cooked as it inevitably became associated with welfare.

    Not everyone agrees with horizontal equity measures (or increasingly these days even grasps the concept), but for those that do I’d urge you to resist the temptation to cash them out. They will die the death of a thousand cuts once you do.

  9. Thinking in old ways says:

    Spog

    “the basic principle behind FTB B (and the without child equivalent, the dependent spouse tax offset) is that a household with 2 adults should pay less tax than a single person on the same income.”

    Why?

    If they only put in half the work effort of the single person why should they pay less tax.

    Why should other taxpayers subsidise someone to clean the house cook the meals bring the ‘bread winner’s’ slippers to them when they return to home and be relaxed and primped for sex?

  10. backroom girl says:

    Well, I’ll be interested to see if anyone suggests means-testing taxpayer-funded paid maternity leave (if that’s what we end up with) on the partner’s income.

    I think I agree with you TIOW on FTBB – I really don’t like any of that old stuff about men needing to be compensated for the costs of supporting stay-at-home wives – but I have always tended to think about the Baby Bonus as the paid maternity leave the previous government wasn’t game to implement.

    Spog’s point about making things look and smell like welfare is also valid, so the question is who will regard taxpayer-funded paid maternity leave as welfare?

  11. spog says:

    TIOW

    I’ve not deliberately avoided responding to your point. I think it’s actually a very valid objection. I’ve been considering a lot of ways of tackling that issue, as it’s one that, for some perverse reason, I do think about often.

    However, I’m going to take a sharp turn and approach this from a completely different angle. Maybe even BG will have some sympathy with it.

    Take two initially unrelated points. The first is that a single person, apart from one getting DSP, does not pay tax on private income that is used to reduce income support payments. By this I mean that if you earn $1 (taxable), and Newstart goes down by 60 cents, you taxed only on the 40 cent gain. Second, our transfer system insists on dependency. A single person who wants to be a full-time student can get Austudy, depending on their own income level. A partnered person who wants to be a student might be precluded solely because of partner income. If that partnered person wants to be a student, they have to be dependent. Similarly, if a single person is unemployed and looking for work, they can get Newstart. A partnered person in the same boat may not, again because of partner income.

    Our system requires a person who is in a marriage or marriage-like relationship to effectively go begging to the other partner to survive. Yes, they could leave the relationship, but then they would get income support. My point here is that the dependency is forced as long as you are in a recognised relationship.

    Now, to bring these two disparate things together. I think it would be appropriate that not only should you not pay tax on income that has reduced your own income support, you shouldn’t pay tax on income that has reduced your partner’s payment either. It is fairly easy to construct an assessment of theoretical income support that you prevented your partner getting, and the income thus used should be tax deductible (or for the wishy washy among us, converted to some non-refundable rebate).

    I think this approach links the tax and transfer systems together and provides a better rationale for recognising a partner for tax purposes.

    I just know you’ll hate it!

  12. spog says:

    I should have included in there that even better (in my view) is that the Government keep out of relationship matters altogether and only have an individual basis for assessment. However, I can’t see that flying any time soon, so take the above as a compromise position given forced dependency.

  13. Thinking in old ways says:

    Spog
    Sorry for the delay – but work got in the way of interesting issues.

    In your pursuit of a perfect system I think though you have lost sight of the underlying question of purpose. Why is income support provided?

    Classically the idea is that of poverty alleviation – that is those who have no capacity to support themselves, and no others with an obligation to support them, who would otherwise be reduced to begging or some other form of charity are provided with money to enable them to achieve some minimum standard of living. This support is provided on a conditional basis – they either have to prove that they are physically or mentally unable to work – something required of those on DSP and deemed for those on Age Pensions, or that they are doing everything they can to get a job (Newstart) or that they are undertaking some activity which is perceived as having an positive externality (being a carer or a student).

    Quite simply being a dependent spouse does not fit into this category (although some might argue that being a full-time carer of young children fits into the externality group).

    Your argument “to effectively go begging to the other partner to survive” of course extends beyond the issue of a partner – and would to my mind equally be applied kids – so do we automatically provide income support to all kids above the age of 12 – or 6 so they do not have to go begging to their parents.

    This has very clear consequences also for the treatment of any income you might receive – and is the reason why social assistance in some countries has dollar for dollar tapers – in effect each dollar you earn substitutes for a dollar which would otherwise have been given to you under the now disproven assumption that you have no capacity to support yourself.

    Of course this approach has some practical problems – in particular around work incentives – but also with regard to savings and self provision.

    These are the same practical problems that I think generate the ‘principle’ of not taxing the value of money which offsets income support – if for the sake of illustration we had something like a 5% flat tax rate and a 25% taper then the argument for non-taxation would be very weak.
    If we were in a GMI world of course the arguments would be different – but that is an entirely different conceptualisation.

    BG
    Of course you are right about the Baby Bonus – it most probably would not have ever come about(and certainly not at its rate of payment) it there had not been the debate about maternity pay and a need for the government to respond to it.

    The issue of income testing any maternity leave depends upon what it looks like. If it is just a repackaging of a Baby Bonus – ie paid to those with or without employment – and not offset against award and other forms of maternity pay where people are entitled to this – then it waddles and quacks like a welfare duck – and most probably should be treated accordingly.

    If on the other hand it looks like a real form of leave – income related – and only to those who have an established work history (although not necessarily with the same employer) and hopefully with some employer contribution then it looks like an individual entitlement and should be treated as such.

  14. spog says:

    TIOW,
    All you have established in my mind (and maybe therein is the problem!) is something of a case for applying conditions to the availabilty of dependent spouse tax offsets – the same set of arrangements under which income support is paid. For example, if we use a person with a completely disabled partner (so as not to contaminate the discussion with issues around the value home production or being “primped for sex” as you so disarmingly put it) income support would be payable in respect of that person (DSP). The partner’s income precludes this happening, forcing dependency on one side, and costs on the other. The tax system should recognise this and not tax the income earner as highly.

    This is not income support or welfare (in my book), just an equity measure in recognition of the cost-shifting that is going on.

    And yes, lower tax rates would make the adjustment for a spouse lower. In my view that is a flaw with the current arangements – the amounts should fall with tax cuts. And again, that’s very different to welfare.

    However, I suspect that the cutoff for this post, and many many others, will pass before either one of us moves much on their respective positions on this.

    And just as an aside, do I know you? Your arguments and something about the style of writing has a familiar ring. I’ve been in discussions with people before on this and various blogs only to find that some of the participants were well known to me in another life.

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