Wednesday, May 11, 2005

“incentive to work”.



It was a prescient choice for me to wear my angry tie this morning. I am seriously pissed off and I haven’t even had the opportunity to sit down at look at the news clippings yet.

The presentation of the budget last night announced a range of massive tax cuts that will be introduced over the next few years. This was justified under the tired maxim that lower tax provides an incentive to work.

As Peter “it’s my go on the swing” Costello said in his speech;

“to improve incentives for people to move out of welfare into work, I am announcing a tax cut for low-income earners. The 17-cent tax rate which applies between $6000 and $21,600 will be cut to 15 cents in the dollar. This change will take effect on July 1.”


Knock yourself out. For someone on $20,000 a year, this equates to about an extra $280 — or $5.40 a week. The tax that this person pays is equal to about 1.6 percent of their post tax income.

Compare this to someone on $100,000, who is $3252 better off ($62.5/wk). This net benefits from this change is equal to around 4.6 per cent of this person’s post tax income.

And this is a “progressive” income tax system.

The difference in the post tax incomes under the different income tax schedules is shown above. Those that benefit the most are those with pre tax incomes over $58,000. (And this doesn’t incorporate changes to various taxers faced by companies that allow a lot of these higher income earners access to lower rates anyway).

If you are thinking about effective marginal tax rates you probably want to chuck the changes to Newstart in. The top taper rate for Newstart has been cut from 0.70 to 0.60 cents in the dollar, and the threshold where this kicks in is to be at $250 rather than $142. This is good, but a fairly minimal move in the right direction — the total increase in welfare expenditure is just under $4bn. Compare this to the $22bn of tax cuts focussed largely on the wealthy (look at my graph, again).

Now this rant maybe somewhat ideological — I am sort of into the idea of redistribution of income. I do have a bias towards the idea of equality of opportunity (from each according to his ability, to each according to his need … with a healthy dash of market–based incentive structure to ensure some efficiency in production and allocation of resources ... ). You can also consider it from a more economic perspective. This budget is promoting consumption, through delivering so much cash back into the hands of the consumers. This is likely to have an expansionary effect, which will translate to inflation as the economy is struggling to grow further, anyway. This profligacy is likely to deliver further upward pressure on interest rates.

If you are not going to give the money to those that need it (which I know will probably have a greater effect on consumption) at least save it in the form of a surplus, or invest it infrastructure and training to try and promote future possibilities for expansion.

Enough for now.

On an aside, how much did the Age pay Misha Schubert to regurgitate Peter Costello’s guff? Tow the line, baby. No critical thought going on there.

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