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Book review 'Vital Signs Vibrant Society': Labor can lead reform

By Corin McCarthy - posted Monday, 23 October 2006


Emerson sees the tax-free-threshold as a means for addressing the workforce disincentives faced in the welfare transition. Emerson argues that the Lower Income Tax Offset (LITO) should rise from $235 to $625 and would provide an effective tax-free threshold of $10,000 providing some relief from crushing effective marginal tax rates on the welfare-to-work transition up to $10,000.

Indeed Peter Costello has implemented much of this suggestion in the 2006 budget, citing this benefit. However beyond $10,000 in earnings the promotion of work incentives over passive welfare is not fully addressed (see commentary below on tax credits).

Emerson’s tax incentives for the welfare transition are welcome, yet he does not address the other key issue preventing higher workforce participation.

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Ross Garnaut writes:

My high opinions of Emerson’s efforts in this book should not be read as a blanket endorsement of his policy suggestions. For example, the book’s arguments that the minimum wage is unimportant to employment levels in a relatively tight labour market such as that experienced today in Australia, and the associated dismissal of tax and social security reforms as alternatives to increasing minimum wages … [Garnaut instead argues] a combination of minimum wage restraint and tax-social security reform can be seen to deliver substantially better employment outcomes without damaging the take home incomes of low-income Australians.

Indeed. When raising the take-home pay and job security of low-income Australians then Earned Income Tax Credits instead of significant minimum wage uplifts (as Garnaut supports) are the best means of promoting work over welfare.

Most economic study of this area indicates that tax credits in combination with minimum wage restraint will be a more effective means of reducing effective marginal tax rates, lifting workforce participation and improving the standard of living of poor people (as measured as working poor and unemployed people) than any other policy.

Work incentives - women and motherhood

Emerson writes: “There is no way of further reducing effective marginal tax rates for sole parents and for couples with children without undesirable consequences.”

In perhaps his best moment in the book, Emerson outlines: “Reducing phase-out rates for family payments would take Australia further into the realms of upper class welfare. An alternative approach is to identify variables that are not income related but that correlate closely with need and work decisions.”

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Emerson cites the age of children as the logical variable. He claims that by making the system universal in respect of children under three followed by tighter means testing thereafter, will provide a 20 per cent reduction in effective marginal tax rates over a very large income range for many second income families.

Emerson also calls for far larger expenditure on child care and links good available child care with raising female participation rates in the workforce.

These policies on work incentives for mothers are welcome contributions.

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About the Author

Corin McCarthy was an adviser in opposition and government to Craig Emerson MP. He also advised Labor’s 2007 election campaign on small business issues. He has written widely on these issues in The Australian and On Line Opinion. He currently works as a lawyer in London advising on major infrastructure projects. These views are his own.

Other articles by this Author

All articles by Corin McCarthy

Creative Commons LicenseThis work is licensed under a Creative Commons License.

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