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More tax incentive needed at all levels

By Craig Emerson - posted Friday, 9 September 2005

Our tax system is holding back Australia. It is holding back Australians wanting to move from welfare to work. And it is holding back Australians in work who want to get ahead.

Labor's Treasury spokesman Wayne Swan has been pointing out the crushing disincentives in the tax and welfare systems for seven years. In recognition of this, the tax blueprint Labor released at budget time was found by the Melbourne Institute to be far more likely to encourage people to participate in the workforce than the Federal Government's package.

Australia's incentive-crushing tax and welfare system is giving unemployed people little financial reason to move from welfare to work. A recent report by the National Centre for Social and Economic Modelling confirms that under the Howard Government's so-called welfare reforms, single mothers will lose up to 75c in every dollar they earn from taking a part-time job, and that's not counting the cost of child care, travel and work clothes.


Middle-income earners aren't getting rewarded for their effort either. They have to pay 42c in tax on every extra dollar they earn. Many are deciding it's just not worth working overtime or going for promotions. One million working Australians face the 42c rate. In the next three years almost 400,000 more Australians will be hit by an incentive-crushing 12c leap in tax on the extra money they earn as they move from the 30c rate on to the 42c rate. Australians facing the 42c rate earn between $70,000 and $125,000 a year. They are trying to improve themselves and make a better life for their children. They are not rich, especially if they live in high-cost cities such as Sydney, Melbourne and Brisbane.

All up and down the income scale, the tax system is crushing incentive. And this is happening just five years after the government delivered what it described as "a new tax system for a new century".

Australia needs genuine tax reform to restore incentive, to reward hard work and enterprise. That means cutting the punishing rates faced by most Australians. If 47c in the dollar is considered too high for top income earners, then the 75c faced by many people seeking to move from welfare to work is far too high.

Tax reform cannot be achieved in a single budget. To be fiscally responsible, a tax reform plan should be implemented over several budgets, as financial circumstances permit. And as I said in my recent Progressive Essay (reprinted in The Weekend Australian, August 27-28), all the squawking about tax reform is just a cacophony of sound unless funding sources are clearly identified.

In its 2006-07 budget, the government has an opportunity to deliver a big down payment on comprehensive tax reform.

First, it could abolish the 42c rate altogether. Under this proposal, no taxpayer earning between $21,600 and $125,000 would pay more than 30c tax on any extra dollar earned. Now that's incentive! It would cost about $4.2 billion.


Second, the low-income tax offset could be increased from $235 to $600 at a cost of $1.2 billion. This would raise the tax-free threshold to $10,000 for every taxpayer earning less than $21,600: a powerful incentive to move from welfare to work.

Third, the top marginal rate could be lowered from 47c to 45c as a first instalment on possible further reductions as the wealthy gave up their welfare and tax lurks. Trimming the top rate to 45c would cost $600 million and should be funded exclusively by the wealthy.

The total cost of this proposal is about $6 billion.

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First published in The Australian on September 6, 2005.

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About the Author

Craig Emerson is the Minister for Small Business in the Rudd Government and Member for Rankin.

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