Full marks to Malcolm Turnbull for responding promptly, even playfully, to the 58-year-old childless lesbian poet who complained "there is nothing in the budget for me". She will certainly enjoy the benefit of the across-the-board tax cuts. Still, she was onto something. John Howard has never set out to court the inner-city vote just as he's never really sought the endorsement of economists, either. Perhaps this is why the (Sydney Morning) Herald and the Australian Financial Review gave an otherwise very well-received budget its most critical reception.
In 1996, Howard set himself the mission of helping low and middle-income families with children, and he and Peter Costello have never deviated from that. The problem with the tax system was that it only recognised people's incomes, not their responsibilities. Back then, the problem with the transfer system was that its beneficiaries were mostly people who didn't work. That's why Howard and Costello have consistently set out to reduce taxes and increase benefits for the group under most financial pressure: working families with children.
Figures released on budget night showed that a single person on average weekly earnings now has $43,166 in disposable income compared to $52,024, on average, for a single income couple with children. The improvement in real after-tax and transfer income since 1996 has been 27 per cent and 36.3 per cent respectively. For working people doing it tough, the Howard Government has delivered the reform that matters: more money in their pockets.
In 1996, a single-income couple with two young children on average weekly earnings had just $4,194 more to live on than a single person with the same earnings, after tax and transfer payments. That was to clothe, feed and house three extra people. It's no wonder that middle-income families regarded themselves as Australia's new poor under the Keating Government. In 2001, the same household had $5,980 more disposable income than a single person.
After this budget's changes, a four-person household on average earnings will be $8,858 ahead of a single person. Support may be lukewarm in Paddington and Balmain but Howard has effectively turned large sections of the traditional working class into Coalition voters. He strikes many of them as the best prime minister since Ben Chifley.
The budget delivered tax reform, but not the reform most economists wanted. They want a conceptually elegant tax-transfer system where people don't pay tax while they're also receiving benefits. This is indeed an important public policy goal but it's not as important as a fair go for families with children. Also, it's very hard to achieve without undermining the revenue base or creating large categories of losers as well as winners.
High effective marginal tax rates are a disincentive for people to earn more. They create "poverty traps" for people moving from welfare to work because the tax rate is compounded by the rate at which benefits are withdrawn. Effective marginal tax rates come down whenever marginal tax rates are reduced, thresholds for higher rates increased and welfare benefit taper rates reduced. This year's budget delivered all three. That's why Costello is right to say that tax cuts are tax reform. As well, the highest effective marginal tax rates have occurred further up the earnings scale where motivation to work is likely to be stronger. Tax reform hasn't been ignored just because it takes place in incremental steps.
The government hasn't made the economists' mistake of thinking that only financial incentives matter (important though they are). When the alternative to working for a wage is working for the dole, even low-paid jobs can seem more worthwhile, notwithstanding high effective marginal tax rates.
At present, everyone under 50 who has been unemployed for six months is required to perform a "mutual obligation" activity such as Work for the Dole. Since 1997, more than half a million unemployed people have been through six months of Work for the Dole.
Along with a consistently strong economy and better labour market arrangements through the Job Network, Work for the Dole has been a key factor in more than halving the unemployment rate since Kim Beazley was employment minister. As an incentive to choose work over welfare, it's certainly quicker and simpler than the economists' preference for re-engineering the entire tax transfer system.
Economists' nagging is important because even the best governments can never rest on their laurels. Still, it should not obscure Howard and Costello's real achievement as tax reformers.
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