The sustained high-powered campaign to lower the top tax rate of 47 per cent applying to our best-off Australians, contrasted starkly with the lip-service given to addressing much higher effective tax rates applying to our worst-off Australians.
So I posed a challenge to the federal treasurer - would he work to make sure no Australian would suffer an effective marginal tax rate greater than the new top tax rate of 45 per cent?
A challenge is easy, but what would it cost? Could it be done? These questions are very big ones that have no simple answers. They are also ones which have not received a great deal of attention.
Effective marginal tax rates up to 70 per cent apply to low-income Australians when income tax and the removal of welfare are combined when moving from welfare to work. High EMTRs affect the willingness to work.
Reducing EMTRs competes as a policy objective with other important objectives. Targeting of assistance to those most in need was the major objective of family assistance reform through the years of the last Labor government. Those reforms dramatically increased the adequacy of assistance to low-income families but also produced much of the EMTR problem facing us today.
The present government has both exacerbated and relieved the problem to some degree. Creating Part B of Family Tax Benefit stacked another income test onto those already faced by women re-entering the workforce. Reducing taper rates reduced EMTRs for some and extended assistance further up the income range. However it also increased EMTRs for middle-income families.
Very high EMTRs have been reduced as the objective of unemployment assistance has changed. They had to come down to encourage part-time and casual work among recipients. At the same time, if they came down too far unemployment assistance could become some sort of income supplement for low-income workers. That has not been the traditional role of unemployment assistance.
The problem to be addressed is how to produce lower EMTRs without compromising the other equally important objectives of family assistance and low-income support.
EMTRs are produced by the overlapping of income tests on government payments and subsidies and income tax rates. The more payments, subsidies and rebates a family attracts, the higher the EMTRs. There are also not only income tax rates, but a low-income rebate and a Medicare levy that both modify the tax rate and have phase-out ranges that can add to EMTRs.
Family assistance is broken into two parts which overlap and inevitably produce higher EMTRs when combined with tax rates, levies and rebates. Families with Youth Allowance dependants face further stacking when the family income test for YA is added. Other families may have further complications due to public housing subsidies.
Research on how many people are facing high EMTRs is thin on the ground. A NATSEM report by Gillian Beer in 2002 gave an idea of the considerable scale of the problem. She found that high proportions of families with children, and especially sole-parent families, faced high EMTRs.
In 2000 David Ingles from the ANU mapped out three approaches to EMTR reduction: harmonisation, integration and separation.
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