work and income and tax reform
DESCRIPTION
Work and Income and tax reform. Grant Belchamber ACTU 26 February 2009. Fair and efficient. Tax treatment of employees cf ‘contractors’ Tax actually paid Super contributions Workers comp / insurance Expenses Company & trust income cf personal income - PowerPoint PPT PresentationTRANSCRIPT
Work and Income and tax reform
Grant Belchamber
ACTU
26 February 2009
Fair and efficient
Tax treatment of employees cf ‘contractors’• Tax actually paid• Super contributions• Workers comp / insurance• Expenses
Company & trust income cf personal income
Hypothecation – partition the schedule to link sources and uses of tax revenue
Marginal rates and thresholds
Focus is bottom of the income distribution
• Income adequacy
• Work incentives and rewards
• Dignity
Consider single adult person with no dependents
Real tax cuts since July 2000full year cost = $24.5 bn
0
50
100
150
200
250
300
1000
0
2000
0
3000
0
4000
0
5000
0
6000
0
7000
0
8000
0
9000
0
1000
00
1100
00
1200
00
1300
00
1400
00
1500
00
1600
00
1700
00
1800
00
1900
00
2000
00
annual salary
$ p
er w
eek
0%
2%
4%
6%
8%
10%
12%
% p
ost
-tax
in
com
e
$ per week % post-tax income
Tax cuts 2009 and 2010
0
10
20
30
40
50
60
70
1000
0
2000
0
3000
0
4000
0
5000
0
6000
0
7000
0
8000
0
9000
0
1000
00
1100
00
1200
00
1300
00
1400
00
1500
00
1600
00
1700
00
1800
00
1900
00
2000
00
annual salary
$ p
er w
eek
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
% p
ost
-tax
in
com
e
$ per week % post-tax income
Rates and thresholds from 1 July 2010
$ / yr MTR
Tax-free threshold 6,000 0
Part-time workers 37,000 15
Ordinary full-time workers 80,000 30
Med-high full-timers 180,000 37
Top end earners - over 180,000 45
The Low Income Tax Offset [LITO]
LITO from July 2010 is $1500 / yr, withdrawn at 4 cents in the dollar over $30,000
Effective TFT = $16,000 / yr, not $6,000
Raise LITO to $2400 and abolish TFTdelivers identical result for low paid workers, but• Med-high and top end earners pay more tax• Saves govt revenue
Budget neutral LITO
• Is ~ $2565 with withdrawal at 4 cents in the dollar on incomes above $30,000 pa
• The effective tax-free threshold is $23,100
• Tax cut rises by $3pw at bottom end, falls by $17pw at the top end
Future tax cuts plus means tested LITO
0
10
20
30
40
50
60
1000
0
2000
0
3000
0
4000
0
5000
0
6000
0
7000
0
8000
0
9000
0
1000
00
1100
00
1200
00
1300
00
1400
00
1500
00
1600
00
1700
00
1800
00
1900
00
2000
00
annual salary
$ p
er w
eek
0%
1%
2%
3%
4%
5%
6%
% p
ost
-tax
in
com
e
$ per week % post-tax income
Raise the LITO withdrawal threshold to $37,000 (parity with the full-timers tax threshold)
0
10
20
30
40
50
60
1000
0
2000
0
3000
0
4000
0
5000
0
6000
0
7000
0
8000
0
9000
0
1000
00
1100
00
1200
00
1300
00
1400
00
1500
00
1600
00
1700
00
1800
00
1900
00
2000
00
annual salary
$ p
er w
eek
0%
1%
2%
3%
4%
% p
ost
-tax
in
com
e
$ per week % post-tax income
Implies this real tax cut since July 2000
0
50
100
150
200
250
300
1000
0
2000
0
3000
0
4000
0
5000
0
6000
0
7000
0
8000
0
9000
0
1000
00
1100
00
1200
00
1300
00
1400
00
1500
00
1600
00
1700
00
1800
00
1900
00
2000
00
annual salary
$ p
er w
eek
0%
2%
4%
6%
8%
10%
12%
14%
% p
ost
-tax
in
com
e
$ per week % post-tax income
What about efficiency?
How effective is our tax-transfer system in promoting productivity growth?
Does it smooth the passage to work for those supported by the social safety net?
Skills programs are vital; but look at the income tests
Current nominal and effective marginal rates
0
10
20
30
40
50
60
70
80
wage and salary income
current nominal MTR current real MTR
Efficiency? What efficiency?
0
10
20
30
40
50
60
70
80
0
5000
1000
0
1500
0
2000
0
2500
0
3000
0
3500
0
4000
0
4500
0
5000
0
5500
0
6000
0
6500
0
7000
0
7500
0
8000
0
Wage and salary Income
current nominal MTR current real MTR
f - t mi n wages
N ews tar t
wi thdr awal
tax free
threshol d
wi th L I T O
Memo item – minimum wage rates
Fed Min Wage = $14.31 per hourShop assistant rate = $15.86 per hourTrades rate = $16.78 per hour
Add say 50c per hour for next increase and the annual equivalents for full-time work are:
Fed Min Wage $29,343Shop assistant $32,414Trades rate $34,237
With 25% casual loading, the minimum rate range is 30-40 Kpa for full-time work
The Low Income Shandy
0
200
400
600
800
1000
1200
1200
0
1400
0
1600
0
1800
0
2000
0
2200
0
2400
0
2600
0
Combined income ($ pa)
$ p
er
fort
nig
ht
Pension Other income
Min income is $225 per week
No Newstart if other income exceeds $421 per week
Let’s get real
Newstart income tests reflect antiquated thinking, that• Work is a full-time thing• Dole is for no work• Social security is not for workers
But today many social security entitlements accrue to full time workers
• LITO, FTB, …
Transition to work
• A Newstart recipient can work 2 hours a week as a shop assistant before their benefit is withdrawn at 50% per dollar earned; more than 8 hours a week and the withdrawal rate is 60%
• A person working 5 hours a day (25 a week) as a shop assistant gets no Newstart at all
• The return from working between 2 and 25 hours a week is $7.25 an hour after tax – half the minimum hourly rate at the FMW, before costs of work (fares, clothes)
Alignment Step 1
Double the Newstart threshold for ‘other income’ from 2 to 4 hours work per week
• From $62 per fortnight to $125 per fortnight.• Aligns with the effective tax-free threshold at $15,000
Puts an extra $31.50 a week into the pockets of Newstart beneficiaries who work four hours a week, and $13 a week for recipients who work 4 hours a day
NB Age pension rate is already $60 a week more than Newstart
Alignment step 2
Abandon antiquated thinking, integrate tax and transfer structures.
Adopt new rule: no effective marginal rate greater than the top marginal rate for low income workers
• ie withdrawal rate on Newstart = 45-MTR• Above total income of $15,000 (other income of
$62.50pw)
This 2-step alignment delivers a big tax cut below average earnings
0.00
50.00
100.00
150.00
200.00
250.00
Other income $pa
New
star
t $
pw
new Newstart $pa old Newstart $pa
And makes a big difference to effective marginal rates on low incomes
0
10
20
30
40
50
60
70
80
Wage and salary income
current real MTR new real MTR
Concluding thought
Would be much better still using 37 – MTR for Newstart withdrawal
Some savings available by combining this with the LITO change, and by changing other nominal rates and thresholds
Still expensive – in order of $20 bn. But as a long-run goal, integrated with changes to tax rates, has a lot going for it