1. Work and Income and tax reform Grant Belchamber ACTU 26 February 2009

2. 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

3. 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

4. Real tax cuts since July 2000 full year cost = $24.5 bn

5. Tax cuts 2009 and 2010

6. Rates and thresholds from 1 July 2010 $ / yrMTR Tax-free threshold6,0000 Part-time workers37,00015 Ordinary full-time workers80,00030 Med-high full-timers180,00037 Top end earners - over180,00045

7. The Low Income Tax Offset [LITO] LITO from July 2010 is $1500 / yr, withdrawn at 4 cents in the dollar over $30,000 Effective TFT = $16,000 / yr, not $6,000 Raise LITO to $2400 and abolish TFT delivers identical result for low paid workers, but Med-high and top end earners pay more tax Saves govt revenue

8. 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

9. Future tax cuts plus means tested LITO

10. Raise the LITO withdrawal threshold to $37,000 (parity with the full-timers tax threshold)

11. Implies this real tax cut since July 2000

12. 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

13. Current nominal and effective marginal rates

14. Efficiency? What efficiency?

15. Memo item – minimum wage rates Fed Min Wage = $14.31 per hour Shop assistant rate = $15.86 per hour Trades 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 $29,343 Shop assistant $32,414 Trades rate $34,237 With 25% casual loading, the minimum rate range is 30-40 Kpa for full-time work

16. The Low Income Shandy Min income is $225 per week No Newstart if other income exceeds $421 per week

17. 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, …

18. 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)

19. 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 NBAge pension rate is already $60 a week more than Newstart

20. 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)

21. This 2-step alignment delivers a big tax cut below average earnings

22. And makes a big difference to effective marginal rates on low incomes

23. 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