TAX-WELFARE CHURNING:The Government Giveth and the Government Taketh Away

PETER SAUNDERSThe Centre for Independent Studies (Sydney)

Australian Institute of Family Studies seminarFriday 6th July 2007

Welfare State is now the core of Government Targeted cash transfers (income support) = $83bn pa (2004-05)

Age pension $28bnFamily payments $25bn (includes FTB and PP)Disability pensions $12bnUnemployment & sickness assistance $5bn

Services in kind (schools, health care etc) = $129bn

Health = $58bn; Education = $38bn

Total tax revenues = $218bn (federal) + $43bn (state) = $261bn

Welfare state spending (excluding admin) = $182 bn = 70% of all tax revenue

Mass reliance on welfare state (Rise of “Middle Class welfare”)

• Income support: 1 in 6 adults of working age relies almost wholly on welfare payments for an income;

• Family support payments: 9 in 10 families with children receive family payments (plus child care benefits/ allowances, baby bonus, etc);

• Age pension: 8 out of 10 over 65 receive a government age pension (54% of retirees get a full government age pension and another 28% get a partial pension);

• Health, education and community services: 6 out of 10 rely entirely on Medicare for their health care; two-thirds rely on government schools to educate their children.

Where does the money come from?Tax revenues (all levels of government) 2004-05

$m % of total revenueFederal Government:• Personal income tax 96,900 44.5• Medicare levy 5,790 2.7• Fringe benefits/Super Guarantee 4,580 2.1• Company income tax 40,500 18.6• Tax paid by super funds 5,520 2.5• GST 35,190 16.2• Excises 21,803 10.1• Customs 5,335 2.4• Other 2,151 1.0

TOTAL FEDERAL = 217,770 100 (80.3% of all government)

States & territories:• Payroll taxes 11,459 26.7• Property taxes 12,558 29.3• Gambling 4,279 10.0• Motor vehicles (inc rego) 10,894 25.4• Insurance & banking 3,690 8.6

TOTAL STATE = 42,880 100 (19.7% of all government)

Simultaneous churning:Distribution of household income, taxes, and benefits by gross income quintile (non-

equivalised) 2003-04

Percentage share for each gross income quintile:Lowest 2nd 3rd 4th Highestquintile quintile

Private income 0.9 6.4 16.9 26.4 50.0

Direct taxes - 3.4 13.6 24.5 59.2Indirect taxes 9.4 13.8 19.9 24.4 32.9Total taxes 3.8 7.7 16.2 24.5 48.4

Cash payments 31.8 33.6 17.8 11.1 5.9Services 16.6 20.6 19.9 21.3 21.6Total welfare 21.9 25.3 19.1 17.6 15.9

Final income 7.7 13.0 18.0 23.8 37.9

ABS Government benefits, taxes and household income (6537.0: June 2007), computed from Tables 9 and 10. Benefits = education, health, housing, social security and welfare

Value of taxes paid and benefits received, by gross income quintiles ($ per week, 2003-04)

Lowest 2nd 3rd 4th Highest

Private Income 46.46 323.15 812.49 1309.36 2471.82

Total benefits rcd 418.57 81.33 346.78 329.83 296.37

Total tax paid 70.21 139.66 281.75 440.43 867.38

Net gain/loss 348.35 341.67 65.02 -110.60 -571.02

% benefit self-fnd 16.8 29.0 81.2 133.5 292.7

Final income 394.81 664.82 877.51 1198.76 1900.80

ABS Government benefits, taxes and household income (6537.0: June 2007), Table 9

“Couple households with dependent children paid $519 per week in taxes [in 2003--4] and received $501 per week in benefits” (ABS, June 2007)

Incidence of tax payments and welfare receipts for different types of households ($ per week, 2001-02)

Single Couple Couple Couple Couple Couple Couple

Singleperson <35 kids kids kids 55-64 >65

person<35 no kids <5yrs 5-14 15-24 no kids no kids >65

Private income 630.8 1390.6 1095.4 1160.0 1395.6 684.5 287.6150.7

Total Benefits 101.7 107.2 292.3 507.8 564.1 264.5 548.8351.3

Total taxes 208.5 426.9 373.8 393.5 474.4 223.4 102.3 56.1Net cost/benefit -106.7 -319.7 -81.6 114.3 89.7 41.1 446.5

295.1

Final income 524.1 1070.9 1013.9 1274.3 1485.3 725.6 734.1 445. Rachel Lloyd, Ann Harding and Neil Warren, Redistribution, the welfare state and lifetime transitions Paper to the conference on ‘Transitions and Risk’, Melbourne, 24 February 2005, Table 1.

Lifetime churning:

The welfare state as piggy bank “A significant proportion of income taxes paid during the lifetime are returned to the same individuals in the form of cash transfers during some other period of their lifecycle” (Ann Harding)

• Bottom income decile receives 21% of its lifetime income as cash transfers but pays 12% of its lifetime income as income taxes

• Average Australian pays in taxes for 73% of the government health care they receive (even the bottom decile pays for $62,000 of its $177,000 lifetime health benefits – 2006 prices)

Summary of evidence on churning:

At least half of welfare state spending ($85bn) is churned rather than redistributed

So most people could afford to buy what they need (using income smoothing instruments

like insurance, savings or loans)…

… if only they were not being taxed so much to pay for the government to

provide these things for them

Why is churning a problem?(1) Economic inefficiency

• Administration costsATO costs $2.3bn and employs 20,000;

Centrelink employs 25,000

• Compliance costs ¾ taxpayers have to pay an accountant

• Enforcement costs

Why is churning a problem?(2) Economic disincentives

• Deadweight costs of personal taxation = $60 billion (Robson)

• Every extra $1 raised costs $1.20 in lost output (take fewer risks, work fewer hours)

• Problem of high EMTRs due to progressive income tax plus means-tested benefits

Why is churning a problem?(3) Long-term unsustainability

• Pressure on government Age PensionSuper will reduce this – but majority will still get a part pension in 2040Spending on age pension will increase by1.9% points of GDP in 40 years

• Pressure on government health and aged care budgetsFederal health expenditure up from 3.8% to 7.3% GDP in 40 years (PBS 0.6% to 2.5%)Spending on aged care up from 0.8% to 2% GDP

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Why is churning a problem?(4) Personal disempowerment

• Undermines ethic of personal responsibility, promotes “learned helplessness,” escalates expectations (e.g. current child care debates)

• Government “takes the life out of life”

by eradicating problems for people to resolve (Murray). Leaves “only sex and shopping” (Dalrymple).

• Enables self-destructive behaviour that would not otherwise have arisen (e.g. growth in single parent numbers)

Why is churning a problem?(5) Social disintegration

• crowds out bottom-up private initiatives (e.g. charities, neighbourhood self-help)

• creates perverse incentives (e.g. high EMTRs make it not worth working)

• encourages dishonesty (500,000+ payments cancelled or reduced by Centrelink last year);

• fallacy that welfare statebuys social cohesion (crime statistics)

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Why is churning a problem?(6) Politicisation of civil society

• ‘Something for nothing’ from anonymous and remote state agencies breeds instrumentalist ‘rights mentality’;

• Producer group ‘rent-seeking’ and bureaucratic empire building;

• Vote-buying by politicians

The Changing Social Structure:Many of us could now afford to self-provide

Policy Proposals• Voluntary age pension opt-outs in return for tax-

exempted super contributions (up to extra 9% of salary)

Policy Proposals• Voluntary age pension opt-outs in return for tax-

exempted super contributions (up to extra 9% of salary)

• Voluntary Medicare opt-outs in return for $2,500 p.a. tax reductions to fund personal medical savings accounts

Policy Proposals• Voluntary age pension opt-outs in return for tax-

exempted super contributions (up to extra 9% of salary)

• Voluntary Medicare opt-outs in return for $2,500 p.a. tax reductions to fund personal medical savings accounts

• Denationalise the Future Fund - $3,000 seed money for every Australian, to grow into personal earnings replacement accounts with 1% annual levy to replace first 6 months of benefits

Policy Proposals• Voluntary age pension opt-outs in return for tax-

exempted super contributions (up to extra 9% of salary)

• Voluntary Medicare opt-outs in return for $2,500 p.a. tax reductions to fund personal medical savings accounts

• Denationalise the Future Fund - $3,000 seed money for every Australian, to grow into personal earnings replacement accounts with 1% annual levy to replace first 6 months of benefits

• No income tax until subsistence income has been earned; child tax credits to replace family benefits

Annual ‘subsistence’ income levels for different household types, based on welfare minimum payments

Household type Total welfare Implied $ subsistence cost for:entitlement $

1st 2nd 1st 2+ adult adult child children

Single earner $13,328 13,328 - - - Single parent + 1 child $21,824 13,328 - 8,496 -Single parent + 2 children $25,398 13,328 - 8,496 3,584Couple $21,796 13,328 8,468 - -Couple + 1 child $27,308 13,328 8,468 5,512 -Couple + 2 children $30,881 13,328 8,468 5,512 3,573

Based on Melbourne Institute, Poverty Lines Australia June 2006, Table 4. Calculations are based on allowances, which are lower than pensions, and include rent assistance.