Centre for Policy Development
Read the latest InSight edition:
Rethinking the Costs of Targetting
In the Budget, the Rudd government chose to deliver the Howard tax cuts and to make their savings by tightening up means testing. It represents a strategic choice about the best way to achieve income redistribution. The question is whether it is the right choice.
There are broadly two approaches to the vexing issue of redistributing income. One is to have a strongly progressive income tax system and to use it to fund universal services. The other is to have a low flat tax system and to target government hand outs to the most needy.
Neoliberals argue the first system is inefficient. The inefficiency arises firstly from‘churning’ - the cost of taxing people and then giving them their own money back through universal services and payments. There is an efficiency cost in circulating the money through lots of hands. Secondly, they argue, a progressive income tax system distorts incentives for high income earners. So the neoliberal’s prefered approach is to go for low taxes and targeting.
The costs of churning, however, need to be considered against the costs of targeting.
The first and most pressing cost of targeting is the practical challenges created by trying to decide who is in and who is out of a target group. Targeting payments to low-income earners has created serious poverty traps, where the poorest people face very high marginal tax rates as they try to get back on their feet.
Secondly, targetting also creates social divisions. Pauline Hanson swept to power on the back of downwards envy over targeting. Middle income people struggling to make ends meet took umbrage at what they saw as the indolence of those that fell into the target group. Where the division crosses a racial divide, it becomes socially divisive.
Finally, there is the old saying that if you want to have a safety net for the poor, you should never let it become a system for the poor. When it stops being a concern of the average citizen, it is allowed to fall into decay.
We need to reconsider the costs of targeting.
Further reading:
Mr Turnbull commissioned a report from an economist, Henry Ergas, which was handed to the Opposition last July and debated by its shadow cabinet in August. It proposes moving to a single flat tax rate
New York Times “Going Dutch – how I learned to love the European welfare system” – highlights the differences between these two approaches, as played out in the USA and Netherlands.
Comments
Tony Ryan
Hi Tony,
What is your organisation. I'd like to know about the surveys you are doing.
Rethinking the Costs of Targeting
Defining the two basic income distribution systems on these grounds looks reasonable, until one digs deeper at actual application. In the real world a value system is always added (ideology,) and intelligent management is presumed, but rarely occurs.
(1) An efficient economy? According to my organisation's surveys, the Oz high priests of free market theology, driven by their WTO vatican, eliminated two thirds of our family farmers and more than half of our manufacturers, which meant that exports crashed and imports and employment soared, the latter to 19% by 2006 and probably around 23% now (using the critical continuity of 120 year definitions).
This means that 54% of Australian adults have incomes below $15,000; and government revenue has been hollowed out by almost a quarter of optimum. Clearly, taxation systems are irrelevant in such a scenario.
And, I might add, the above is why Pauline Hanson swept into power; not envy over Aboriginal unearned incomes. But in respect of Aboriginal circumstances, the key word was welfare dependency, an accusation that proved to be 100% accurate.
(2) In Australia, there has never before been a system for the poor. This is new. Since Chifley's 1946 Referendum, there was an age pension fund that every worker paid 7.5% of his gross income into, and this was (is) paid separate to income tax. It belonged entirely to Australia's workers and Government could not legally touch it. The big question is, where is it? Who stole these billions? The fund could not be changed without referendum.
(3) Social Services also provided widows, orphans and other pensions; and unemployment and sickness benefit; which, by the way, one could not collect if one had no work record.
None of this had anything to do with being poor. This was the time of the great bell Oz 95% middle class. The poverty existing today was unheard of, even during the Great Depression.
(4) Nowhere is mentioned the obscene incomes of CEOs, politicians, executives and other 'elites', which are at the expense of other Australians.
What we do have is a system of lies and theft. Most workers earn about $380 per week, not $1000. 69% of Aussies have incomes below $29,000. This is the real world. And as I have said to several economists, if you don't like my figures join me in the next survey. When they consider the impact truth would have on their careers, they back off quickly.
Allow me to make a prediction. In the near future, Rudd will announce the great Oz unrepayable debt, and the IMF will forgive this debt on condition we surrender all Australian resources to China; who will be covering the IMF. Gosh, isn't it lucky Kev can speak Mandarin. But isn't it unlucky for Kev we won't have a bar of it.
Electing a preselected, preowned politician to do our thinking for us is an abrogation of self-determination; but imposing informed electoral consensus on government is democracy.
Targeting
The traps associated with a couple on different benefits have to be seen to be believed!
Marginal tax rates from Centrelink of about 80%! When companies complain about tax rates of 30% I find it hard to have much sympathy. The poorest should have it so good!
The targeting also tends to work from a deserving poor mindset: old age pensioners being deserving (which they are) while the unemployed are not.
Thanks for your piece. I guess I'm not as familiar with the progressive tax option. I'm intimately familiar with the viciousness of the targeting done by Centrelink.