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Monday, 2 June 2003
Page: 15607


Mr BRENDAN O'CONNOR (3:42 PM) —I move:

That this House:

(1) recognises that, because of the Family Tax Benefit system, parents of middle incomes pay an effective marginal tax rate of between 60% to 77%;

(2) recognises that, because of the Allowances Income Test, an individual claiming Newstart who earns more than $62 in a fortnight pays an effective marginal tax rate of 67%;

(3) recognises that, because of the Allowances Income Test, an individual claiming Newstart who earns more than $150 in a fortnight pays an effective marginal tax rate of 87%;

(4) recognises that, because of the parental income test of Youth Allowance, 40,000 families face effective marginal tax rates of up to 111.5%;

(5) acknowledges that these effective marginal tax rates are much higher than those for persons with high incomes;

(6) notes that the number of individuals facing effective marginal tax rates of more than 60% has nearly doubled since 1997;

(7) calls on the Government to reform the tax, welfare and family payment systems to avoid the development of poverty traps and disincentives to work; and

(8) affirms its commitment to a tax system that is progressive.

I have moved this motion in order to bring closer attention to the inequities and entrenched poverty trap many people in Australia are confronting today. As a relatively wealthy country we should be able to do more for our less well off, but we are failing them. With increasing pressure upon family budgets in areas such as health, education and children's services, the need to make our social welfare and tax systems fairer is a critical development required.

It is often argued, particularly by those on the other side of the House, that Australia's top marginal tax rate of 48.5 per cent, including the Medicare levy, is too high and comes into effect at too low a level. It is said to act as a disincentive to work, reducing efficiency and productivity and encouraging tax avoidance. Indeed, the Treasurer only four years ago in this House mocked Labor, asking:

Why would you support a system ... whereby people that are just getting past average earnings, maybe doing a bit of overtime, have to pay $1 in $2 in tax?

The reality is that the combination of the social security system and the taxation system delivers effective marginal tax rates far higher than those the Treasurer was referring to when he made those comments.

The awful truth of it is that the highest marginal rates are being paid by those on low and middle incomes—those least able to afford it—not by those receiving high incomes. A person trying to move from unemployment into the work force can face an effective marginal tax rate of up to 87 per cent, and higher under some circumstances. An adult claiming Newstart who earns some extra money currently pays 17 per cent tax on that income. On top of that tax, if he or she earns more than $62 in a fortnight then every dollar earned above that amount reduces the Newstart payment by 50c. That is an effective rate of 67 per cent. If they earn $142 per fortnight—$71 per week—Newstart is reduced by 70c for every dollar, producing an effective marginal tax rate of 87 per cent.

If the Treasurer were right, and 48.5 per cent is a disincentive for those in higher paying jobs, how much harder must it be for someone who is unemployed, most often earning an hourly rate considerably lower than average, and facing a tax rate higher than those on 48.5 per cent? While there are a lot of good non-financial reasons for an individual to take up work that is offered, you can understand how little incentive there would be for a person taking home, say, $2.60 per hour—which is 13 per cent of the amount paid to a person receiving $12 per hour. Perhaps we should ask the Treasurer why he supports a system where people who are earning less than the average income lose a lot more than 50c in every dollar they receive. This is not a new problem. It has been a problem ever since social security payments were introduced, but the problem was once confined to a small, albeit significantly disadvantaged, sector of society.

As the final report of the McClure committee discusses in the section on incentives and financial assistance, with the introduction of the flawed family tax benefit, the problem has been extended so that it affects nearly twice the number of people than previously. And, in conjunction with the introduction of a parental income test for youth allowance, the ludicrous situation has been created where a family could be worse off if their paid income increases. So much has already been said about the numerous other problems with the family tax benefit—and I am sure more will be said this afternoon in debating this motion—particularly about the propensity of the system to drive ordinary families into debt, that you would think the government would have got the message and reformed this a long time ago. Instead, the government have ensured that families on middle incomes, between about $30,000 and $50,000, are faced with a tax rate of 30 per cent, plus a 30 per cent clawback of family tax benefit entitlement on extra income earned. This is an effective marginal tax rate of 60 per cent, and it is paid by ordinary families on ordinary incomes.

That government is not concerned about the interests of the poor and disadvantaged, and it does not really surprise me, but I would have hoped that we might at least see some action from it on looking after middle Australia—the area it professes to represent. The youth allowance system is the worst of the lot. The parental income test for youth allowance—whereby the allowance is reduced by $1 in every $4 over the threshold—combined with the personal income test, family tax benefit and income tax, can deliver an effective marginal tax rate exceeding 100 per cent. As the McClure report points out on page 30:

... certain additional benefits are lost when a dependent child moves onto YA, notably FTB and rent allowance. Furthermore, the lower threshold for the YA parental means test results in a “sudden death” loss of all of the YA when the parents move off allowance.

Let me give you just one story about how the social security, family tax and income tax systems have combined to discourage a constituent in my electorate from continuing employment and improving his lot. Mr C is a single father residing in Sunbury, and he has five children. He receives the disability support pension and family tax benefit A and B. It is a tough enough job bringing up five kids and overcoming a serious injury without having to live off a limited income; nevertheless, Mr C survives and by all accounts is a loving and caring father.

Recently, Mr C has been offered work driving a school bus. It is not too demanding on him physically and it is great for his self-esteem after many years out of the work force. Although it would put him under considerable time constraints, given the requirements of fathering five kids, Mr C hoped that the money he would earn would relieve some of the terrible financial pressure he and his children are under. It could mean new school shoes for the youngest boy, who has always had to put up with hand-me-downs from his older siblings, or it could mean he would be able to afford to pay for swimming lessons for his oldest daughter. But he got caught in the family tax benefit-disability support pension-youth allowance poverty trap.

Even though the hourly rate that he earns is quite reasonable, the end result of Mr C working full time is a net gain of about $90 a week. Mr C is prepared to do that—he wants to work and he needs the money—but he has found that, in earning that money, his access to other benefits such as the health care card has been reduced. He also has other costs as a result of working—such as increased transport and child-care costs—that further erode any benefit he might get from employment. We want Mr C to take employment opportunities that are presented, but the system we have at the moment not only does not help but also actively discourages people to find employment.

I would like this House to affirm its support for a progressive tax system. A progressive tax system is supposed to mean, among other things, that people on higher incomes pay higher tax rates. As I have shown, there are certain elements of the Australian tax system that are not progressive. The government may claim that it supports a progressive tax system, but its policies continually work to undermine this principle. The government, of course, introduced the goods and services tax—the singularly most regressive tax ever imposed upon the Australian community by an Australian government—and now it has overseen the creation of a family tax benefit scheme that penalises ordinary families trying to get ahead.

In January this year, the Minister for Employment and Workplace Relations addressed that bastion of the less well off in our society, the Young Liberals. While he acknowledged the problem of poverty traps, he had no answers. In his speech entitled `Reform with a social conscience'—which, given the speaker and his fondness for the term `job snobs', should be renamed `Reform with a guilty conscience'—he recognised systemic failure without attributing any fault to the Howard government. Nor did he mention the adverse effects of GST upon those on low to middle incomes.

In Sunday's Age, economics editor Tim Colebatch, in comparing OECD countries' tax and welfare systems, indicated that working single parents are `locked in the most severe poverty trap of any Western country'. He went on: `The trap is that if he/she earns another dollar, 70c of it would go to the government.' This is a disgrace and it should be changed. (Time expired)


The DEPUTY SPEAKER (Mr Jenkins)—Is the motion seconded?


Ms Grierson —I second the motion and reserve my right to speak.