We still value the Aussie ‘fair go’ – even if we’re not quite sure what it is

We’re committed to egalitarian concepts: but inequality is growing AAP

Australian political culture still recognises the remains of traditional commitment to egalitarianism as the mythic “fair go”, but the meaning is often not clear.

Opportunity is often seen as the ladder up, despite evidence that inequality is not reducing and maybe is getting worse.

The public concern still shows up in data such as the ANU’s biennial Australian Survey of Social Attitudes (AuSSA) surveys which record perceptions of increasing inequalities and some support for some redistribution.

In the 2003 survey, 44% believed the government should redistribute income to the less well-off, and only 30% disagreed.

But later data and other surveys on welfare payments suggest that this redistribution should be via the paid workforce.

“Working man’s paradise”

This type of response fits into the Frank Castles’ oft repeated description of Australia being seen as “a working man’s paradise” (sic) or at least one for earners - that is, fair wages, not a welfare state.

This approach is clear in the way the current budget has been sold to the voters.

However, this differentiation of income source that focuses on paid work as the solution to inequality, ignores the effects precarious work and low pay rates that effect inequalities between wages/pay at the top and bottom of earned incomes.

The official response to the increasing gap between many wage earners and living wages has been some decades of increasingly adding welfare type supplements to incomes of workers.

This change started in the late seventies and was a major shift from the basic/family wage that would be enough to support the workers and their families.

Where once few income payments went to paid workers, as market forces increased wage inequalities, there were more and more family benefits supplements for those lower income workers.

Entitlements versus concessions

The shift was from other forms of long-term government support that were seen as entitlements: child endowment paid to mothers and tax concessions for dependent spouses and children.

The latter were gradually cashed out and turned into payments, so those paying little tax could benefit and former was increased and income-tested as a family low wage supplement, originally under Liberal Prime Minister Malcolm Fraser.

This major policy shift to income-tested payments for paid workers’ families has led to the current confusions about using tax concessions and direct government payments.

In budget terms, there is little or no difference between the end results of $1000 in income foregone or paying it out.

However, most people and politicians regard reducing their taxes as their right but receiving a payment as a privilege.

This perception results in serious confusion of the aims of policy making in this area and results quite often in unfair policies when too many tax expenditures avoid notice.

‘Upper class’ welfare

For instance, an “upper class welfare” tag should be applied to the $32 billion in tax concessions on superannuation and other rorts like capital gains that seriously reduce the taxes paid by the rich.

Again they have escaped notice and the public ire and fury have been turned on families who earn and gain considerably less.

I want to explore the basis of such payments to better off families to show the flaws in the media hype on the issue of who is deserving enough to be supported by government funding.

Taxation theory, at least in the personal tax context, suggests the relative impacts of both the tax and transfer systems should assessed by ability to pay on both horizontal and vertical equity, not just the latter.

Horizontal equity means seeking income outcomes that relate to ability to pay amongst like groupings. For instance, families with dependent children tend to have higher expenses than a similar income family without children.

So it is reasonable to have policies that reduce child rearing families tax/or transfer income to adjust their final income to their ability to pay.

This is the basis for the former tax concessions for families with children and surviving rebate for some dependent spouses.

Feminist economists raised doubts on the merits of the latter tax concession because her untaxed extra household production could lessen household expenditure.

The old universal child benefit and tax concession were a tax and/or payment that increased equity between households with and without children.

Now it is more difficult to explain payments for children that are no longer universal as they are now also part of vertical equity re-distributing.

These types of payments became an effective low wage subsidy to smooth out differences to final household incomes, as shown by ABS and confirmed by the OECD.

The policy objective gave government the means to increase payments and relax means testing to reach many more voters.

So family payments grew into a major program used for both equity and election bribes to families. The old universal payments were abolished, so some families now received nothing.

Another point of confusion is the odd differentiation between eligibility for Family Tax Benefit payments A and B.

A is assessed on joint incomes and B initially only on the second income, but recently adding a cap of $150,000 on the main income. Note the term Tax Benefit was retained even though these are now essentially welfare payments.

The many changes explain some of the confusion about the role of family payments that underpins the current arguments.

Family payments a ‘right’

Many families see the payments as a right, that is, the government’s contribution to their child rearing costs.

The issue then becomes clearly one of eligibility for such entitlements.

If this is a subsidy that goes to families on the basis of need, how does the government determine need? Who deserves the support of other taxpayers?

This decision is not easy. Even though those individually on $150,000 are on high income, they are not even in the top income tax bracket.

There are acknowledged problems with defining poverty lines at one end of the income scale and the really rich at the other because both perceptions and realities differ.

Income is only part of what determines our financial standards of living and often spending determines the perceptions of sufficiency.

High mortgage plus child care costs, maxed out credit cards, private school fees and private health insurance may break a budget so some families on quite high incomes will feel financially stressed.

This type of spending may not impress the great majority of taxpayers who have nowhere near the income to even think about such spending but also raises questions on why many people feel obliged to use private schools and health care.

The current budget items in question focus on income because, unlike many other countries, we do not have wealth taxes.

There are many other subsidies for various costs some of which are income tested, some are not.

Whether the income comes from two earners or one also makes a big difference to net incomes depending on who in a couple earns what. Households with single incomes may do better than those with two, as was noted in the Henry Report.

This affects decisions to take on paid work by the second parent earner, whose high effective marginal tax rate of overlapping tests will reduce their potential income gains.

Added child care costs and other work related expenses means many mothers may net negative extra income which is probably why the child care tax rebate is not income tested.

What’s rich - and what’s poor?

People generally having little idea what others earn and should earn. A survey published in the Daily Telegraph last week showed cuts to the family tax payment is unpopular, with 47% rejecting the idea a family on $150,000 was rich.

The Sun Herald this weekend quoted an ACTU survey that showed most respondents overestimated the income of the poor and underestimated the wealth of the rich, so assumed we were more equal that we are.

OECD reports show quite clearly that Australia is both a low tax country, and also pays lower levels of welfare that most members.

This suggests a solution could be to raise taxes to fund all families for a basic horizontal equity payment, as only 15% of families miss out now. Such a change would also undermine those who now fiddle their finances to maximise their payments, particularly those in their own businesses.

Such a change would minimise the social costs of the divisive debates and the vitriol of deciding who deserves what but no government will risk raising taxes to make this possible.

Nor will they be prepared to fund this change by cutting the hidden billions of superannuation and other tax expenditures that publicly subsidise mainly rich men.