Our welfare system is a byzantine complex of redistributive arrangements whose total effect nobody understands.

By Lyle Dunne

As luck would have it, a friend sent me a list of upcoming events recently including a forum on Welfare, Morality and Politics organized by a group called Thoughtbroker, who seemed to be a kind of professional controversialist organisation. However they promised

a convivial evening of thinking and drinking at this pub forum exploring diverging perspectives on serious issues

which of course I found irresistible – particularly at $15 with a drink thrown in.

Also I’d encountered both the principal speakers (UK welfare Sociologist Professor Peter Saunders, David Hetherington, Executive Director of Per Capita) previously, and knew they’d be thoughtful and thought-provoking.

Welfare, as the Thoughtbroker website notes

is an area of policy where those notionally on the left and the right find the least common ground with conflict on principles of care and responsibility; buying votes and mollifying the masses; taxation and redistribution; equality and fairness; pragmatism and ethics.

 In truth there was rather less controversy than I might have expected.

Saunders’ talk was an extension of his article in The Australian of a few days earlier. Much of this dealt with what Peter Coleman in the Spectator called the “Victorian distinction” of the deserving vs the undeserving poor.

Saunders argues that unemployed people who had contributed to the workforce (and tax system) over a lengthy period were deserving of more benefits (and latitude) than those who had never worked.

Hetherington’s talk, and his article in the Australian, argued that

Unemployment is not a matter of choice, it’s a trap. Economic evidence shows unemployment correlates with parental joblessness and poor educational opportunity. Most unemployed would far prefer the self-esteem offered by work than the depressing environs of the Centrelink office.

Agreement too far

There is an element of caricature about both positions. Clearly some people on unemployment benefits are there through no fault of their own – and others are lazy, improvident or addicted to gambling or “substance abuse”.

One problem with this whole debate is that welfare supporters focus on recipients’ need, and opponents on the cost to taxpayers – and no-one asks whether “generous” welfare payments are really sapping incentives and creating poverty traps.

But the moral questions more complex than just this tradeoff.

To puncture the balloon of unanimity, I decided to defend “middle-class welfare” – something both speakers had of course denounced.

Both the left and the right agree that “churn” (taxing people to pay for their own “welfare”) is bad economics – but irresistibly good politics: it seems people are grateful. When I receive a tax return, it’s hard to remember I’m just getting back money loan I lent the government interest-free.

But “middle-class welfare”, unlike the tax system, provides “horizontal” equity: it takes (some) account of the needs of families. The present tax system still largely treats dependents as chattels, rather than as co-owners of the income of the breadwinner(s).

(This idea should appeal to both traditionalists and feminists – but somehow I don’t see the latter in particular buying it.)

I agreed with Saunders’ point that, as the German system (I think) recognised, people’s obligations to provide for their families were prior to obligations to support the government. If a single mother earns barely enough to feed, clothe and house her family, she shouldn’t be paying income tax.

But should the “undeserving poor” who perpetuated their dependency through continued drug-taking, drinking, having children out of wedlock – have their welfare payments reduced as a disincentive?

Children, once brought into existence, have economic rights in themselves.

In this last case, there is another dimension to be considered. The children themselves were clients of the welfare system, and had done nothing wrong. It seemed unreasonable to visit the sins of their mothers upon them.

I’m not arguing here that the bearing and rearing of children is a good and worthy thing, necessary to the continued existence of society and thus deserving of support.

My point is that those children, once brought into existence, have economic rights in themselves. Dad or Mum can’t spend all the family’s welfare income on beer or the pokies.

From this it follows that the amount paid to the family should take their needs into account. But somehow people are more reluctant to apply this logic to wages, and the way they’re taxed.

This is partly because we’re unused to thinking of the tax system in moral terms – unless you count “soaking the rich”.

Ethical considerations

But why, for example, do we have a tax-free threshold?

The Federal Labor government recently tripled the threshold; I don’t recall any conversation about what the threshold was for.

It seems to me self-evident that this should be the level below which someone can’t afford to pay tax, after providing for his family (on the principle that family needs come first).

Surely, then, it’s also self-evident that the amount required to provide for one’s family depends on the number of mouths to be fed, feet to be shod?

But I suspect some people think the tax-free threshold is simply the result of our “progressive” income-tax scale.

“Progressive” is of course Left-speak for “good”, as in “Progressive forces occupied the city, liquidating counter-revolutionary elements.”

But some on the left think “progressive” is necessarily good, even in the literal sense: the more redistribution, the better. So we have means tests, not only for welfare and tax (including various levies, and carbon tax “compensation”), but for health-benefit concessions, dental treatment schemes, public transport subsidies, childcare subsidies, baby bonuses, private health insurance subsidies, utilities discounts, public-housing access – even family tax benefits, apparently intended to produce “horizontal” equity (though packaged as welfare payments).

Education funding is tied not to the income of the individual, but that of the geographic area or the school population. HECS payments are tied to income.

Land rates and stamp duty contain a “progressive” or redistributive component.

And of course the way any of these schemes treats families varies enormously.  As Judith Sloan noted in The Australian:

In some cases, the means test is based on individual income; in others, it is based on family income. Having children or not having children matters a lot. And the age of those children also has a bearing. There are hundreds of different means-testing arrangements imposed by federal, state and local governments. They are very confusing and difficult for people to understand.

 The problem however is not too much inconsistency, but the reverse.

Most of the means tests seem to be based around pre-existing thresholds like those for Family Tax Benefits or Healthcare cards, or good round numbers like income of $100,000.

Cascading disincentives

What happens when you hit those thresholds? The effective marginal tax rates (EMTRs) – what you pay in extra tax, plus what you lose in benefits, for each extra dollar earned – can be well in excess of 100%. And because some benefits are “lumpy” – you either get public housing or you don’t, it can’t be scaled down like a subsidy — there are points on the graph where an extra dollar in income would cost you hundreds if not thousands in lost benefits.

This is a moral issue because it’s a poverty trap on steroids. People will forgo an extra hour’s work because they’d lose more than they gained – but this means they can’t reach a point further up the graph where they might be independent of welfare altogether.

Further, some will do things that are foolish or dishonest, or both, to escape the trap, as in the recently-publicised issue of pensioners keeping thousands of dollars literally under the bed, to avoid assets tests.

Even quantum physics is understood by the guys who invented it – but no-one invented this system.

There’s another aspect to this. There are some analyses of EMTRs, but they’re not complete, because it’s just too bloody complicated. (They still find EMTRs of around 60 – 70%, occasionally gusting to 100% plus — just counting basic tax and welfare. And even on this simplified analysis, for much of the graph, the system is in fact regressive: the more you earn, the lower your EMTR.)

Calculating cash equivalents of all benefits would be a huge task, and the values would vary greatly with people’s circumstances. What’s subsidised rail travel worth? It’s beyond modelling – let alone in combination with everything else.

The upshot is that we have a byzantine complex of redistributive arrangements whose total effect nobody understands. (Even quantum physics is understood by the guys who invented it – but no-one invented this system.)

And the decisions about it (usually to make it more complex) are made by Cabinet, a group with no special qualifications, whose preparation consists of reading – if we’re lucky – a one or two page brief. Does anyone imagine the Cabinet briefs for the Carbon tax mentioned EMTRs?

This is not a criticism of Cabinet government, still less any particular Cabinet.

It’s a criticism of an income-redistribution system that is growing and proliferating without anyone really – not its architects, let alone its intended beneficiaries — understanding what it does nor what incentives it creates.

That, to me, is a moral issue.