As an admirer of Christian Kerr, I’m disappointed in his lack of responsiveness to a fabulous debate in September that he helped to kick off in Crikey – it was then adjourned to Club Troppo. It was blogging at its best with experts dropping in from the bureaucracy in Canberra – and world authority Peter Whiteford helping out from Paris!
But most of it seems lost on Christian, who’s still promoting the idea that reducing churning (the way governments tax people and then return the money as benefits) will stop Governments “playing favourites”. (As if they don’t play favourites with the taxes.)
So here’s my three point summary of the issues.
1. High effective marginal tax rates (EMTRs) arising from the simultaneous imposition of tax and benefit reductions as people’s earned income rises aren’t pretty. But the alternative is worse – the European approach of universal benefits and higher taxes – a European path last seriously promoted in our climes back when Gough was PM. We’ve got the world’s best social security system not because it’s neat (none are!), but because as our policy makers have chosen between evils, they’ve chosen the lesser ones. We keep far more of our benefits out of the hands of the rich than any other country.
2. Peter Saunders’s proposals to reduce churn also reducing targeting. His higher tax free thresholds for those with children ape existing benefits that target children. The difference? Saunders’s benefits don’t generate such high EMTRs – but that’s simply because the benefits are universal. Saunders extends the favour from needy and middle class children to children of the wealthy. So others get less.
3. The spread of cash benefits may encourage the spread of a “handout mentality”. If so, let’s copy the Americans who pay tax credits rather than benefits to families and (like we do with our cash benefits) claw them back as incomes rise. Playing favourites for most kids but not for millionaires.
Christian, when anyone tells you they’re against churning and high EMTRs ask what trade-offs they want to make – how the evils they choose are the lesser ones. To paraphrase what someone once said, trade-offs weren’t meant to be easy.