Jun 6, 2013

Debunking the ‘middle-class welfare’ furphy

Don't believe what you read. Australia actually has the lowest level of middle-class welfare in the developed world, argues ANU academic Peter Whiteford.

There's been plenty of commentary in the media about the need for "cuts to middle-class welfare", as the federal budget deficit refuses to close. And this comes in tandem with the expectation that taxes should not be increased. Peter Whiteford decided to look deeper into the issue.  Should we deal with the growing budget gap by cutting spending or increasing taxes -- or by some combination of the two? Before we try to answer that question we need a clear understanding of the current distribution of welfare spending (who gets what?) and how spending is financed (who pays for it?). Are higher-income groups already overburdened with taxes or are they actually benefiting too much from profligate spending? The Australian Bureau of Statistics has published studies of government benefits and taxes and their impact on household incomes since the 1980s, with the most recent results being for 2009-10. Chart 1 shows the distribution of benefits and taxes in 2009-10 across households divided into five equal groups, or quintiles, ranked from the poorest to the richest in terms of their private income. (In these figures, household incomes are "equivalised", or adjusted for the number of people in the household. Tax expenditures are not separately identified, but are included in the measured distribution of taxes or, in the case of the health insurance rebate, in non-cash benefits.)

Chart 1: Benefits received and taxes paid (dollars per week) by quintiles of equivalised private income, 2009–10 Source: Calculated from ABS, Government Benefits, Taxes and Household Income, Australia, 2009-10, Cat. No. 6537.0

The poorest 20% of households received about $435 per week in cash benefits and received services worth about $446 per week (mainly public healthcare); they paid negligible amounts of income tax but around $105 per week in indirect taxes (excises, rates and the GST). In contrast, the richest 20% of households received only $15 per week in cash benefits (or about one-30th as much as the lowest-income group), received $234 per week in government services (mainly education and healthcare), and paid $756 per week in income taxes and $273 per week in indirect taxes. Not surprisingly, government spending on health and education is far more important than social security for the richest households. The richest quintile received only 1.7% of social security benefits, but benefited from $83 per week in education benefits, or around 14% of total government education spending, and $140 per week in health benefits, or 15.5% of health spending. Overall, the non-cash benefits received by the richest were worth nearly 16 times as much as the cash benefits they received ($234 per week compared to $15 per week). Of the cash benefits received by the richest 20% of households, only $1 per week came in the form of family payments, the most common target of the criticism of middle-class welfare and the main target for reduced spending in the 2013-14 budget. Most of the social security benefits received by the richest 20% were age and disability pensions, veterans’ pensions and unemployment benefits. This is not because the income-testing of these payments is lax; income tests in the social security system are based on the nuclear family, so this "leakage" to high-income households is mainly the result of aged or disabled people or the unemployed sharing a house with their parents or their children. On the tax side, the richest quintile of households paid around 58% of income taxes and 30% of indirect taxes, although they had 45% of private income. Direct and indirect taxes paid by the richest households amounted to 46.5% of all taxes paid; so while indirect taxes offset some of the progressivity of income taxes, the overall tax take is still progressive, as shown in Chart 2. Most importantly, of course, these taxes pay for the benefits received by lower-income households.

Chart 2: Direct and indirect taxes as percentage of income by quintiles of equivalised disposable income, 2009–10 Source: Calculated from ABS, Government Benefits, Taxes and Household Income, Australia, 2009-10, Cat. No. 6537.0

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15 thoughts on “Debunking the ‘middle-class welfare’ furphy

  1. Yclept

    It would be interesting to get a picture of corporate welfare as well.

  2. David Hand

    Redistributing wealth from high income to low income earners is an important foundation of our egalitarian society. At the same time, it’s difficult to redistribute wealth if it is not created in the first place. This is the fundamental flaw in communism. “To each according to his need” is enthusiastically accepted. “From each according to his ability” just doesn’t work.

    I’ve always felt that targeted tax breaks around health care, education and childcare could be better designed but the policy objective is clear – incentivising people who pay enormous amounts of income tax to keep generating the country’s wealth.

  3. Shaniq'ua Shardonn'ay

    Is Negative gearing included in this?

  4. Hamis Hill

    The age of entitlement will most definitely be over when the Abbott austerities finally open the door to the GFC.
    Unless Dear Tony can miraculously excise Australia from the Globe then the Global Financial Crisis will be arriving quite soon.

  5. geoffb

    Peter Whiteford takes a very narrow view of middle class welfare if he thinks there isn’t plenty of funny business involving the transfer of extensive public funds to richer households. How about the private health insurance rebate, more than half of which goes to the richest 33% of households? Or the structure of superannuation tax benefits which, despite recent changes, still accrue overwhelmingly to the richer among us. If you were taking an expansive view, you could also look at the way private schools are funded, which almost by definition benefits the better off. Sure, social security benefits per se are probably not tilted towards the middle class, as you’d expect. But ‘benefits in kind’ are very much structured to provide ‘hidden’ benefits to the middle (and even higher) class.

  6. David Hand

    The way I read the read the article, all the rebates and lurks you refer to are included. Yes, super rebates are skewed to high income earners because they put most into super. This is a good thing. Most of Australia’s $1 trillion plus has been saved by this group. The existence of this savings resource is one of Australia’s great economic strengths and will reduce the demands of retirement costs for taxpayers. This is an example of wealth creation, a necessary prerequisite to wealth redistribution.

    You can’t redistribute wealth that isn’t there.

  7. geoffb

    I think you may be right in relation to the private health insurance rebate, David. Apologies for the oversight. However, a number of studies have shown that even for someone on the (moderate but decent) income of about $80,000 (whose income increases in accordance with average wage growth over time) will benefit more from superannuation tax concessions than they ever would have received from the age pension. The equation becomes even more stark for those at higher income levels.

    I’m not especially left wing, but I do recognise that there is some significant and largely unjustifiable skewing of certain benefits towards high and very high income earners. In the case of the private health insurance, they are largely wasted expenditure, as the richer among us will tend to acquire health insurance with or without the rebate. The same could largely be said of super tax concessions. And again in relation to exclusion of even extremely high value homes from the pension assets test.

    If we are suddenly required to reduce our public expenditure, there are plenty of areas where expenditure, although politically popular, simply any rational test of return on investment, and should be adjusted accordingly.

  8. geoffb

    Sorry – If we are suddenly required to reduce our public expenditure, there are plenty of areas where expenditure, although politically popular, simply fail any rational test of return on investment, and should be adjusted accordingly.

  9. David Hand

    Yes Geoff,
    Your valid comments about health insurance is an example of how tax breaks for high income earners might be better designed.

    But don’t forget there are consequences that follow every policy position. Removing super tax concessions for example, may reduce the amount of money invested in super funds and fuel say more property investment, driving up prices. It is the tax concessions that make super so attractive. Removing the concession may reduce the level of investment. We would all then suffer the consequences of not having it.

  10. Patrick Green

    Is there any recognition of how much businesses pick up the living costs of those who own or manage businesses – cars, rentals, expenses…?

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