Mark Latham's tax policy is underfunded by $2.7 billion.
It does not fund the Low Income Tax Offset which 3.5 million Australians earning less than $27,000 per year are entitled to receive in respect of 2004-05.
To close this hole Labor needs to abolish the current Low Income Tax Offset this financial year and make 3.5 million Australians worse off.
This follows Labor's admission that at least 400,000 families will be worse off on a yearly basis, because of the abolition of Family Tax Benefits.
The attached analysis also finds that the package penalises parents who stay at home to look after children; that the claimed improvement in addressing welfare to work provisions worsen effective marginal tax rates; and that the increased prices of clothing, footwear and cars will harm low and middle income earners.
Mr Latham claims that the policy is "Fully costed, fully funded". It is not.
He claimed when he released the policy that he would release NATSEM figures - he hasn't. He claimed that PricewaterhouseCoopers would audit Labor's package - it hasn't. He continues to refuse to allow independent officials in Treasury to cost the policy.
CANBERRA
22 September 2004
WHY LABOR'S TAX AND FAMILY PLAN DOESN'T ADD UP
Costing
Labor's tax and family package contains two serious costing errors amounting to $1 billion in 2005-06.
Labor claims behavioural second round effects to fund its policy which are not generally allowed by Treasury.
These claims amount to $1.7 billion over three years.
In a $12 billion policy this leaves a shortfall of $2.7 billion over 20 per cent.
Labor should submit its policy for costing under the Charter of Budget Honesty.
Families Who Lose Out
Of the more than 2 million Australian families with dependent children, approximately half are either single income couple families or sole parent families. A large proportion of these families stand to lose significant amounts taken out of their existing family benefits under Labor.
The policy abolishes the Government's $600 per child per annum FTB (A) annual payment. The more children they have the greater the amount parents will lose.
Labor's policy penalises families where a mother (or father) chooses to stay at home and look after their children, or where parents do small amounts of part time work.
Low Income Earners are at Risk
Labor threatens 3,500,000 taxpayers with incomes less than $27,475 with increased taxes because it has not funded the 2004-05 low income tax offset which is to be paid to them in 2005-06.
Labor's claimed $8 a week tax cut actually delivers nothing to a third of taxpayers, and less than $8 to two thirds of taxpayers.
Labor's policy undermines encouragement to save for retirement. Low income workers who contribute a few dollars a week into superannuation will be worse off because Labor is abolishing the $1.50 co-contribution scheme from 11 October 2004. Labor proposed contributions tax cut only comes in on 1 January 2005, and even then it is only half a percent cut in the first year.
Costing Errors
Labor's costings are in cash terms.
Low income tax offset - $700 million hole in 2005-06
The low income tax offset (LITO) is a rebate of $235 which can lift the effective tax free threshold from $6,000 to $7,382 for eligible low income earners. It currently provides tax relief to some 3 million Australians earning less than $27,475 per year. Around $700million per year is claimed through the LITO.
Labor says it will abolish the LITO from 1 July 2005, but keep it for the current 2004-05 year. Whilst the LITO applies to current year incomes it is paid in 2005-06. This means that $700 million must be allowed for the cost of LITO in 2005-06 even if it is abolished on 1 July.
Labor's Working Tax Bonus (WTB) is proposed to be paid to taxpayers in 2005-06 " …through an automatic adjustment to their weekly PAYE tax deduction." This will have a cash impact in 2005-06 of around $3,200 million.
Labor's policy document states:
"The cost for Tax Relief for all Australian Taxpayers includes the Working Tax Bonus … and is net of the Government's Low Income Tax Offset and the 2004-05 Budget income tax cuts."
The reason Labor costs its net policy at $2,629 million in 2005-06 is that it has deducted the cost of the LITO. But the cash cost of the LITO falls in 2005-06 because it is paid in arrears for 2004-05.
There is a $700 million hole in Labor costing in 2005-06.
Labor's LITO error is put in stark relief when compared to the Coalition's Mature Age Worker tax Offset (MAWTO) which has been submitted for costing by Treasury. The MAWTO is a tax offset commencing in respect of the 2004-05 year and paid at the end of the year. As the Treasury costing shows, the cash impact on the Budget is in 2005-06.
If Labor wants to use the $700 million from abolishing LITO to fund its tax policy in 2005-06, then it will have to announce the abolition of LITO from 1 July 2004. This means raising taxes for 3 million low income earners this financial year and backdating the tax rise.
Reversal of GST concession for small business - $330 million hole in 2005-06
Labor says it will reverse the Government's concession that allows small businesses with annual turnovers of $50,000 or less to report and pay their GST on an annual basis. It claims this will improve the budget by $346 million in 2005-06.
The Government's policy is due to commence in 2004-05, resulting in a deferral of GST revenue to the States in 2004-05, for which the Commonwealth will pay compensation to the States with a one-off cash impact of $330 in 2004-05, as confirmed by PEFO (p7). After that there are only minor impacts of the order Labor has scheduled for 2006-07 (confirmed in 2004-05 Budget Paper 3, p39).
If the Government measure does not proceed, the States will receive the full GST revenue as scheduled in 2004-05, so the Government will have no need to pay compensation and make a cash saving in 2004-05 not in 2005-06.
Labor's proposal therefore has a further $329 million costing error in 2005-06.
Disallowable Second Round or Behavioural Effects
ATO compliance - $412.5 million hole over the forward estimates
Labor's savings from a further Tax Office compliance program are spurious. It claims that by injecting $25 million per year into the ATO's compliance program, it will generate $50 million in savings in 2004/05 and $225 million in each of the following income years. No areas of increased compliance are named.
The ratio of expenditure to revenue claimed by Labor is 9:1 (ie expenditure of $25 million produces revenue of $225 million). The ratio that the Government relied on in the 2004-05 Budget was around 3.5:1. In the 2002-03 Budget, the Government relied on a ratio of around 1:1. Simon Crean is on the record advocating a 4:1 ratio (see his press releases of 24 October and 31 October 2001 as the Deputy Leader of the Opposition and Shadow Treasurer).
Using a more realistic 3.5:1 ratio, Labor's proposal leaves a $412.5 million costing hole over the forward estimates.
So Called Participation Dividend
The participation dividend does not exist and is not available to fund policy (see below). This leaves a costing hole of $1.216 billion over the forward estimates.
Labor's Tax Increases
At his press conference at Parliament House on 5 July 2005, Mark Latham said "We won't be increasing taxes".
Yet approximately $2.1 billion of Labor's Tax and Family Policy consists of tax increases. Labor consistently claims its savings' are made by cutting waste. This is false. These are not savings to expenditure, they are increases in tax.
MOST TAXPAYERS DO NOT GET $8 PER WEEK
Labor's policy claims a tax cut of $8 per week, claiming it is the equivalent of increasing the tax-free threshold to almost $8,500 for taxpayers earning less than $52,000. The real impact of Labor's Working Tax Bonus AND increase to the top tax threshold is as follows:
About a third of taxpayers receive no tax cut
- About a third receive a cut less than $8 a week for example $3.48
- About a third receive $8 a week
- The average cut is between $4 and $5 a week.
Higher Taxes for 3.5 Million Australians
Unless Labor funds its LITO costing hole referred to above, its policy means that Labor is retrospectively raising taxes for 3.5 million Australians on incomes less than $27,475 who currently expect the benefit of the low income tax offset in their 2004-05 tax refund.
High Effective Marginal Tax Rates
Labor's package does not eliminate high effective marginal tax rates. It moves them and adds to them through the introduction of new tapers (e.g. a 30 per cent taper for the single income tax threshold). Workers on incomes above $50,000 could face very high effective marginal tax rates due to the tapers associated with:
- the Working Tax Bonus (10 per cent taper)
- Family payment (20 per cent taper)
- Single income tax threshold (30 per cent taper)
- Baby care payment (30 per cent taper)
For example a worker on $52,000 with two children and a wife in part-time work will have an effective marginal tax rate of 61.5 per cent consisting of 31.5 per cent tax, 10 per cent working tax bonus taper, 20 per cent Family Payment taper.
Hundreds of Thousands of Families Lose
Mark Latham finally admitted the extent of the number of losers in Labor's policy when he conceded that Labor's annual tables showed that out of around 2 million families who currently receive Family Tax Benefit around 600,000 families will be worse off under Labor.
Based on an analysis of the distribution of families by income and family type (dependant children 18 or under) we estimate:
Of the 536,000 single income families, more than 200,000 will be Latham losers, with most of these being couples with three children or more on modest incomes of $37,000 and less. Single income families with incomes above $65,000 are also significant losers. While Mr Latham has previously said that these people are not rich, his policy significantly penalises them.
More than a third of the 676,000 sole parent families will lose. In particular, as the Labor family tables demonstrate, those low income sole parents with two children lose through Labor's abolition of FTB (B) and the Government's $600 per child FTB (A) supplement.
Tens of thousands of dual income families with children will also lose through Labor's abolition of the $600 per child payment. In some instances, dual income families with one working spouse being eligible for some FTB (B) will also lose out under Labor's policy.
The more children you have the more you lose
By abolishing the Coalition's $600 per child payment Labor is punishing families with more children. The more children families have, the more they lose as a result of Labor abolishing the Government's $600 family payment supplement.
Labor claims that a single income family on $30,000 with one child gets $416 a year extra. The same family with two children loses $208 and the same family with 3 children is $832 worse off.
Under Labor a dual income family on $30,000 loses $72 a year if they have one child. The same family with 2 children loses $696 and loses $1,321 if they have 3 children.
Parents are punished if they stay at home to look after their children
Families will lose between $1,000 and $2,000 a year if they choose to stay at home and look after their children.
Labor is abolishing FTB (B), which is worth $3,000 to a family with a child under 5 and over $2,000 if their youngest child is under 15. This payment is indexed and increases from 1 July every year.
Labor is replacing this payment with a new payment known as "per family component" and access to a second tax free threshold that is worth only $1,020 to the family budget. Income tax thresholds are not indexed so families will lose the value of this benefit over time.
Under Labor parents will lose the choice as to how they balance their work and family responsibilities. The Coalition encourages people to go back to work - Labor forces them back to work by stripping away their benefits.
Families will be punished if they decide to have more children
Families with both parents working will lose hundreds of dollars in assistance if they choose to have another child.
Under Labor a dual income family on $30,000 (where the mother earns $6,000) loses $72 a year if they have one child. If this family decides to have another child they would be $307 worse off under Labor if the mother stops work.
Even if the father takes on more work or overtime so that the family's earnings remain the same, this family would still be $208 worse off hardly an incentive to climb Mr Latham's ladder of opportunity.
Tax free "guarantee" - Labor's indexation swindle
By abolishing FTB (B) and the $600 per child supplement and introducing transferable tax free thresholds for couples, Labor is replacing an indexed payment with a tax threshold that is not indexed.
Families will lose more money with each passing year because Labor has abolished an indexed payment.
Labor has not spelled out how the family component' of their new payment will be indexed. Labor commits to indexing the per child component', which replaces the existing Family Tax Benefit (A) to Male Total Average Weekly Earnings. However, by implication, Labor would index the per family component' to CPI, in keeping with the arrangements for the existing Family Tax Benefit (B).
However, the increased tax free threshold for single income families is not indexed at all.
Single income families will be worse off over time under Labor's package because 2 indexed payments (FTB Part B and the $600 per child lump sum) are being abolished and replaced by a non-indexed tax benefit.
Further, for those families that only receive a small benefit under Labor's policy, it is also true that those families will be worse off the year after.
2005-06 |
Losses |
Gains |
Net Results |
| Sole parent 1 child, no private income |
|
|
$-1 |
2006-07 |
Losses |
Gains |
Net Results |
| Sole parent 1 child, no private income |
|
|
-$23 |
Dodgy participation claims
Labor claims that it will recoup around 20 per cent of the cost of its package through savings driven by behavioural' responses.
The assumptions are based on a paper produced by the Melbourne Institute.
The key behavioural assumptions made by Labor is that their tax and family payments changes will attract some 71,810 people not currently in the workforce to look for a job, 75 per cent of them get a job and 95 per cent of the full year annual savings are achieved by the third year.
This rapid and non-linear transition path' to the full behavioural response allows Labor to claim $666 million in behavioural savings in the third year of the package, and a total of $1,216 million over three years.
For a number of reasons, these savings cannot be claimed by Labor as a legitimate source of funding for their tax policy.
Costings practice
Treasury and Finance, when costing income tax proposals do not include employment effects. This is spelt out in the Guidelines issued by the Secretaries of the Departments of Treasury and Finance on costing election commitments under the Charter of Budget Honesty, which state: "individual costings will generally not incorporate second round effects. The focus of costing will be on first round effects or the direct budgetary consequences of policies."
In costing the 2000 A New Tax System package, no employment effect was factored into the costing, despite cuts to personal income tax rates and reductions in taper rates for family payments. Nor were any employment effects factored into the costing of the 2004-05 Budget initiatives which also reduced marginal tax rates for a large number of workers, reduced taper rates for FTB (A) and increased the free area' for FTB (B).
Treasury has also made it clear that in costing the Coalition's 2004 election commitment to introduce a Mature Age Worker Tax Offset, no behavioural assumptions have been factored into the costing.
Supply-side v demand-side issues
Labor's participation dividend focuses purely on the purported impact of the tax and family payment changes on labour supply. However, the overall level of employment is determined by the interaction of labour supply and demand. Even if Labor's assumptions about labour supply were achieved, a commensurate increase in labour demand would require faster economic growth or a change in average productivity.
The Melbourne Institute paper states that: "Microsimulation models of the type used in this report are not configured to account for the wider labour market effects of tax or welfare policy reform. For a variety of reasons, the behavioural (labour supply) responses predicted by MITTS will not translate directly into changes in employment."
The Labor Party simply assumes that 75 per cent of those who want to enter the labour force find a job.
However, this ignores the fact that Labor's overall policy mix (particularly in industrial relations) will have a deleterious effect on workplace productivity and labour demand.
For example, Access Economics concluded that:
"Taken collectively, it seems fair to conclude that the ALP workplace relations platform measures could reinforce one another in terms of their negative impacts on productivity, wages, on-costs and employment."
Furthermore, Professor Mark Wooden, Deputy Director of the Melbourne Institute of Applied Economic and Social Research has been reported in the Sydney Morning Herald (20 September) as saying that Labor's proposal to widen the scope of subjects that could be covered by awards would "chill enterprise bargaining". He said
"It's the worst of all worlds. In between the Accord and enterprise bargaining is this kind of horror outcome, which we had for the best part of a century."
Labor's modeller admits that Labor's changes to enterprise
bargaining, which has been credited with a substantial contributi