8 August 2017
From the point of view of the economy, there is no doubt that hard work is a good thing. Encouraging work effort means there are more people prepared to take jobs and more people willing to put in and work long hours.
Of course, from the point of view of the individual and family, it is a balancing act: achieving the appropriate work-life balance as well as being rewarded (or not penalised) for working extra hours. But here is the nub of our problem: our income tax system is designed to discourage hard work. In combination with the welfare system and the withdrawal of benefits at certain income points, we have the worst of both worlds: people are discouraged from working harder and/or moving into the next income tax bracket.
It comes as no surprise that the proportion of workers working very long hours, defined as 45 hours or more, has fallen in the past 15 or so years. In 2002, 37 per cent of male workers reported working very long hours; last year, the proportion had fallen to 30 per cent. (Women workers are much less likely to work very long hours, with the latest recorded proportion being fewer than 10 per cent.)
It should also come as no surprise that people of all political persuasions recognise the strong disincentives in the system. When your pay moves from $18,200 to $18,201 you are up for 19c tax in the extra dollar, although just to complicate matters, if you earn less than $20,542, you are entitled to the Low Income Tax Offset.
Arguably, the worst trap in the system is at annual income of $87,000 when a dollar more leads to 32.5c tax on the extra dollar compared with the previous marginal tax rate of 19c.
And if Labor has its way and the additional Medicare Levy of 0.5 percentage points applies to only those earning more than $87,000, this will add an extra $435 for that extra dollar of earnings. This will set a world-record in term of an effective marginal tax rate.
But it’s not just the tax system that is deterring work effort, it is also the withdrawal of family benefits and, from next July, of childcare fee subsidies as family income rises. And then there are those hardworking small businesses that organise their affairs around a discretionary trust.
Labor wants to increase the tax on the beneficiaries of the trust by at least 50 per cent by imposing a minimum 30 per cent tax on trust distributions. The bottom line is that whoever is the government, there is an urgent need to reconsider the tax and welfare system and the disincentives it throws up for hard work.
The tax-free threshold is too high, the marginal tax rates are too high and the interaction with the welfare system discourages participation of the secondary worker within families. Throw in changed taxation on trusts, a distorted implementation of a higher Medicare Levy under Labor (and don’t even get me on to super) and you have recipe for lower workforce participation, reduced working hours and shorter working lives.
(Emphasis added by Save Our Super)