Means Test II: Disincentive to work.

Yesterday I posted about how means testing was a waste of time and money. Today I will be going over a particular disadvantage of the use of means testing, a disincentive to work. When a government starts to means test welfare they have to decide what level of income can the welfare recipient achieve. That is, they set a bar, walk under it and get full support. This is generally achieved by looking at what the poverty line is. Comment: The fact some forms of welfare hasn’t been adjusted in years is another argument. 

Then they have to slowly decrease the welfare received rather than cutting it off. This is an attempt to manage this disincentive, I mean why work 20 hours to get paid an extra $40 a week? What happens is they make it so an individual (or family member) can earn a certain amount and then the amount of support they receive is decreased by a set amount. For instance paid parenting payment partnered is $472.60 . The human services website explains the means testing for this payments as “Your income must be less than $102 per fortnight, and your partner’s income must be no more than $928 per fortnight to receive the maximum payment. If your partner earns income above $928, your payment is reduced by 60 cents for every dollar of income over $928.” It is important to recognise this is looking at the amount earned before tax.Effectively checking the income received by the family and limiting that welfare. The problem is it almost acts as an extreme taxation for those on the middle scale. The issue is where this bar is and where it stops.

Example:

If the partner earns $920 in a fortnight, earning $20 an hour 46 hour worked. The individual receives the $472.60. A total family income of $1392.60 BEFORE tax. $460 per week pays 23920 a year before tax. At that rate its 1,083.00 (ato tax calculator) paid in tax for the year: 19c in the dollar over 18,200 (ato).  That’s $878 a fortnight after tax, the $472.60 is beneath the current tax free threshold. Total of $1350 a fortnight after tax for the family income.

How about if the partner earns $1200 for the fortnight? So 60 hours works, an addition 14 hours a fortnight? Sounds great right? The maths says otherwise. $31200 for the year, $2,470 paid(ato tax calculator). More money earned more tax paid which is fair enough. That means take home is now $1098 for the fortnight. So, what does this do to the means tested support? Remember the support is $472.60 decreasing 60c in the dollar after $928. Well the partner earned $272 over the total, that’s a decrease of $163 to that payment. In total the family takes home $1407.6. That means for the family for the extra 14 hours worked they get only $57… the equivalent of working $4 an hour… would you work for $4? This is at no fault of the business they work for or the person wanting to work extra, but a failure of the system, the means testing system.

This is just one example, the same method applies to the majority of the human services welfare system. It shows the inefficiency of means testing and just how much of a disadvantage working those few extra hours actually is.

It would be more efficient to increase the income tax rate, and/or lowering the tax free threshold(TFT), to limit the amount of money welfare recipients take without the need for this flawed system. The tax rate would eat the welfare support payment after a certain point depending on the TFT and the rate.

Don’t just read what I post, research it.

Martin.

Sources for figures:
http://www.humanservices.gov.au/customer/enablers/centrelink/parenting-payment/income-and-assets-tests
https://expertsystems.ato.gov.au/scripts/cascripts/atogov/index.html?anchor=STC#STC/questions
https://www.ato.gov.au/Rates/Individual-income-tax-rates/

Means Testing; a pointless waste of time and money.

Means testing is one thing that is prominent in the Australian Welfare state. Australia has a targeted welfare system, and we do it well, with the highest targeting in the OECD.

But what does means testing do? According to the treasury, means testing is an important tool for targeting government payments to those with most need and for managing the sustainability of the transfer system. Ok, it includes not only income, but also the ability of a person to generate an income from their assets. So It limits access to the welfare state based on wages and assets.

However, the current system has many issues, mainly the costly demand on the system tying up resources and the ‘fair and equal distribution’ of welfare. Even the treasury has acknowledged there is an issue with the targeting system.

“It should continue to be used in the transfer system, but could be improved so that income and assets are more fairly assessed and incentives to work and save are strengthened.

However, means testing can increase the level of complexity a person faces in interacting with the tax and transfer systems and can affect their incentives to work and save. Striking an appropriate balance between targeting based on need and maintaining incentives to work and save is a significant challenge in designing a means test.

Within the current two-part means test — the income test and the assets test — some assets are assessed under both tests, while other assets are assessed only under the assets test. This results in people receiving different levels of government payments even though they have the same level of wealth. This reduces the fairness of the means testing system.”(http://taxreview.treasury.gov.au/).

So if the treasury even admits that the targeting is not doing as planned, and further review is required. The treasury is wasting time and money reviewing this system trying to further target. We all ready have a tax system that does this targeting. The progressive tax system, that is a tax rate that increases based on income generated, that Australia uses would counter any welfare given to those earning over an amount, after all the welfare is counted as an income stream.  The tax system currently checks all of the ‘targeting’ issues faced by the current welfare system. It looks at the amount of money that is generated from assets, wage earned and size of bank accounts. So why are we double checking? Votes? Hard image?

Yes this means there could be some more expenditure on welfare for those that have figured out how to get all their tax returned. So, in order for this to be truly effective tax reform would need to occur to make sure a minimum amount was paid after deductions, but that seems the way reform could be headed anyway. However, by removing means testing the government saves a lot of money. If we think about the structures that are currently in place, the phone lines, information organisation including databases, websites, and constant requirements for individuals to report earnings would all be redundant. That is a considerable saving to the government purse.

In addition to the means testing, a lot of the welfare state is not means tested. Medicare, there is a the Medicare levy in place, effectively acting as the progressive tax as mentioned before, only hitting those over a certain amount. Currently those earning over $20,896 have to pay a 2% levy. Seniors and pensioners have an increased limit of $33,044 and $ 41,306. There are several exemptions to the levy, such as child dependants, sickness welfare, or blindness.  In addition there is a Medicare Levy Surcharge, designed to take pressure off the public system. The system charges an additional amount based on income for those over the base income threshold is $90,000 for singles and $180,000 for families. This levy is also on the progressive scale going from 1% to 1.5%. This progressive system works here.

In addition, education is also not means tested. The Victorian government has set out principles for education funding.

“In our response to the Australian Government’s Review of Funding for Schooling, we set out four principles:

• choice in education should be defended in legislation
• a freeze of funding on individual schools is unacceptable
• funding should be centred on students, not schools
• personal or private contributions towards a child’s education should have no bearing on the level of government funding that the student receives.” – www.is.vic.edu.au.This funding for children’s welfare as stated in the last point is ‘equal’ disregarding the wealth of the family. It seams fairly contradictory in comparison to the treasuries reasoning for means testing.

Looking at what is means tested and what is not you could almost piece together an argument that there is an attack on those that need help the most. It is extremely contradictory in the way each of the areas has been developed. A progressive tax system covers the issues the current system fails at, so why are we double checking?In conclusion,  there is no need for the means testing system we have in place and as the title says, its a waste of time and money.