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/
A Progressive Approach 