Where family payments aren’t welfare

John Howard disliked the idea that family payments were ‘welfare’. That’s why they were called ‘family tax benefits’, to emphasise that FTB was giving families back their earned money, rather than giving them a handout. At least for the generation that Howard came from, self-reliance was an important middle class idea.

I’ve never bought this argument. You don’t have to pay tax to get FTB, and indeed it is most generous to those who have no or very low market incomes. It is largely managed by Centrelink, the key institution of the Australian welfare state.

Yet an Essential survey released yesterday suggests that most people take Howard’s view. Welfare should only go to those on low incomes, but family payments aren’t welfare, just help with raising kids (what do they think single mother benefits are?). At least they support cutting benefits at $150,000.

(Apologies for the low-quality image)

32 Responses to “Where family payments aren’t welfare

  • 1
    Andrew Carr
    May 24th, 2011 07:58

    ‘I earn a tax benefit, you are given welfare’. It’s an old and grubby attitude. We are getting to a stage where people think any major cost in life ought to come with an equal tax-reduction. A consume and save system.

    As one who would like to end the entire FTB system (with commensurate tax cuts) the past few weeks have been deeply dispiriting.

  • 2
    Rajat Sood
    May 24th, 2011 08:03

    Putting the labelling to one side, I asked Howard whether he acknowledged the incentive-sapping effect of means-tested FTBs when he spoke about his book recently at the Liberal Book club. He skirted the question by saying that FTBs were to help families with the costs of raising children.
    The inescapable problem is that stiffer means-testing means higher EMTRs and lower EMTRs effectively require payments to those who don’t need it. For example, under a negative income tax, the citizen receives money below a certain income and pays money above that threshold. Say, the threshold is $30k and the rate that money is withdrawn or paid is 33%. This means that if the citizen earns zero, he will receive $10k from the ATO (being 33% of $30k). If he earns $30k, he will pay nothing and receive nothing. If he earns $100k, he will pay $23.1k (being 0.33*(100-30)). This can be broken down into a flat rate tax of 33% combined with an unconditional payment to each taxpayer of $10k. While, in practice, the higher-income earner would not actually receive money, he benefits from a tax-free threshold that is much higher than it is now. Hence the high ‘cost’ (to the Budget) of such a scheme. How to resolve this impasse?

  • 3
    May 24th, 2011 09:29

    You’re right Andrew….it’s middle class welfare and there is no excuse for it. In fact, it’s quite amusing that the richer we get, the more we spend on welfare. Well not amusing, but you know what I mean.
    That all said, I have some sympathies for it.
    Firstly, the payments are for kids – hence encourages people to have children. I support this. Kids are like votes for the future of our community. They’re an investment in future taxpayers, kids lessen the need (if there is one at all) for aliens. Kids, are just awesome.
    But more to it. There’s gotta be something in government for ordinary Aussie folks. I mean, give or take 35% of you’re income goes to government. And what do you get for it. Once upon a time, that 35% included infrastructure (now it’s out-sourced and you pay for it), it once included a decent law and order system, a workable health system. Mate, I feel like I get nothing for all the tax dollars I tip into the budget….And this is the reason why people are shirty. And I don’t see how this is gonna change. I remember my grandfather once saying that in his day they raise income taxes and told everyone it is to pay for their future pensions. But guess what, when he came to collect, ‘oh sorry, the pension is now means tested and is not for the likes of you’.
    So I think there’s a real breakdown in the social contract. Now it’s just make sure you get what’s coming to you. It doesn’t sound very fair and honest attitude, but if you don’t follow it – you get no gravy !

  • 4
    Andrew Norton
    May 24th, 2011 11:26

    Patricia Apps suggests paying family benefits universally, but taxing them – so there would be just the marginal tax rate and not a withdrawal of benefits as well.

    I suspect this would cost more in total, but not have the same disincentive effects.

  • 5
    Tom N.
    May 25th, 2011 09:03

    I love Howard’s answer to Rajat that FTBs were “to help families with the costs of raising children”. If only he’d apply the same logic and help me with the cost of my new Ferrari!

    There is a horizontal equity issue here – people who choose to spend their time and money on parenthood get a tax break that people on the same income who choose to spend it on other things miss out on. Howard always justified his policy using the thetoric of “choice”, but failed to recognise that having kids is a choice – so he was subsidising one particular lifestyle choice at the expense of alternatives.

  • 6
    Rajat Sood
    May 25th, 2011 20:43

    Tom N, if anything, I’ve long thought that children’s parents should be taxed to avoid distorting the work-leisure trade-off. Surely, if children provide utility and are not taxed, people will have too many children and work too little. The large subsidies to people who have children suggest that we – as a society – have way more children than is socially optimal.

  • 7
    May 25th, 2011 20:56

    Andrew, I accept your position as the valid one, but as a new father, it is interesting how my perception of the validity is evolving. Now I am clearly experiencing what is known as ‘I want my money’ syndrome but I am also aware that as a family with two working lawyers, one on generous maternity leave, I am probably that upper middle class family targeted. And yet, I may own a property, have some shares etc, my parents may have some significant assets I will inherit one day, but I am far from ‘rolling in money’ and I am unlikely to be so any time soon. In my view, this is what lies at the heart of that social experience called ‘cost of living’ politics and is probably why Abbott could get away with his daft maternity leave policy and accompanying tax rise on large businesses. It is also the case I think that people compare themselves up the earning scale more than down, so for example, people see others they work with earn more or friends who probably work harder and longer get a big bonus. There is a strange vibe in Australian public life that says I want to be ‘moving ahead’ but we can’t all do so at the same time. And for those who are real ‘middle income’ earners, say families, with parents 35 or more, on $40-60K, how do they get ahead. Simply put, they don’t, so they love those FTBs and can feel ‘good’ they are getting ‘something for their toil’. It is rubbish policy and personal experience is a bad guide to governments wanting to make good decisions. Unfortunately, they keep using that as a starting point in the electioneering process and the public are becoming used to ‘entitlements’.

  • 8
    Tom N.
    May 25th, 2011 21:22

    I generally approach the issue this way:
    1) There is no direct* equity argument for parental subsidies as parenthood is a lifestyle choice, not more worthy or unworthy than spending your time and money on a Ferrari.
    2) For there to be an efficiency argument for parental subsidies, the number of Australians (from whatever source: immigration plus domestic reproduction) that results from private incentives must be less than the socially optimal number.
    3) Most of the ‘arguments’ advanced for parental subsidies do not meet that test. That is because most of those arguments focus on costs to parents, rather than identifying external benefits or other market failures that might lead to sub-optimal reproduction.
    4) But, even if the number of Australians (or young Australians) was sub-optimal, we can import 18 year olds in 18 years time at no cost to the tapayer – indeed, we could probably charge – so unless there is a “cultural preference” worth more than the necessary subsidy to induce additional domestically reproduced children, then imports would be a superior option.
    Your point about the ‘psychic income’ of parenthood is well taken – indeed, there are many low or zero monetary income/high psychic income jobs or activities that are undertaxed. Of course, this argument applies more generally than just to parenthood.

    Howeover, I would (controversially, in present company, I suspect) draw on the happiness literature to counterargue that there are other market failures leading to excessive focus on monetary income. Were that argument accepted, one of course would need to consider which effect dominated.

    * Equity arguments become complex because children’s wellbeing is also relevant, and there are of course complex ethical issues regarding whether society, having chosen not to prevent “low grade” parents reproducing, has some responsibility to compensate their children for the poor parenting they subsequently receive. Of course, even if society is deemed to have such a duty, it does not follow that parental subsidies are necessarily a good means of discharging it.

  • 9
    Rajat Sood
    May 26th, 2011 04:55

    Tom N, I pretty much agree with you except I’m not sure how easy it is to work out the optimal population size on a top-down basis. I would rather rely on individuals to make their own decisions about reproduction without distorting that decision through massive subsidies. I see the whole externalities concept as problematic because, as you suggest, it depends so much on who is having the children. We know that 60% of people pretty much consume more in government services and transfers than they fund while a further 20% are about neutral. And it would not be feasible to discriminate.
    I am also not sure about the market failures leading to excessive focus on monetary income. Income-earning (as well as consumption of market goods and services) is highly taxed compared to leisure activities. While most utility-providing leisure activities are largely untaxed (eg gardening), having children is by far the biggest non-paid utility-providing project that most people will undertake in their lives and they enjoy the returns largely tax-free.
    I agree with you that if we are to make deliberate efforts to increase the population or young labour force, immigration is the better option.

  • 10
    News Digest – Thursday 26 May 2011 | CSSA news & research
    May 26th, 2011 06:03

    […] Where family payments aren’t welfare, Andrew Norton […]

  • 11
    May 26th, 2011 17:41

    Andrew, what did you say at the time of Labor’s 2004 tax policy, which I assume you thought was better than Costello’s FTB’s? http://parlinfo.aph.gov.au/parlInfo/download/library/partypol/BOOD6/upload_binary/bood64.pdf;fileType%3Dapplication%2Fpdf

    Unhelpfully for those who prefer work incentives, like me, it got smashed by the public, who didn’t see the reward and only saw that single mothers were worse off. I would also suggest that the overall direction of that 2004 tax policy would have seen an alternate government be very decisively reformist on tax with the mining boom bounty. I accept that Costello increased the LITO decisively, basically ripping off the Labor proposal there, but that was off the back of the greatest influx of money into Treasury in our life time. In the 2004 election period, that boom was an ‘unknown’ and hence couldn’t be relied on, hence the unpopular savings measures.

    It is easy to say Latham was a nut-case and yes it was good for the ANZUS alliance (which is a bed rock policy for me) he didn’t win, but I’d also say that this tax policy was about as ‘interesting’ piece of possible policy since Hewson got beat. And let’s face it perhaps that is the point.

    How do you propose to change that dynamic?

    I know you’ll probably say I publish reports for the CIS, I monitor public opinion and write about it, but frankly opinion has turned decisively against the values of the CIS and by that I would mark Abbott as arguably the worst offender. In my view Tony Abbott what Reformist Australia should be against. He’s a believer in the dead hand of government in climate policy, in taxing people more by removal of income tax cuts for compensation. He’s also declared he’ll raise corporation tax on the biggest companies and socially he’s an avowed monarchist. How can this go so unsaid by the CIS.

  • 12
    May 26th, 2011 17:54

    Andrew, now I’ve had my rant, apologies, I accept you did the Conservative Social Democrat paper and that was ground breaking.

  • 13
    Andrew Norton
    May 26th, 2011 17:57

    Corin – I really can’t remember what I said about Latham in 2004 (though if any of my blog posts from that era have survived the various Catallaxy server crashes somewhere, there might be something), though I did publish a lengthy paper on how the tax and spend cycle was turning against small government, and in 2006 published my big government conservatism article – which made some of the same points as your last paragraph.
    I’m under no illusions about the role of think-tanks – a handful of people on shoestring budgets can do only so much – but all we really can do is have ideas ready if and when political conditions change.

    But on size of government, history suggests that slowing growth is as much as can be achieved.

    On micro-reforms things are still possible.

  • 14
    May 26th, 2011 20:16

    Andrew, I largely agree, and I also accept I was asking a lot by citing soemthing that old. It was more that in 2004 australia had the choice you ask of it now and it decisively went for FTB hand outs among other reasons why Latham got smashed.

    In my view, less government is now a dream and ‘more nimble’ more proportionate government should be the goal of liberals. I don’t think either side of politics has this position and yet both clearly have practitioners of those views.

    In my view, the CIS should break from the overtly sceptical on climate change and build a sentiment for a pragmatically market based approach based on staged reductions according to world conditions, otherwise you’ll just end up with the Australian Settlement problem of hand outs to industry.

    Garnaut is a true liberal in my view on all policy, including those close to Labor’s heart like IR. That is a remarkable thing in public life, he is unique there. I am amazed he is not a major CIS hero, it is as though you are competing with teh IPA for conservative curry rather than carving a real agenda based on the liberal ideals it holds.

    Enough from me, I just enjoy giving you a hard time some times and think the CIS has largely lost its way or more precisely isn’t staying up with the debates occuring internationally.

    It is to Australia’s detriment I think.

  • 15
    Andrew Norton
    May 26th, 2011 20:41

    Corin – The CIS has actually stayed out of the debate on climate change science – though a couple of our guests have offered their views on it – so there is nothing to break from. Years ago we decided that we had no expertise in this area and had nothing to add, and getting involved would just consume us in the crazy passions this issue unleashes.

    We frequently get people saying we should do more or less on issue x, y or z. I actually don’t think we should get involved in climate change, because we have no comparative advantage in this area and no possible perspective that I am aware of that is not already well-represented in the debate.

    My view is that think-tanks do their most valuable work early in an issue cycle, since they are free of most of the political constraints on the major players. They can advance ideas or perspectives that don’t have a constituency or which run against orthodoxy.

    Climate change is a mature issue, in the sense that is has been exhaustively discussed for many years.

  • 16
    May 26th, 2011 20:53

    yes, but I think it is where liberals have to have views, otherwise it is just lost to the fringes. I think the fringes, you may well say are dominant, don’t you think?

  • 17
    Sinclair Davidson
    May 27th, 2011 05:57

    “Garnaut is a true liberal in my view on all policy” – Like Malcolm Fraser, perhaps?

  • 18
    Club Troppo » Missing Link Friday – Books, factories, politics & welfare
    May 27th, 2011 09:34

    […] pay tax and are administered by Centrelink. So you might think that makes them welfare. But as Andrew Norton writes: "John Howard disliked the idea that family payments were ‘welfare’. That’s […]

  • 19
    KB Keynes
    May 27th, 2011 10:33

    I suspect Sinclair’s understanding of the word liberal is as accurate as his understanding of the word predecessor

  • 20
    Sinclair Davidson
    May 27th, 2011 11:32

    Hi Homer

  • 21
    May 27th, 2011 21:08

    Sinclair, as much as it galls me to respond to you on that, even you would concede that Garnaut as chief architect of trade liberalisation policy in Australia is perhaps one of Australia true stand out liberals. Not only that, he was one of the “Five Economists” that would have delivered far more beneficial wages reform than Howard did with Work Choices. Surely all this should make him a stand out hero in public life, rather than someone who you seem to consider has a ‘secret agenda’ to regulate. I’d say he is the total opposite, taking the considered view that climate change policy will occur no matter who wins and it should and it is better that it avoid the hand out mentality, pre-83 that Fraser epitomised. Enough from me I am way off topic.

  • 22
    Sinclair Davidson
    May 28th, 2011 06:41

    Corin – no, sorry. I am unmoved by those claims.

  • 23
    Sinclair Davidson
    May 28th, 2011 15:52

    Corin – I should actually add to that – an economist promoting free trade is not grounds for admiration or praise. Any person purporting to be an economist would always promote free trade IMHO.

  • 24
    KB Keynes
    May 29th, 2011 10:01

    Sinclair is unmoved because he clearly has understanding of what thew word liberal means, moreover using it an economic context further confuses him as he has little idea of that area as well.

    We also see what he is famous for being unable to use any substance to add to his remarks.

    Sinclair believes the budget is expansionary whilst it takes out 1.% percentage points from the economy.

    A person who doesn’t understand that simple concept would get a headache thinking about what an economic liberal is

  • 25
    Sinclair Davidson
    May 29th, 2011 13:58

    Oh Homer – I don’t miss you at all.

  • 26
    KB Keynes
    May 29th, 2011 15:33

    Yes Sinclair you are still superficial and run away from serious analysis as you show here.

    Funny how you can ban people for having the temerity to show how the IMF have examined fiscal consolidation and they find that classical economics is completely useless in atempting to explain anything.

  • 27
    Sinclair Davidson
    May 29th, 2011 15:41

    Not at all.

  • 28
    May 30th, 2011 10:48

    The question that appears to arouse the most passions is the one of fact, on whether significant human-induced climate change is occuring at all.

    If we take it as read that if the answer is “no” then the classical liberal response would be to continue the status quo with respect to emissions of greenhouse gases, then what is still interesting is what the classical liberal response would be if the answer is “yes”. The answer to that doesn’t require hefty climate science credentials, and will be of use should the initial question ever be settled to enough people’s satisfaction.

    That is, you don’t have to believe in climate change to answer the question of what the correct response would be if you did believe.

  • 29
    KB Keynes
    May 30th, 2011 12:12

    Each time you speak your nose gets longer and longer and it is highly instructive you refuse to debate Corin at all in substantial issues however as I have shown this is completely understandable.

    You can not understand simple precepts of english or fiscal policy.

  • 30
    May 31st, 2011 00:01

    caf, it is a probability question and the clear probability in the well considered research is that climate change is occurring. the probability (really the only question) is whether international agreements will form based on the evidence. I would suggest the jury is out here but the probability is that it is worth moving Australian from its heavy carbon intensive reliance to less reliance slowly, meaning we should take out some insurance that an international agreement occurs, otherwise the structural adjustment will be severe and time pressurised. The original target of the CPRS of 60% reduction by 2050 was based on the science as best as could be applied, obviously to get there would be catstrophic for Australia without international agreement so no one is suggesting this.

    the other probability is whether mitigation can be sufficient in itself. Perhaps, but that is only the case where climate change is milder than the general scientific evidence/opinions would consider appropriate.

    Also, I don’t see how it can go unnoticed that Abbott has the same target of a 5% reduction by 2020 as Gillard only with a far a more costly proposal on the economy and no tax cuts as compensation.

    In my view, the CPRS was flawed because it wasn’t part of a tax reform package of lower company taxes and lower income taxes.

    That’s reform. People like Abbott are as far from reform as we have seen since Black Jack McKewen. I’m not going to suggest that Gillard is much better but at leasy she isn’t arguing for taxing the poor to line the pockets of industry. That’s about as illiberal as you can get in my view.

    I think that climate scepticism is born from a hatred of green politics not out a ggenuine consideration of the issues. I formed my view in the ALP as an anti-green, I would suggest that my positions were not that different from say Gary Johns, but he appears to have simply burried his head in the sand for the last 10 years. I would suggest Garnaut had a journey that is far more enlightened.

    BTW I still largely hate the Greens as illiberal but I don’t let my hatreds rule my thinking unlike Sinclair. So one can find a truly liberal position.

    Andrew, given that climatte change will dominate the restructuring of the Australian economy for the next 50 years or more, it is truly strange that the CIS has no interest in a liberal position emerging on it.

    Let’s stick to FTB hey?

  • 31
    May 31st, 2011 07:54

    corin: I happen to agree, but my point is that even if you do disagree on the question of fact, that is no reason to deal yourself out of the policy debate. After all, if you genuinely disagree on a factual question based on the evidence, you must at least entertain the possibility of future evidence emerging sufficient to change your mind.

  • 32
    KB Keynes
    June 1st, 2011 12:53

    I would have thought a blog site that believes itself to be economically liberal but is a denialist would say although we disagree with the Garnaut report we do agree if you believe in AGW then it is the way an economic liberal would approach the subject.

    A economic liberal would certainly be against direct action.

    Have we seen either at Catallaxy?