Michael Pascoe: Treasury degraded to PR spinners – what everyone’s missed

Overshadowed by the politics surrounding the stage-three tax cut changes is the sad matter of Treasury proving incompetent, or so degraded by answering its political masters’ call as to be no more than a PR outfit, torturing computer models until they spin fairy floss.

Option C – both – is a live option. 

Declaration upfront: The Albanese/Chalmers changes are an improvement, but the document supposedly produced by Treasury to  justify the revision – and dutifully swallowed and regurgitated by the commentariat – is a joke or, at best, a demonstration that Canberra’s econocrats are so far removed from the real world that they need to be sent on work experience for a couple of years doing something useful, like stacking shelves in Woolies or cleaning nursing homes. 

And while the “Treasury document” works hard at finding positive things to say, it carefully avoids two shortcomings hidden in the “too-hard” basket: The tax bite for low-income workers having worsened much more than that for high-income earners over the past decade; and the middle Australians facing effective marginal tax rates of 50 per cent and more. I’ll come back to that. 

First though, the commonsense test. Treasury, or the Treasurer’s spinners, solemnly claim the Albanese changes will increase female workforce participation by 0.24 per cent compared with the Morrison model and produce a total increase in labour supply of 0.15 per cent.

“The redesign is expected to produce a larger increase in labour supply, driven by increases in hours worked and participation of women with taxable income between $20,000 and $75,000,” says Treasury.

That and more bracket creep for the top 30 per cent of taxpayers is how the government claims the changes will improve the budget by $28 billion and thus make any inflationary impact disappear. 

Commonsense out the window

The spin stresses the changes are aimed at women and in-demand occupations “including teachers, nurses, aged carers and disability support workers and childcare workers”. 

I’ll shout a bottle of Bin 389 to the Treasury economist who ventures into the wild and produces an unemployed woman who wasn’t interested in taking up a job paying $60,000 a year until, come July 1, she will receive an extra $15 a week after tax. 

Cue Magda Szubanski’s Lynne Postlethwaite character: “Pet, I said luv, I said pet, no way was I going to be a wage slave, but hold the phone, an extra $3 a day? I’ll be there!” 

In the aforementioned real world, more than matters of equality and career, the female workforce participation rate is around record levels because people rather desperately need money. Alan Kohler fingered it on Monday, the higher cost of housing alone – mortgages and rent – is viciously squeezing households, never mind inflation overall and weak wages growth. 

Treasury notes that women are more likely to work part time. For someone doing a couple of days a week for a gross wage of $30,000, the stage-three changes mean an extra $6.80 a week. 

Every dollar counts in the present circumstances and always counts in low-paying jobs, but let’s not pretend these amounts will make the difference in taking a job or working extra days.

The Treasury figures are an example of loading an economic theory into a computer model without adjusting for commonsense. That’s how we ended up with trickle-down economics. 

While wielding a nursing home mop, the econocrats might discover the people who are really suffering high effective marginal tax rates – nose-bleed rates, the sort that do make a difference in deciding whether or not to work an extra day. 

Treasury seems a bit light on this sort of modelling, but fortunately Australia has David Plunkett, a retired former policy analyst with the Department of Social Services. I asked Mr Plunkett for the implications of the tax changes where the rubber meets molten lava – where income tax rates intersect with transfers (social welfare and family tax breaks).

Here are two ways of looking at the same example, a not uncommon one of a couple, Kim and Sam, with two children, aged 13 and 15. 

Kim is on $80,000 a year. Sam’s EMTR soars from 20 per cent at a little over $20,000 to a peak of more than 60 per cent of the extra dollar a bit below $50,000 as the family tax benefit is lost. 

As the difference between the current blue line and the proposed post-July orange line shows, you wouldn’t notice the difference in the marginal tax rate when it’s so high. 

To make it easier for Treasury to understand and fitting the scenario of Sam deciding how many days a week to take, here’s how that works out on the basis of Sam doing a job that, if full-time, pays $60,000 a year broken down into each day paying $12,000 a year. 

Of the gross extra $12,000 a year for working a third day, Sam presently gets $6140 and will get $6500 from July 1. The effective marginal tax rate eases from 48.8 per cent to 45.8 per cent – still more than the rate for people on many hundreds of thousands of dollars. 

As for working a fourth day, Sam’s EMTR reduces from 55.7 per cent to 52.8 per cent.

“I said, pet, I said luv, that’s still more than half of the extra dollar going to the tax man – forget it! Gina would change the government before she let that happen to her!”

But in schools and hospitals and shops and aged care and childcare centres, people, mainly women, are paying those marginal tax rates because they have no option – their family finances are so squeezed by decades of rubbish government housing policies and the impact of poor COVID initiatives (mainly Treasury’s) that they have no choice. 

A convenient distraction

And then there’s the other little embarrassment of the tax bite on lower-income earners have risen proportionately and by more percentage points than for high-income earners.

Bracket creep has whacked the working poor much harder than the wealthier. 

This is spelt out in a paper by Brian Lawrence, former deputy president of Victoria’s Industrial Relations Commission, published by Pearls and Irritations.

It shows that the average tax bite on a trade-qualified worker on the minimum award has gone from 10.2 per cent averaged under the five budgets of the previous Labor government to 14.1 per cent proposed in the next financial year – a jump of 38.2 per cent. 

For a cleaner on the minimum award rate, the bite has risen by 34.8 per cent, from 9.2 per cent to 12.4 per cent. 

Over the same time, the tax bite on someone on $248K – five times the cleaner’s wage – has risen by only 5.1 per cent, from 31.3 to 32.9 per cent. 

And for someone on $496k – 10 times the cleaner’s wage – the tax bite has increased by only 2.8 per cent, creeping up from 38.6 per cent to 39.7 per cent. 

The kerfuffle over the broken promise – justified but bumbled in its execution – is a convenient distraction from the greater problems being skated over. Spare me Treasury and academic PR fluff putting lipstick on it. 

If you want an indication of how people are really faring, it is in Tuesday’s retail sales figures from the Australian Bureau of Statistics. 

Over 2023, inflation is about 5 per cent and population growth has been 2.4 per cent, but retail sales have grown just 1.3 per cent. That’s finances being squeezed, people going backwards.

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