Michael Pascoe: Very average wages, searing effective marginal tax rates

Michael Pascoe says the harsh realities of low-income workers is only getting worse.

Michael Pascoe says the harsh realities of low-income workers is only getting worse. Photo: TND

Here’s a (very) little surprising good news: Many people receiving JobSeeker will actually be a bit better off than the advertised $50 a fortnight compared with the pre-COVID rate.

It’s only a little and it won’t be noticed compared with the size of the drop back from the emergency pandemic assistance – but what’s more important is the unchanging harsh lived reality: After all the talk of tax cuts and increasing the unemployment rate, they will continue to suffer searing effective marginal tax rates of about 80 per cent – rates the wealthiest people have long since had abolished for themselves.

The headline “$50 a fortnight” permanent JobSeeker increase only tells a small part of the story for people receiving unemployment benefits – and that’s a miserable enough.

That headline figure doesn’t exist in isolation.

In the real world, there is the interaction of tax and welfare policies that are much more complex.

For a start, to state the obvious, unemployment isn’t restricted to single people.

JobSeeker increases will be negated by effective marginal tax rates.

Couples are not treated as individuals when JobSeeker is being paid.

And then it gets very complex when there are children involved with other elements of our transfer system coming into play.

This is where the work of retired public servant David Plunkett is most valuable. He has the ability to work through the permutations for a glimpse of the real world.

For this exercise, we’ll not make it too complex by leaving children out of it.

Mr Plunkett has run the numbers on what happens when one member of a couple on JobSeeker starts work and is steadily offered more shifts or a better-paid position.

A job in the gig economy may look good on the surface, but dig deeper. Photo: TND 

First the good news: If one member of the couple manages to gain a gig economy shift a week that pays $192 – the equivalent of $10,000 a year in private income – the couple will have $126 a fortnight more disposable income after next month’s changes compared with pre-COVID levels.

Aside from the “$50 a fortnight”, delivering $100 for the couple, there also have been an small liberalising of how much people can earn before starting to lose JobSeeker. Further up the pay scale, the low income tax offset has been increased a bit, too.

This theoretical couple is still dropping from a COVID-time annualised disposable income of $43,692 to $36,427 – that $7265 loss, which is what they will feel. And on an income that low, it will certainly be felt.

Which is the government’s intent – the government wants it to hurt to force people to take whatever work they can find, even when there are more unemployed people than vacant jobs.

(As an aside, remember that people on low incomes have by necessity been spending any extra welfare they have received during the pandemic while the better-off have been banking such money. The government is betting the recovery on the better-off spending those savings with wild enthusiasm as the extra payments are scrapped. Good luck with that.)

Mr Plunkett’s spreadsheets go through the theoretical couple’s interaction of JobSeeker payments, income tax and Medicare levy for annualised private income for one partner from $0 to $200K in $250 increments. Yes, he is thorough.

His main intent in the exercise was to show the impact of the loss of extra COVID payments, but an important sidelight for me is the way the numbers demonstrate the cruel effective marginal tax rates for people trying to “have a go”. They’re not “getting a go”.

Prime Minister Scott Morrison speaks during a press conference

The Morrison government slogan to ‘‘have a go’’ doesn’t equate to low-paid workers ‘‘getting a go’’. Photo: Getty 

For example, if one partner increases their annualised private earnings from $20,000 to $30,000 after April 1, the couple’s disposable income will only increase by $2832 as JobSeeker is reduced and income tax and the Medicare levy come into play.

That’s an effective tax rate of 72 per cent on that extra $10,000 in pay. And then it gets worse.

If the working partner picks up another $10,000 a year to $40,000, the couple’s disposable income only increases by $1791. That’s an effective marginal tax rate of 82 per cent on that extra $10K.

On the next $10,000 rise to $50,000 a year, the couple only gains $1500 – an 85 per cent EMTR.

The EMTR on the next $10,000 to make the average wage of about $60,000 is “only” 60 per cent.

Those who believe the rich must pay less tax to encourage them to work more while the poor have to be penalised more will point to the theoretical couple’s disposable income of $50,013 when one partner is earning $60,000.

“See, they don’t pay much tax at all!”

But that displays a wilful misreading of the way “having a go” works, of how dispiriting it can be to work more for little extra return, particularly given the other costs involved in longer hours.

The rich wouldn’t stand for it.

Remember the seriously big money is not made on PAYG wages, but via capital gains with a tax rate of just 23.5 per cent.

They’re certainly getting a go.

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