Pay everyone: the simple fix for welfare and tax

A basic income for everyone would slim down the ATO's role.
A basic income for everyone would slim down the ATO's role.

Comment | Over the years, Australia’s taxation and welfare systems have become an absolute shambles.

They don’t have to be.

There is an alternative which has been sitting on the shelf in various reports around the world for years.

It is a solution which will be strongly opposed by the Coalition, by the Australian Labor Party and most of all by the Canberra bureaucracy.

Anything with that sort of support deserves serious consideration from the rest of us.

Look at our social security system.

On a rough count at the time of writing, there are no fewer than five different payments for the sick or disabled, two for the unemployed, 10 for families, and eight or more for those in education.

Some of these benefits are overlapping, some are mutually exclusive, all with different amounts, cut-off points, means tests and eligibility rules. And every year the rules change, payment rates change, new allowances are invented and old ones phased out or scrapped.

Some are federally-funded, others are state-funded and vary from state to state around the country.

Then there are the subsidies – for rent, telephone, travel, education, medicines, different age groups, different regions, different income groups … it goes on and on. Not to mention all the tax allowances and concessions.

It amounts to micro-managing individuals on a mind-boggling scale.

Thousands of people are employed full-time purely to make sure people don’t get these rebates, benefits and allowances, or don’t get more of them than they might be entitled to.

Thousands more are employed to explain the systems to the public, or to train the staff who have to administer the systems, and thousands more are employed to process payments and keep the books for all the separate schemes.

It has got to the point where poverty must be one of Australia’s biggest job-creating industries. This is the economics of Looneyville.

So let’s take the existing income tax and welfare systems and scrap the lot.

Instead, pay every citizen and permanent resident an index-linked minimum living wage.

Everyone. Automatically. Whether they are employed or not, rich or poor, young or old.

This is not a new notion. It goes by a number of names but is probably best known in Europe as basic income, where it has serious support and a carefully reasoned website.

It is sometimes called negative income tax, because under this system if your income is below a certain level you do not pay tax, the tax office pays you.
In Switzerland, a petition for a citizens’ referendum on a basic income scheme recently attracted 20 per cent more than the minimum number of valid signatures required to force the government there to hold a referendum. If a majority of the people vote ‘yes’, the government will have to obey.

The knee-jerk reaction by most people is to object strongly to paying people who “do nothing”. But we already do.

Moreover, basic income systems need not preclude social responsibilities or even work-for-the-dole schemes.

Indeed, because the basic income system is so much simpler and transparent than the present mess, basic income is something of a dole bludger’s nightmare –the fewer and simpler the rules, the fewer loopholes there are.

It also eliminates, once and for all, the so-called poverty trap, where the combination of income tax and loss of benefits means there is little or no incentive to take a job.

Yes, there is such a thing as welfare dependency. One of the key elements of this is a lack of self-esteem. Those with jobs, especially those who have jobs they dislike, tend to assume that anyone who is not working is a bludger. That doesn’t worry the tiny proportion of genuine bludgers, but it is demoralising for tens of thousands of people for whom there are no jobs.

If everyone gets a basic income, no one needs to be classified as second-class citizen just because they earn little or nothing.

One of the best ways to break that dependency mindset is to make more jobs available, and especially greater choice of jobs, and that is potentially the greatest benefit a basic income scheme could provide.

For example, employers would have the option, through national or enterprise bargaining, of cutting wages by anything up to the amount of the state-paid wage. For many firms, that would cut production costs by at least 20 per cent and in many cases 50 per cent or more.

What would that do for the nation’s international competitiveness? Labour-intensive industries in particular would become more competitive or more profitable or a combination of both.

Not only would costs drop, but quality would improve. Employees who were frustrated, bored, or under stress because they were barely competent in the job would be much more likely to leave. Quitting would no longer mean waiting periods for the dole or other hassles from Centrelink (you’d get paid the basic income every week whether you were working or not).

Just think what it would that do for morale, and for quality and productivity? It would certainly make life easier for management.

Not only would improvements in quality and cost competitiveness tend to create jobs, the existence of a no-questions-asked guaranteed income would make it less risky for people to create their own jobs by going out on their own. And it would make it easier for people to switch from one job to another for which they might be much more suited.

Businesses would save money because they would no longer have to act as tax and superannuation collectors for the government. Wages could simply be paid gross into employees’ bank accounts – the same bank accounts used by the tax office to pay them the basic income.

For most people, their annual income tax return would consist simply of their bank statements for the year.

Compulsory super would be replaced by the basic income. Individuals who wanted to save additional money for their retirement would still be free to do so.

Could the nation afford it? Yes.

For a start, a huge range of existing handouts would vanish. No aged pension. No dole. No disability pension. No baby bonus. No widow’s allowance. No partner allowance. Etc etc etc.

The savings would be huge.

Personal income tax allowances, deductions and refunds would be replaced by the minimum wage. Another big saving.

Many if not all the tax breaks to business would also disappear. If the government pays part of the wages, it does not also need to subsidise buildings and equipment or research refunds, or give multinational companies million-dollar handouts – more big savings.

The politicians won’t like it. The bureaucrats will hate it. Tax accountants and tax lawyers will hate it. The genuine bludgers and rip-off merchants will hate it.

That leaves at least 21 million people who might think it is a bloody good idea.

Brian Donaghy is an Adelaide freelance journalist.

This is an edited extract from his book, Cents and Sensibility (Adelaide Independent Reporter, 2014), which advocates for a basic income.

 

Image: AAP

  • richard

    I can hear a mighty retrenchment groan coming from public servant land. There again they may now hastily employ more PS to administer their fight back campaign committee of thousands.

    That aside, Mr Donaghy you have made too much commonsense for the idea to be adopted.

    • Brian

      It would have to be phased in over five or ten years (more than one Parliament) partly because of the impact on bureaucratic jobs — though I suspect a fair number of government employees would jump at the chance to follow their dreams without having to go through Centrelink hoops.

  • Paul

    Tax Cuts – A Simple Lesson In Economics

    Suppose that every day, ten men go out for dinner. The bill for all ten comes
    to $100.
    If they paid their bill the way we pay our taxes, it would go something like this:

    The first four men (the poorest) would pay nothing.
    The fifth would pay $1.
    The sixth would pay $3.
    The seventh $7.
    The eighth $12.
    The ninth $18.
    The tenth man (the richest) would pay $59.

    So, that’s what they decided to do.
    The ten men ate dinner in the restaurant every day and seemed quite happy with the arrangement, until one day, the owner threw them a curve.

    “Since you are all such good customers,” he said, “I’m going to reduce the cost of your daily meal by $20.”

    So, now dinner for the ten only cost $80. The group still wanted to pay their bill the way we pay our taxes.

    So, the first four men were unaffected. They would still eat for free. But what about the other six, the paying customers? How could they divvy up the $20 windfall so that everyone would get his ‘fair share’?

    The six men realized that $20 divided by six is $3.33.
    But if they subtracted that from everybody’s share, then the fifth man and the sixth man would each end up being ‘PAID’ to eat their meal.

    So, the restaurant owner suggested that it would be fair to reduce each man’s bill by roughly the same amount, and he proceeded to work out the amounts each should pay.

    And so:
    The fifth man, like the first four, now paid nothing (100% savings).
    The sixth now paid $2 instead of $3 (33% savings).
    The seventh now paid $5 instead of $7 (28% savings).
    The eighth now paid $9 instead of $12 (25% savings).
    The ninth now paid $14 instead of $18 (22% savings).
    The tenth now paid $49 instead of $59 (16% savings).

    Each of the six was better off than before. And the first four continued to eat for free. But once outside the restaurant, the men began to compare their savings.

    “I only got a dollar out of the $20,” declared the sixth man. He pointed to the tenth man “but he got $10!”
    “Yeah, that’s right,” exclaimed the fifth man. “I only saved a dollar, too. It’s unfair that he got ten times more than me!”
    “That’s true!!” shouted the seventh man.
    “Why should he get $10 back when I got only $2? The wealthy get all the breaks!”

    “Wait a minute,” yelled the first four men in unison. “We didn’t get anything at all. The system exploits the poor!” The nine men surrounded the tenth and beat him up.

    The next night the tenth man didn’t show up for dinner, so the nine sat down and ate without him.

    But when it came time to pay the bill, they discovered something important.
    They didn’t have enough money between all of them for even half of the bill!

    And that, boys and girls, is how our tax system works. The people who pay the highest taxes get the most benefit from a tax reduction. Tax them too much, attack them for being wealthy, and they just may not show up at the table anymore. There are lots of good restaurants in Europe and Asia.

    • Luke

      Firstly, what’s the wealthy man doing hanging around poor men? Is he lost? Secondly, why would he want to shout his poor friends dinner? Isn’t that the government’s job?

    • jason42

      > And that, boys and girls, is how our tax system works.

      It’s nothing like how our tax system works. You tell an amusing story but it’s completely out of touch with reality.

    • Fruitbat12

      Love this – so true!

  • John R

    This idea is the most common sense I have heard in a very long time. I understand why the bureaucracy, the politicians and the industry feeding off welfare and tax payers would hate it , they all have a vested interest in maintaining the status quo – I am very happy to be one of the 21 million who might think it is a bloody good idea.

    • Simon

      I agree sounds logical to simplify and reduce overheads despite the fact there would be a large cost to implementing intially. It would benefit the people in the long run. If there is no support from the parties to make this happen though I doubt we will hear about this again. :(

  • Fred G

    This idea has serious merit and is one I have been supporting for many years.
    Unfortunately it will never be possible to introduce it in Australia because we are denied any right to force the government to do what we want by Public Referendums.
    The politicians will say we can force change through the ballot box but this is a lie because they both refuse to accept that their policies could be wrong and deny us any involvement in the policy making process. The first thing we need to do is to force them to introduce Public Referendums by continually embarrassing them with petitions and demonstrations until they cave in to our demands.

  • Neil

    Where is the incentive to work hard in this scheme? It is what makes a capitalist regime work!

  • Luke

    Would a system such as this lead to inflation, or hyperinflation? I don’t have a background in economics, but it sounds almost like a “free money” concept that would just drive up prices on everything, similar to the effect of Howard’s first home buyer’s grant on house prices.

    • Brian

      See Jason42’s reply to mice.

  • mice

    where does the money come from to pay the basic income?

    • jason42

      The money comes from taxes, but the cost of distributing a basic income to everybody is still cheaper than the bureaucracy and auditing required for a means-tested welfare system.

      Effectively the same amount of money is distributed but more fairly and with much less overhead.

  • Confused

    “Currently the poorest 4 would pay for all the rest and the richest would pocket a huge tax free bonus” Is this what you believe is happening in Australia today despite the fact that your statement is in response to a comment that doesn’t state that at all?
    Just require clarification, Rob….seems I’m a bit thick.

  • Senko Naga

    Yes, it sounds good- this is similar to socialist utopia.
    However, we human are greedy animals and without sense of motivation to work, many would choose to become earners of the ‘free basic’ income and it is nicely illustrated by Paul’s story (which I have read somewhere else as well). The issue is someone else has to pay for the basic income, unless we print money, it is very hard to achieve in practice. Nevertheless, the governments can control putting a cap on the maximum income a person can earn (similar to salary cap of footy players), since many do not believe the millions of dollar earning CEO and others are not ten times better than their immediate subordinates, who earn a fraction of their salary.

  • Allan

    There was a story going around when I was at University in Alberta, Canada that a study had shown that the savings alone from getting rid of all the bureaucracy would pay for such a scheme. It probably wouldn’t be far off. In Germany they figure it is cheaper to pay people not to work in some places; they even give extra for having a dog (apparently people who have to take care of animals get up to less mischief).

  • Morpheus

    why do we need incentive to work? I for one would be happy to keep doing what I am doing looking after the environment and reducing my and other people’s carbon footprint. Artists could paint, performers and actors and musicians and writers etc etc could keep doing what they are doing. If you wanted to be nurse and were trained and qualified you could keep doing that. We need to change our thinking. With the oncoming rush of robots many many jobs (read as Just Over Broke for most people) are going to disappear. We are mostly treated as slaves – look at the your drivers licence and then check out what Capitis diminutio maxima means.

  • Andrew

    Isn’t it simpler to scrap income tax, the minimum wage and welfare, leave in place the gst to cover some basic governance expenses and for the government to get out of inefficiently providing education and health services leaving these to communities and business.

    Try reading a book titled. Income tax, the root of all evil.

  • AJ

    What if I don’t want any money from the government?

  • whackywombat

    This sounds very sensible…which means it doesn’t stand a chance in political circles…no brownie points in it.

  • Watchman

    It clearly needs sorting. But it has to be done in a compassionate manner.

  • Senko Naga

    BTW, people with disabilities will have more needs than a basic wage, similarly families need more income to feed more mouths than a single basic income person. Have you thought of this in your book?

    • Brian

      Yes. Health — including disability — is an insurance problem, not a welfare problem. Revamping Medicare to become a genuine community-based insurance scheme is another issue.

  • Senko Naga

    what will motivate the communities to raise revenue, if all are going to get paid with the basic income, whether they work or sleep at the beach?

  • Brian

    What makes you think everyone is not going to work? Read the book before you dismiss it as based on neither facts nor econometrics.

  • Brian

    How can
    someone get ahead by working? They get the basic income PLUS their after-tax income.

  • Brian

    Negative gearing enables wealthy investors to pay over the odds for property because they can offset the resulting losses against tax. The higher your tax bracket, the greater the benefit. The increase in property prices keeps some would-be owner occupiers in the rental market, putting upward pressure on rents, which in turn tends to push up the value of investment property. So negative gearing does have something to do with house prices.
    So does lower interest rates, but rates are determined by a number of factors, only one of which is the government’s desire to see more people able to afford a mortgage.

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