08 January 2012

Income inequality and Newstart allowance

Over the last couple of months I seem to have kept bumping into a couple of topics - an OECD report that, among other things, discusses the growth of inequality in Australia, and criticism of the rate of Newstart allowance (NSA).  The OECD's specific country notes for Australia are here and there's a quick summary of the overall report at Matt Cowgill's blog.  Coverage of the NSA rate was all over the place, but this Club Troppo blog gives a brief rundown, with links, including the widespread nature of the complaints.

On the inequality side, the OECD reckoned one of the drivers to be changes to the tax transfer system that have reduced its redistributive effect.  There are others too, but the tax-transfer bit was always going to catch my attention.  So, below is a picture that deals with the way the tax transfer system has treated single people on various levels of private income over the 10 year period ending in the September quarter 2011. I chose these dates because the September quarter is, at the time of writing, the latest one for which CPI data is available.

NSA fits into this via the simple notion that the person with zero private income will have a disposable income of the NSA rate.  Importantly for this approach, the NSA rate is adjusted every 6 months by reference to upward movements in the CPI.  This means it can be viewed as a reference base against which the other disposable income results can be compared.

Just to be clear, the gross private income levels are the same in CPI adjusted terms at all points and are expressed in September 2011 values.

A short summary of this is that in the last 10 years tax cuts (from July 2004) were greater than required to simply maintain the relative positions of single taxpayers at these various private income levels.  This process continued until July 2010 (note the whopper increase in 2006!).  Since July 2010 the trend has reversed.

Taxes actually increased at higher incomes from July 2011 due to the imposition of the flood and cyclone levy.  This is a one-off effect for the 2011-12 year only.

For single people at least, changes in the last decade did indeed reduce the redistributive effect of the tax-transfer system due to what had begun to seem like an eternal springtime of tax cuts.  Whether the cessation of this bounty has been apparent to those who have had above CPI wages growth is a moot point.  For those whose private income has increased by CPI or less since the tap was turned off, this must surely be a felt effect by now.  The impact of upcoming changes - amongst them the carbon pricing related tax cuts and household assistance (for some) and associated price effects (for all), and the (proposed) increase in the medicare levy surcharge/ reduction in the private health insurance rebates - will be interesting to see.