27 July 2012

DSP - to tax or not to tax; that is the question.

A couple of weeks ago, Don Arthur (a regular ClubTroppo blogger) mentioned via Twitter this CIS article about the way blind people are treated for the purposes of disability support pension (DSP) and age pension.  Blind recipients of those payments are not subject to the same means testing arrangements as non-blind folk - for the most part the payments are made free of any means test at all, something the article's author saw as somewhat inequitable. 

It reminded me of another difference between some DSP recipients and the rest of the pensioner population - DSP paid to people under age-pension age is not assessable income for income tax purposes - it's a tax free payment.  This has been the rule for as long as I can remember (I'm too slack to chase up the detailed dates). 

It's a rule that is intended to advantage DSP recipients.  After all, getting a swag of money, tax-free, must be a plus.  Indeed, it used to be.  But not anymore.

26 July 2012

Low CPI means low Newstart increase

Yesterday's CPI release prompted quite a bit of commentary about its possible implications for broader economic issues - for example, does it give the Reserve Bank sufficient impetus for another interest rate cut?  But the CPI is used for a whole lot more and in the tax-transfer system it's often used to reset things like rates and thresholds.  Income support rates are among those affected, and this (June quarter) CPI release is particularly important in that context because it's used to set the rates that will apply from 20 September.
In the light of the ongoing controversy over the rates of Newstart allowance and similar payments I thought it would be interesting to look at how the rates will be affected by this low CPI figure.

14 July 2012

4 Parliaments - single parent edition

In my last post I looked at how single people had fared under the tax-transfer system changes that have occurred over the lives of 4 successive Parliaments, ending with the current Gillard goverment  in Parliament 43.  This time I thought I'd take the same approach, but for single parents.

I can't think of a way to show what's happened to all the possible single parent household types, so instead this post will focus on a single parent with 2 children, aged 8 and 10.  I've picked this family because having the youngest child as an 8 year old brings to attention the significant change to single parent income support eligibility that occurred in Parliament 41 (the last Howard government).  That change involved lowering the age of the youngest "qualifying child" that could attract entitlement to parenting payment for a single parent (PPS) from 15 to 7.  Prior to the change, when the youngest child turned 16 the parent's entitlement to PPS was lost and some other income support - usually Newstart allowance (NSA) - had to be claimed if required.  Since July 2006 this change now occurs when the youngest child turns 8.

I'll use the same format as I did with the single person, and start with a "spaghetti" chart which compares the results for all 4 Parliaments at once.  And here it is:

05 July 2012

Different strokes for different...Parliaments

I started this blog in November last year with a post looking at how the disposable income results provided by the tax-transfer system for a single person had deteriorated over the term of the current Government.  This was largely a result of the lack of any tax cuts up to that time.  Now we are in the new financial year (2012-13) and it comes with the first tax cuts of the current Goverment.  It made me think it was worth updating that first post to see to what extent the fall in disposable incomes had been offset by the new settings.

I also thought I'd retain the comparison with earlier governments, and add in an extra one for good measure.  So, in this post I'll include the results for the last 4 governments - Parliaments 40 to 43 inclusive - being the last 2 Howard governments, the Rudd-Gillard goverment, and the still-in-train Gillard government.

As before, this is for a single person who has not taken out private health cover (I want to be able to show the effect of the medicare levy surcharge).

The first chart is a spaghetti effort.  It shows all 4 governments and the percentage change in disposable income over the term of each.  This is measured in current dollar terms (ie, it's CPI adjusted).

(click to enlarge)

It's a bit hard to make out really, but the last Howard government really stands out at both ends of the income range I've covered here.  In contrast his preceding period was quite lackluster.  Let's have a closer look at that one (Parliament 40). 

(click to enlarge)

This chart shows the contribution of the individual tax-transfer elements that go to make up the total change - tax, medicare and (at low incomes) Newstart allowance (NSA).  At the low income end we can see that NSA declined in value where it was combined with some level of private income.  This reflects that fact that the NSA income test parameters were not changed during this government and so declined in value in real terms.  There are some tax changes and a bit of medicare movement (the dip at around $60,000 is, like the NSA decline, due to a lack of indexation of the surcharge threshold).  Overall though, the whole thing is easily contained within a 2% up or down band.

In the following term, the brakes seem to have come off...

(click to enlarge)

In this period there were a succession of tax cuts (those on 1 July 2006 were particularly large).  These favoured the higher income end, but there were equally generous (in proportional terms) cuts at around the $35,000 mark.  Interestingly, NSA recipients who had some private income had a significant boost to their incomes as a result of a relaxation of the NSA income test tapers.

The election campaign at the end of this Parliament had the intriguing spectacle of both Labor and the LNP coalition offering very similar tax cuts if elected (Labor's were quite explicitly designed to almost exactly match the LNP proposal).  In the event, Labor was elected and the promised tax cuts were duly delivered.

(click to enlarge)

A couple of things to note here.  The decline in the NSA rate even at zero income is actually a product of the timing of CPI increases to the NSA rate relative to the election dates.  NSA is CPI indexed and so in theory it's maximum value (at zero private income) shouldn't change in this type of chart.  However, the actual date of the increases in rates lags a little and so the rate wobbles around the no-change position rather than nailing it every time.  This is only true of the maximum rates though - the declines where there is also some low private income reflects the lack of any indexation or other changes to the NSA income test.  The other item is the medicare levy surcharge - in this period there was a significant increase in the threshold at which the surcharge applied, with the resultant (green) boost to incomes in the affected income range.

So now to the current government.  After 8 years of quite noticeable increases in incomes in real terms just from the tax-transfer system (ie, ignoring any wages growth or other factors that contribute to household prosperity) we have this:

(click to enlarge)

It's a bit like Howard in Parliament 40, except that it's the higher incomes that have gone backwards rather than the low income end.  There has been a noticeable increase for low income singles due to the combination of clean energy payments and tax cuts, but this has disappeared by $40,000 - the cuts don't make up for the effect of inflation.

On the subject of inflation, it's worth noting that the effects of carbon pricing have yet to appear.  Without other changes to the tax-transfer system, when they do flow through the results above will be pulled down even further.

To me the results to date for Parliament 43 (remembering there's still over a year to go) go some way to explaining the perceptions of a decline in incomes that keeps bubbling away in the media.  Sure, wages growth will override this, and declining interest rates will too.  But not for everyone - those on fixed incomes, and those relying on interest income are not helped.  And even for those who do benefit, they are having to come off a lower - and negative - base compared to the two preceding Parliamentary terms.

I like these forays into comparative Parliaments, so  I may do some more down the track with other household types.  If there's one that interests you let me know in the comments.