Monday, May 05, 2014

Hockey's Commission of Audit anything but responsible

Who in their right mind would hit anyone with an effective marginal tax rate of 94 per cent?

Australia’s top personal income tax rate has never hit 80 per cent. Labor’s resource super profits tax would have been 40 per cent applied to a 28 per cent company tax rate. Labor feared that any more would take away the incentive to mine.

Yet the Commission of Audit wants to hit Australians moving from the dole back into the workforce with an effective marginal tax rate of 94 per cent on wages of $19,0000 to $32,000.

This would stall their reward from work at close to $19,000 even as they took second and third part-time jobs.

It’s not as if the commission is unaware of the concept of incentives. It mentioned them more than 70 times in its report released last week. It even mentioned  “incentives to work”.

At the moment, financial incentives dive as earned income passes $18,000. That’s when the 19 per cent income tax rate comes into play as well as the 60 cents by which Newstart is withdrawn for each extra dollar earned. Where one member of an otherwise employed couple is on Newstart it can amount to an effective marginal tax rate of 79 per cent. It is a minimal return for extra work, but it is something.

At recommendation 27B the commission proposes boosting the withdrawal rate from 60 per cent to 75 per cent. It says it “represents a more appropriate targeting of safety net payments”. It would also represent an effective marginal tax rate of 94 per cent.

It would all but eliminate the immediate financial return for either person in that couple taking on extra work.

Whether the commission realises this is unclear. It certainly doesn’t mention it. Its chief concern is saving the government money. That's fine as far as it goes, but at times it goes in the opposite direction to what the government is trying to achieve.

The report begins with the commission’s 10 “Principles of Good Government”. There are exactly 10: Live within your means, protect the truly disadvantaged, respect personal responsibility; those sorts of things.

What there isn’t is an attempt to address the question of what government is for and what it is trying to achieve. It is trying to achieve a lot more than protecting the truly disadvantaged. Among other things to get people into work. And to keep them alive.

Which brings us to Medicare co-payments.

It proposes them as a cost-saving measure: “From an economic perspective health care is like any other good or service in that utilisation increases dramatically when the marginal cost approaches zero,” it says.

“There would be substantial benefit in addressing health costs if the community is more aware of the real costs of using the health care system.”

Doubtless true, in the short-term.

The Commission says it may “help to reduce demand for unnecessary or overused services”.

It would. But it would also cut demand for timely services that stop people becoming sick and save costs later on.

Most of the time when we go to the doctor we don’t know whether we are seriously sick. That’s why we go. Dissuading us from going when we think we are not particularly sick will at times also dissuade us from going when it turns out we are.

The massive Rand Corporation experiment in the 1970s funded tens of thousands of visits to the doctor at different rates. Some were charged large co-payments, some small ones and some none.

The Americans who were asked to pay did indeed visit the doctor less. But the study found that those who who stayed away were just as likely to have serious problems as trivial ones. In its words: “Cost sharing did not seem to have a selective effect”.

Neither the Rand experiment nor a later comprehensive study by Australian health economist Jeff Richardson represent the final word. But it would be nice to think the commission even read them, or even considered the impact of its recommendations on health.

It’s the same for the Pharmaceutical Benefits Scheme. Pushing up co-payments would save the government money. But the commission’s own talk about price signals suggests it would also dissuade people from obtaining prescription drugs. That would be a good thing if we overused them. It would be a bad thing if we needed them. It’s a question worth considering.

The tragedy of the commission’s report is that virtually none of it could be adopted without further consideration. It’s a list of ideas without an assessment of their consequences.

Governments need to be responsible. It’s unfortunate that the commission subtitled its report “Towards Responsible Government”.

In The Age and Sydney Morning Herald