Ideas@TheCentre – The Centre for Independent Studies

Ideas@TheCentre

Ideas@TheCentre brings you ammunition for conversations around the table.  3 short articles from CIS researchers emailed every Friday on the issues of the week.

Self-sustaining leviathan

23 October 2012 | ON LINE Opinion

Has Australia's welfare state become so large that it can now sustain itself and grow through the ballot box? This is the key issue raised by recent controversies in the United States and the United Kingdom.

Mitt Romney, the Republican presidential hopeful, drew fire for his remarks about the 47% of US households that pay no federal income tax. Romney was factually correct (although many of the 47% do pay social security payroll tax, which is like an income tax), but his analysis was so clumsily expressed that his essential point was lost in the frenzied commentary that ensued. In democratic welfare states, the proportion of the electorate that attracts more in social benefits from government than it pays in tax has become so large that candidates who promise to curb the welfare state have a hard time winning elections.

The same issue has been raised in the United Kingdom, where a recent study by the Centre for Policy Studies revealed that 53.4% of households receive more in benefits than they pay in taxes, and that this proportion has been rising dramatically in recent decades.

Given these developments, it is instructive to consider how Australia compares in the welfare dependency stakes. Here, 26.4% of individual taxpayers (who are different from households) paid no net income tax in 2009–10. Twenty years ago, this proportion was only 14.3%, and it is likely to have risen further since 2009–10 in light of an increase in the effective tax-free threshold. (Whereas the bottom 47% of US households paid no income tax, the bottom 47% of Australian individual taxpayers accounted for 10% of total income tax paid, although much of this would have been offset by family tax benefits.)

But there is no reason to stop at income tax. People also pay GST and many other taxes. The Australian Bureau of Statistics (ABS) has compiled data on total taxes paid and total social benefits (cash and in kind) received by households in 2009–10 classified into five slices (quintiles) from bottom to top according to their private income. The first three quintiles (that is, 60% of households) each received more in direct social benefits than they paid in taxes. It is impossible to determine from the ABS data the exact income level at which households, on average, move from being net beneficiaries to net payers, but it is probably close to the median household private income (around $75,000 a year).

Whether households are aware of the balance between the taxes they pay and the benefits they receive is another matter. If we compare total benefits with income tax alone, which is the tax households are most aware of paying, then only the top 20% are left paying more than they collect in benefits.

It is hardly surprising or objectionable that the population is divided into net beneficiaries and net funders of the welfare state, but there is ample scope for argument about the coverage and size of welfare state benefits, where the dividing line should be drawn between net recipients and net payers, and the size of the burden that the net payers – whether the top 20%, 40%, 50% or whatever – can reasonably be expected to carry.

Some things are clear. The welfare state has gone far beyond a 'safety net' concept. There is a large constituency whose direct financial interests are best served by the preservation or enhancement of social benefits, whether or not that is in their broader self-interest or the national interest. And the top 40% of households are bearing the burden, paying 72% of the taxes and receiving 22% of the benefits.

Robert Carling is a Senior Fellow at The Centre for Independent Studies.

The fall in Australian poverty

19 October 2012

This week is Anti-Poverty Week, and the media repeated the welfare lobby’s line that there were 2.2 million Australians living below the poverty line, and that the proportion of people in poverty rose by ‘approximately one third of a percentage point from 2003 to 2010.’

What they didn’t bother to report was that according to the ACOSS report Poverty in Australia, the proportion of Australians living below the poverty line actually declined from 14.5% of the population in 2007 to 12.3% in 2010 (see pp. 32–33).

The fall in poverty was largely a result of the global financial crisis reducing growth in median incomes, combined with increased government expenditure on payments to pensioners, which pushed some people above the 50% median income threshold. As a result, welfare payments grew faster than income, and poverty fell.

If you think something is wrong with the picture of poverty in Australia since 2003, then you would be right. Commonsense suggests poverty should decrease when the economy is growing (2003–07) and increase when the economy is in trouble (2007–10). However, commonsense doesn’t seem to apply to poverty.

The problem lies in the definition of poverty as 50% of median income (about $358 per week for a single person). It is an arbitrary line that measures inequality, not poverty, and does not consider the numerous other benefits and subsidies (public housing and education) received by those on welfare.

Because the measurement of poverty is flawed, the proposed policy solution of increasing welfare payments like Newstart is equally flawed. It is telling that more than 50% of the 2.2 million people identified by ACOSS to be in poverty aren’t in the workforce at all. Less than 20% of those 2.2 million in poverty are in full-time work and more than 60% receive most of their income from welfare payments.

However, more money for welfare recipients will not address the causes of poverty. It would be better to focus resources on encouraging people capable of working into the workforce and tackling unemployment instead of spending increasing amounts of taxpayer money on welfare payments.

Andrew Baker is a Policy Analyst at The Centre for Independent Studies. Poverty in Australia: Beyond the Rhetoric (2002) by Peter Saunders and Kayoko Tsumori is available on the CIS website.

Too scared

19 October 2012

Seven British soldiers serving in Afghanistan are facing a murder charge for shooting and killing a Taliban insurgent following a fire fight. The details of what happened are sketchy and the case is sub judice, but on the face of it, it seems odd to prosecute soldiers for killing insurgents when that is precisely what we sent them to Afghanistan to do.

The UK newspapers these days are filled with such oddities.

A 52-year-old female deputy head, confronted by a six-year-old who sat on the floor and refused to go into class, picked him up under his arms and dragged him in. She was dismissed.

So too was a 59-year-old male teacher who reacted to a pupil throwing a milkshake over him by aggressively pinning the unruly boy’s arms by his side, and forcibly pushing him into his chair.

The police, too, are in trouble for doing their job. At an unruly demonstration in London a few months ago, one officer shoved a man who had been told to move. The man (who turned out to be an alcoholic) fell to the ground, cracked his head on the pavement, and later died. The officer was dismissed from the force and put on trial for manslaughter (the jury acquitted him).

This week there was a report of another officer being dismissed after 12 years of service. He had arrested a youth with a long record of troublemaking, brought him to the station, and ordered him to turn out his pockets. When he refused to do so, the officer pushed his arm up behind his back and forced him over the desk.

Reading this last case put me in mind of the 1982 essay on ‘broken windows’ policing by Wilson and Kelling. What everybody knows about this essay is its recommendation of ‘zero tolerance’ – stamp down on the small infractions and you’ll stop the big ones from developing. What is less often remembered is the authors’ crucial insight about the traditional role of the police.

Policing, they say, used to be more about maintaining order than solving crimes. Police officers traditionally enjoyed discretion to nip trouble in the bud. A ‘clip round the ear’ was often more effective than a formal arrest and charge. But any copper who tries that nowadays will lose his or her job and quite probably end up in court.

Our problem is that big state bureaucracies – the army, schools, police – find it difficult coping with individual initiative or making room for commonsense. My favourite sociologist, Max Weber, recognised this when he distinguished ‘formal’ from ‘substantive’ rationality. Bureaucracies, he warned, are driven by formal rules. This leads to an emphasis on box-ticking, even while the substantive purpose for which they were set up goes unrealised.

Weber thought we can do little about this, for the only alternative to dull, bureaucratic conformity is dilettantism. But sometimes we need people to turn a blind eye, to fudge the strict interpretation of rules, to seek out the grey areas. Otherwise, we’re going to end up with soldiers too scared to fight, teachers too timorous to teach, and police officers too cowed to tackle crime and disorder.

Peter Saunders is a Senior Fellow at The Centre for Independent Studies.