This report is the third in a series of three titled ‘Restoring Self-Reliance in Welfare’ and explains the economic and social reasons for reducing tax welfare churning by allowing people to retain more of their income in return for reduced use of government benefits and services. This requires lower taxes and increased use of personal savings, loans and insurance. The first report, The $85 Billion Tax/Welfare Churn, showed the mass welfare state has outlived its usefulness. The second report, Six Arguments in Favour of Self Funding, explained why we should replace it with greater use of self-funded benefits and services.
At least half of all welfare state expenditure goes back to the same people who contribute the money in the first place. Sometimes people pay tax and get it back straight away as benefits or services (‘simultaneous churning’); sometimes they pay tax and get it back much later on (‘lifetime churning’). There are strong economic and social reasons for reducing both types of tax welfare churning, and this paper considers how this might be done.
Churning can only be reduced by allowing people to retain more of their income in return for reduced use of government benefits and services. This requires lower taxes and increased use of personal savings, loans and insurance.
The best way to reduce simultaneous churning is to raise the tax-free threshold (TFT). Low income families are then taken out of the tax system and higher income families retain more of their income so they no longer need government payments.
The key to reducing lifetime churning is to enable people to save. It is proposed that the Commonwealth Government’s Future Fund should be abandoned and the money redistributed among all Australians to provide everyone with their own ‘Personal Future Fund’ (PFF). This would help reduce people’s reliance on welfare payments and services in the following ways:
- No more unemployment benefits: Income from an individual’s PFF could be used to cover up to six months of any period of unemployment (anybody still without a job after 6 months should be offered full-time Work for the Dole until they find employment). This would reduce the stigma of unemployment and strengthen job-search activity.
- Voluntary Medicare opt-outs: Taxpayers could be allowed to opt out of Medicare (up to an annual health expenditure limit) by making additional tax-free contributions to their PFFs. PFF money would then be used to pay for GP visits, pharmaceuticals, health insurance deductibles or direct purchase of private health care.
- Tax-free savings: An annual tax-free savings allowance could help younger people invest in their PFF in order to purchase a first home, education and training, or set up a business.
The paper also calls for reforms to superannuation. Tax on super contributions and on fund earnings should either be scrapped entirely, or should be removed for individuals who opt out of their entitlement to a government age pension. Retirees who do not opt out should be required to convert part of their lump sums into annuities up to the value of the age pension.
Peter Saunders is the Social Policy Research Director at The Centre for Independent Studies.