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Tax system creating poverty traps: Catholic Social Services


High effective marginal tax rates are creating poverty traps by acting as disincentives for people on low incomes to join the workforce or to increase their hours of work, says Catholic Social Services director, Frank Quinlan.

Mr Quinlan was commenting on yesterday's release of an AMP/NATSEM report, Trends in effective marginal tax rates 1996-97 to 2006-07, which shows that almost nine in every 10 working age Australians face an effective tax rate in their next dollar of income of 40 percent or less.

The report is the first, since income tax changes were introduced on 1 July, to analyse effective marginal tax rates - how much of an additional dollar of income is kept after income tax is deducted and means-tested Government support (for instance, age pension, family tax benefits and Newstart allowance) is withdrawn, according to an Age report.

This means that most Australians do not face high effective marginal tax rates (EMTR), the report says. But focusing on the effects of marginal tax rates on the poor shows that low income do face "EMTRs higher than the top marginal tax rate of 45 cents in the dollar," Mr Quinlan said.

"People on low incomes are also disproportionately affected by a range of other factors which may compound high EMTRs.

"These include work-related childcare and transport costs; loss of non-cash concessions such as transport concessions and health care cards; and higher rent payable by public housing tenants as a consequence of their higher income.

"The report shows that one in five sole parents will lose more than 50 cents of every additional dollar earned. By contrast, only one in twelve sole parents was in this position ten years ago.

"A sole parent, with children aged 8-12, working 15 hours per week at $13 an hour faces an EMTR of 54.9 per cent, keeping only $88 of $195 after taxes and benefit withdrawal - less than $6 an hour.

Mr Quinlan says that EMTRs have taken on particular significance with the implementation of the Welfare to Work package on 1 July, which places strict breaching requirements on sole parents and disabled people.

"Some sole parents are now required to accept a job offer if they would be at least $50 a fortnight better off after taking into account costs associated with working, or risk losing their benefits entirely," he said.

"A sole parent required to sacrifice family time to work for such a small net financial gain may question the value of such paid work.

"The Government must put into place strategies to minimise the EMTRs faced by low income Australians. This will require substantial reform of the interplay between the taxation and welfare systems," Mr Quinlan said.


SOURCE
Urgent need to address high effective marginal tax rates faced by low income Australians (CSSA Media Release, 20/9/06)
Deeper tax bite makes work less attractive (The Age 20/9/06)

LINKS (not necessarily endorsed by Church Resources)
Catholic Social Services
AMP.NATSEM
Trends in effective marginal tax rates

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21 Sep 2006