There’s a significant debate on EMTRs (effective marginal tax rates) about the burden created by the withdrawal of means tested payments from people when they start earning a little more and the creation of huge work disincentives.

Democrat Senator Andrew Murray put a question on the Notice Paper in September asking:

Is it possible to introduce policy measures that will ensure that no Australian experiences an effective marginal tax rate above 46.5 per cent [the top tax rate]?

If it is possible to do that, what steps are being taken by the Government to lower existing effective marginal tax rates, (affecting lower income Australians), towards the top rate of 46.5 per cent?

If the answer is that it is not possible to ensure that no Australian experiences an effective marginal tax rate above 46.5 per cent, please explain why not.

An answer’s come through. It defines the problem well:

The Government is committed to targeting assistance and benefits to those most in need.

A consequence of the Government targeting benefits is that as a taxpayer’s income rises it is generally necessary to withdraw payments. The tapering of benefits and the progressivity of the personal income tax rates gives rise to the concept of effective marginal tax rates (EMTRs).

That’s about the only part that’s adequate, however.

Targeting creates the EMTRs problem – and creates an impression that the Government is playing favourites. And in the end, the Government declares that it would be “very expensive” to fix the problem and “reduce the Government’s ability to target those people most in need”.

Economist Nick Gruen and Peter Saunders from the Centre for Independent Studies were offering different takes on the issue – and alternative policy approaches – in Crikey and over at Club Troppo back in September.

It’s worth revisiting Saunders’s comments on the problem:

[M]eans tested benefits are the curse of the Australian welfare system because they undermine work incentives (high effective marginal tax rates are unavoidable if you insist on withdrawing payments as soon as people work harder).

In an attempt to lessen these disincentive effects, the government has made the taper shallower (e.g. FTB is now withdrawn at only 20 cents in the dollar at the lower end), but this extends the range of incomes at which people become eligible for assistance (creating so-called ’middle class welfare’) and increases the number of people who are paying tax and receiving benefits simultaneously (the problem of “churning”).

Churning is a bad thing for a number of reasons – not just economic inefficiency, but more especially the way it encourages working people to believe they need the government to help them even though what they earn means they could and should be self-reliant…

In other words, they remain reliant on governments playing favourites – and continuing to favour them.

And the EMTRs rip-offs continue.