The middle class welfare myth

Solve all our economic problems by cutting middle class welfare! Anyone who says this has never thought any more about this than whether the slogan sounds good…

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The Facts

When people speak of middle class welfare, if they have any idea what they are talking about at all, they are generally talking about Family Tax Benefits and the Child Care Rebate/benefit (they must be so sad that the baby bonus is gone as they still complain about it today even though it does not exist).

The total cost a year of these two programs are:

– Just over $20 billion a year for Family Tax Benefit; and
– Just over $5 billion a year for the Child Care Rebate (see http://www.budget.gov.au/2013-14/content/bp1/html/bp1_bst6-01.htm).

$25 billion is a lot of money, but this represents everyone who gets benefits, not just those of the unworthy “middle class”. So how much of this is middle class.

For the largest part of the Family Tax Benefit by far, Part A, the amount payable is dependent on how many children you have and what your household income is. Once your family income is above $49,000 family tax benefit part A starts reducing. I don’t think a family income of $49,000 is middle class. Now the taper rate is very slow (specifically designed to avoid high effective marginal tax rates at certain income levels) but by the time the family income reaches about $100,000 family tax benefit part A is gone. As the average household income according to the ABS is $80,000 it would appear that little of Family Tax Benefit Part A is going to these sponging middle class.

Of the $20 billion in Family Tax Benefit cost most (say 75%) goes in Family Tax Benefit Part A and most of that goes to families earning the average income or less. So you could maybe save a billion or two by tightening the taper rate but not much more than that.

The remainder of the Family Tax Benefit, being Part B, is the much smaller amount that is only payable generally in single income families. So if the middle class family has two income earners (with the lower of the two earning more than about $26,000) there is no Family Tax Benefit part B. Also if the higher of the two earners earns greater than $150,000 there is no Family Tax benefit Part B at all.

So you can argue that single income families earning near, but not above, $150,000 should not get a government handout for their kids – but be honest that dropping the $150,000 threshold massively is unlikely to even raise you even $1 billion.

That leaves you with the child care rebate (I know I should say child care benefit but it does not sound as good). Again this has about a $150,000 threshold and starts to phase out when the family income is greater than about $42,000. As most households claiming this will be two income households these thresholds will ensure much of the benefit flows to lower income families. My best guess is you might save another $1 billion by tweaking the threshold and the phase out rate.

The Conclusion

So for all the screaming of middle class welfare, at the most aggressive you could save around $3 billion dollars… With a structural deficit of between $20 to $30 billion this is only going to put a very small dent it a very big problem… So lets start talking about real spending cuts… and for those talking about tax increases – https://taxrambling.com/2013/11/29/finding-extra-revenue-in-the-tax-system-where/

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About Ken Mansell

As a stay at home Dad most of the week this is my way of pretending I am still the tax counsel of ASX and SEC listed companies, working at big 4 firms, working at the Federal Treasury, on the Henry Review and at Parliament House for the previous government.
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