Wednesday, October 24, 2012

Budget redistributes income over life cycle

Listening to all the argy-bargy over the budget update makes you think - what strange things budgets are. The government spends all this money - hundreds of billions a year - but where does it come from? From us, of course. The politicians use the budget to take money from us with one hand, then give it back with the other.


They have one set of public servants to take our money from us and another to give it back. What's the point of all this "churning"? Wouldn't it be a lot simpler and cheaper to have lower taxes and lower spending?

If we each got back pretty much what we put in, it would indeed be a pointless, wasteful exercise. In reality, high-income earners put in a lot more than they get back, whereas low-income earners receive a lot more than they pay in taxes.

But even that doesn't adequately describe the rearranging brought about by the budget.

Every six years the Bureau of Statistics conducts a study in which, using several of its surveys, it takes all the taxation we pay - federal and state - and attempts to attribute it to different classes of household. It does the same for all federal and state government spending.

Of course, not all the taxes we pay can be attributed to households - company tax, for instance. Similarly, not all government spending can be attributed - spending on defence or roads, for instance.

In its latest study, for 2009-10, the ABS managed to attribute $194 billion, or 62 per cent, of total government revenue and $234 billion, or 51 per cent, of government spending.

Remember Shakespeare's seven stages of man? The study divides Australia's 9.8 million households into 10 main life-cycle stages. It turns out whether your household's a net payer or a net recipient depends heavily on where you are in the life cycle. We'll limit ourselves to six stages.

Most people start their working lives as single and under 35. On average, people in this category pay $226 a week in income tax and $115 a week in indirect taxes, such as the goods and services tax and the various excises.

They get back very little in cash benefits ($28 a week) and not a lot more in benefits in kind, $80 a week, mainly health care plus a bit of public spending on tertiary education.

So, on average, younger singles pay $233 a week more in taxes than they get back in benefits.

The next typical life stage is being young (under 35) and married, before the kids start coming. Households in this category - in which both partners are likely to be working - pay an average of $384 a week in income tax and $196 in other taxes.

They get back virtually nothing in cash benefits ($12), but $136 worth of benefits in kind, mainly healthcare and tertiary education.

So, on average, young childless couples pay no less than $432 a week more in taxes than they get back in benefits.

Once the kids start arriving, however, the tables turn. Somewhat older couples with dependent children, the eldest of which is aged between five and 14, pay more income tax ($454) and a bit more indirect tax at $227 (a sign of a more frugal life style).

Cash benefits jump to $133 a week (mainly family tax benefit) and benefits in kind leap to $608 a week (mainly school education, but also a lot more healthcare and a bit of childcare subsidy).

So, on average, couples with a kid or two get back $60 a week more than they put in. They think they're paying a lot of tax but, in truth, they're getting a net subsidy from other taxpayers.

Once the kids grow up, however, the tables turn again. Couples with non-dependent children average $604 a week in taxes. Against this, they get cash benefits of $176 and benefits in kind (overwhelmingly healthcare) of $328.

So older working couples revert to paying more in taxes than they get back, to the tune of $100 a week.

We've reached the last two stages of life: couples 65 and over, then single people 65 and over. On average, largely retired couples pay next to nothing in income tax and a bit in indirect taxes, totalling $168 a week. Against that, they get cash benefits of $378 (mainly the age pension) and benefits in kind (mainly healthcare) of $481.

So, on average, retired couples get back $691 a week more than they pay. For surviving single retirees it's a net gain of $475 a week.

See what all this proves? As well as redistributing income from rich to poor, the budget acts as a giant, multi-faceted mutual support scheme. At some points in your life you're a net contributor, at others a net recipient.

The system requires those without dependents to subsidise those with, particularly when the little blighters need educating. It requires the well to subsidise the sick. It requires those who work to subsidise those too old to work.

I think it's a good system, a sign we live in a reasonably caring, civilised society, where those in need get supported by the rest of us.

It's a reason we should pay our taxes with a lot less grumbling. The pity is, the system's so complex and convoluted it's not until you see a special study such as this that you realise how it works - it's inbuilt fairness and solidarity.

Something to think about next time you're tempted to justify a demand on government because you've "paid taxes all my life". You've also been benefiting all your life.