Increase the minimum wage by...$8? $149?

This has been another of those times when several topics come together and prompt another.  In this case it was the combination of reading a number of blogs on the theme of things in Australia being pretty fine (all things considered), numerous references to the "fiscal consolidation" we are undergoing at the moment and the fact that the national minimum wage setting process is about to get underway for this year.

In my previous post I had a chart which showed that for single people on incomes that had stayed the same in real (ie, CPI adjusted) terms, disposable income had been slowly but surely declining since 1 July 2010.  This reflected the absence of tax cuts (in fact there were tax increases in the period) and shows a tax-transfer outcomes aspect of fiscal consolidation.  What the chart did not show was the effect of wages growth.

Stephen Koukoulas is one of a number of bloggers who has referred to sustained periods of above-CPI wages growth in the context of continually improving standards of living (at least in longer run periods - eg a decade or so).  Certainly through much of the Howard era, and the Rudd-Gillard first term, the tax transfer system and wages growth were pushing up average disposable incomes.  However, this has arguably changed over the term of the current Government, with tax-transfer changes (or a lack of them on the tax cut side) pulling disposable incomes down.

This trend raises the question of just how much wages have to increase to offset the tax-transfer tightening.  One way to look at this is to calculate disposable incomes at 1 July 2010 (the tax-transfer system settings "inherited" by the current government), and then convert these to January 2012 equivalent values.  These can be compared with disposable incomes at 1 January 2012 (the start date for the current tax-transfer settings, at least as I model them) assuming that no increase in wages has  occurred.  It's then possible to work out how much extra has to be earned to return the current (January 2012) disposable income to the July 2010 equivalent value.

My first chart shows two things.  First, how much a single person's disposable income would have fallen from July 2010 to January 2012 in real terms if they did not have a wage increase in that period.  Second, how much gross wages would need to increase (in % terms) to return the person to their July 2010 position.

This suggests that for singles under 55 with July 2010 earnings of $20,000 or more, gross wages need to have increased by a little over 5% in 18 months to maintain the status quo.  The wide variations at incomes under $20,000 reflect interactions with the lower single rate of Newstart allowance.

Of course, the results will differ depending on the household type.  At the other extreme (maybe) is the single income couple (and yes, I know I've been banging on about them in earlier posts, but they are an intriguing example of a marked shift in policy settings in a short period).  The same type of chart for them looks like this:





This is an amazingly higher requirement, and far exceeds average wages growth in the period.  The reason is that we are not just looking at the erosion of value caused by inflation, but a deliberate policy shift in tax-transfer outcomes.  In this case it's the abolition of the dependent spouse tax offset.

These two quite disparate results provide a segue into the minimum wage issue.  Imagine trying to come up with a minimum wage decision that provides a "safety net" when the goalposts move about like this.  But that's what is required by 1 July, when the new minimum wage is supposed to come into effect.  1 July itself confuses the issue because that is also the start of the new tax scales and household assistance measures associated with pricing carbon.

Just as a teaser though, here's a tip for the minimum wage increase.  Based on the charts above, at this stage (ie, January  2012 parameters) an increase in the minimum wage of just $8.09 a week will keep a single person at the 1 July 2010 standard (this takes account of the increase already provided in July 2011).  For a single income couple though, the increase needs to be more like $149 a week!

So, my tip is that the increase will be somewhere between $8 and $150 a week.  Bet I'm right!

Income inequality and Newstart allowance

Over the last couple of months I seem to have kept bumping into a couple of topics - an OECD report that, among other things, discusses the growth of inequality in Australia, and criticism of the rate of Newstart allowance (NSA).  The OECD's specific country notes for Australia are here and there's a quick summary of the overall report at Matt Cowgill's blog.  Coverage of the NSA rate was all over the place, but this Club Troppo blog gives a brief rundown, with links, including the widespread nature of the complaints.

On the inequality side, the OECD reckoned one of the drivers to be changes to the tax transfer system that have reduced its redistributive effect.  There are others too, but the tax-transfer bit was always going to catch my attention.  So, below is a picture that deals with the way the tax transfer system has treated single people on various levels of private income over the 10 year period ending in the September quarter 2011. I chose these dates because the September quarter is, at the time of writing, the latest one for which CPI data is available.

NSA fits into this via the simple notion that the person with zero private income will have a disposable income of the NSA rate.  Importantly for this approach, the NSA rate is adjusted every 6 months by reference to upward movements in the CPI.  This means it can be viewed as a reference base against which the other disposable income results can be compared.

Just to be clear, the gross private income levels are the same in CPI adjusted terms at all points and are expressed in September 2011 values.

A short summary of this is that in the last 10 years tax cuts (from July 2004) were greater than required to simply maintain the relative positions of single taxpayers at these various private income levels.  This process continued until July 2010 (note the whopper increase in 2006!).  Since July 2010 the trend has reversed.

Taxes actually increased at higher incomes from July 2011 due to the imposition of the flood and cyclone levy.  This is a one-off effect for the 2011-12 year only.

For single people at least, changes in the last decade did indeed reduce the redistributive effect of the tax-transfer system due to what had begun to seem like an eternal springtime of tax cuts.  Whether the cessation of this bounty has been apparent to those who have had above CPI wages growth is a moot point.  For those whose private income has increased by CPI or less since the tap was turned off, this must surely be a felt effect by now.  The impact of upcoming changes - amongst them the carbon pricing related tax cuts and household assistance (for some) and associated price effects (for all), and the (proposed) increase in the medicare levy surcharge/ reduction in the private health insurance rebates - will be interesting to see.

The song of the single income couple

This is kind of a continuation of my last post, which looked at a single income couple with children.  Single income couples are interesting in that they are a family type which appears to be falling out of favour, at least from the perspective of their treatment by the tax-transfer system.  This is perhaps most obvious when looking at single income couples without children.

The first chart shows the % change in disposable income since last year's election for single income couples without children, where both partners are in the age range 21 to 40.  As with the earlier posts, the comparison is between similarly constituted households at different points in time, not the change for a particular household.

Here we can clearly see the impact of the removal of the dependent spouse tax offset (DSTO) from  July 2011.  With some exceptions, that change applies in respect of partners born on or after 1 July 1971.  The complete removal of the DSTO for the affected group builds on the earlier introduction of a household income test (the $150,000 upper limit) which removed the DSTO (and Family Tax Benefit Part B) from higher income households.

The message apparently embedded in the tax-transfer system for these households (or the non-working partner at least) echos Paul Keating's famous 1995 jibe "Get a job...".

It's a simple message but, as so often happens with the tax-transfer system, a change in one part has flow-ons to another.  In this case one effect has been a consequential increase in marginal tax rates on the earner in these couples, particularly at lower incomes.  Here's how the effective marginal tax rate for the earner looked at the time of last year's election.

Here's how it looks now

Notice the increase in the EMTR in the income range (very roughly) $20,000 to $40,000.  This is now sitting at 80% or more in a range where the National Minimum Wage resides.  For these households a very large part of any wage case pay increase will be consumed by tax-transfer effects.

On the bright side, it's probable that there aren't an awful lot of single income couples who would have the right mix of circumstances to be affected by this change (eg, no children; young-ish partner who is not obviously precluded from working for one reason or another).  For those who are, just listen to the sweet siren song the system is singing you.  And probably in Paul's voice, no less.

150,000 stories

I'd been wondering what kind of household to look at following my inaugural single person outing when I was rescued by a story in the Telegraph about a 3-child couple, which I came across via a blog posting in Crikey!.  It's about families who will not receive household compensation when the newly-enacted carbon pricing arrangments come into effect next year.  It uses the Samuelson family to illustrate its impact on a single income couple earning $150,000 a year.  Apparently, they will go backwards financially by about $700 a year.

The Telegraph article is here.

Perhaps more entertaining than the article are the responses posted by hundreds of readers to both the Crikey and Telegraph stories.  They cover a wide range of positions but one fairly common attribute is an over-enthusiastic assumption about the disposable income (ie, after tax and transfer payment imposts) of a Samuelson type household.  The silliest of them is perhaps the claim from a few posters that they'll now have to make do with $149,300.

Before looking more closely at the disposable income issue, here's how the tax-transfer system has altered the disposable incomes of 3 child, single income couples in the private income range $0 to $200,000.

As with the single person in my last blog post, it's backwards most of the way.  The main contributors are the non-indexation of the tax thresholds, plus the flood levy, and the freeze applied to various bits of the family tax benefit.  At $150,000 the fall has been roughly 1%. 

As an aside, it's interesting that the Telegraph's Samuelson family are at exactly $150,000 - any more and they would not get family tax benefit part B.  The choice of this family does, I suspect, increase the likelihood of robust discussion in on-line comments, combining as it does a high income (relative to average and median earners in Australia) with the receipt of a transfer payment.

So, let's look briefly at the issue of comparative disposable incomes.  I'm not going to look at how $150,000 earnings compares to the earnings of a typical Aussie.  That's been canvassed in depth on other blogs (for example, Matt Cowgill has a nice article here).  Instead, let's use a simple (I hope not simplistic) measure to compare households - in this case our 3 child single income couples.

At zero private income such a household would get the maximum assistance that the transfer system provides.  Using that as a baseline, how does disposable income in the range $0 to $200,000 compare?  In the chart below, the disposable income is shown as a multiple of the baseline.  For example, if private income is $50,000 the households disposable income is about one and a half times the baseline.  In other words, getting a job earning $50,000 would increase the unemployed household's income by 50%.

So, the Samuelson type houshold, at $150,000, gets 2.6 (two point six, not twenty six) times the income of the baseline unemployed household.  You can draw you own conclusions from this, but I hope it helps in making a more appropriately sized choice of violin or rocket when pitching a response to the Telegraph article.

Testing, testing...

This is probably going to be a very occasional thing...

Here's a picture of the way the tax-transfer system's treatment of a single person with an income in the range $0 to $200,000 a year has changed between the date of the last election and 30 September 2011.

The private income is in current (September 2011) dollars, on a CPI adjusted basis.

So, what's this telling us?  Not a lot at this early stage, but we can see that the lack of tax cuts in the current term of government has caused an increase in real terms in the amount of tax paid compared to what was payable at an equivalent income in August last year.  That means less disposable income in real terms.

On its own that might not amount to much, but consider how singles such as this fared over the previous two governments - Rudd-Gillard and the final Howard term.

Here's a picture for that story...

There are many reasons why this might be so (the flood/cyclone levy and the GFC for example) but I do wonder whether this difference in results has been noticed by the hip pocket nerve.   If it has, to what extent has that affected perceptions about the current Government?