Justifying poor policy often makes politicians say dumb things, and yesterday we saw a classic case by the minister for finance, Senator Mathias Cormann, as he attempted to argue that a tax cut for people earning over $80,000 was necessary to encourage part-time workers make the “additional effort” to work full-time.

The policy to increase the threshold of the 37% income tax bracket from $80,001 to $87,001 is notionally about reducing bracket creep.

Bracket creep occurs when due to a wage rise you move into a higher tax bracket. In effect, it is a tax increase by stealth. For example, a person earning $79,000 who got a 2% wage rise to $80,580, goes from paying a marginal tax rate of 32.5% to 37%.

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But we need a bit of context. They would only be paying 37% tax for the $579 they earned above $80,001, the rest would be unchanged.

The tax changes mean that now instead of going into a higher tax bracket, this person would remain with a tax rate of 32.5%. It makes a difference of $26 a year less in tax.

The biggest tax cut anyone will get is those who earn over $87,001 – they will get a cut of $315 a year, or $6 a week.

Some economists care about bracket creep because they believe it is a deterrent to work – in effect you will choose not to work extra hours or cut back on your hours to avoid the higher tax bracket. And as result, workforce participation is reduced.

It’s a nice argument, but it works better in theory than in practice.

In reality, what studies have found is that people keep working the same amount, they just try to reduce their taxable income by either reducing non-wage income or using new ways to increase their income deductions.

But most people don’t earn over $80,000, let alone $87,000. As a result, this measure is greatly targeted to the wealthy.

It was on this point that Cormann found himself selling economic snake oil.

While debating the legislation yesterday in the Senate, the Greens Senator, Peter Whish-Wilson, asked Cormann who would receive the benefit of the tax. He replied that “the government is focusing on average full-time wage earners, and no average full-time wage earner will miss out on this tax cut.”

Now this is some pretty sneaky use of language.

Cormann is right to suggest that “no average full-time wage earner” will miss out. The current average “ordinary” full-time earnings is $78,832 – requiring just a 1.5% increase to get to $80,000 by the end of 2016-17.

But the average wage is a very skewed way to look at income.

If you have nine people earning $50,000 and one person earning $150,000 then the average earnings of that group is $60,000 even though only one person in the group earns at least that amount.

And when talking about “average full-time workers” things get even more skewed because 63% of all full-time workers are men, and their average wage is much higher than that of women.

The current average total full-time earnings for men is $88,223, while for women it is just $71,245.

So when Cormann talks of average full-time workers, he is really talking average male full-time workers.

And while “average” sounds like you are talking about someone on middle income, it is actually talking about the top third of wage earners.

In 2013-14, when the average annual full-time earnings was $78,972, the median taxable income for men was $62,000, and for women it was just $47,284:

In that year, just 35% of men had a taxable income above the average full-time amount, and just 17% of women:

So in no way are those earning $80,000 on “middle incomes”.

But rather than suggest the tax cut was designed to benefit such workers, Cormann yesterday tried to spin it as a marvel of incentives for part-time workers.

He argued of the policy that “the whole purpose is to provide an incentive for part-time workers to work more hours without being penalised with a higher tax rate. That is the whole point”.

The whole point.

Seriously.

He continued by suggesting, “we want families to be encouraged to stretch themselves to put in an additional effort, but not to be penalised with a higher tax rate as a result”.

OK, let’s work this through.



Cormann is suggesting “the whole point” of this tax cut, which is costing $4bn over four years, is to encourage people who are now working part-time to go full-time.

He also believes they can do this just by “stretching themselves”.

OK then, let us pretend we have a woman working part time and earning $48,000 – the current average earnings for all women (and thus a very well paid part-time position).

If, by some dint of luck and hard work, she was able to get a full-time job that paid $87,000, her after tax income would go from $41,333 to $67,178 – a 63.3% increase.

Cormann would have you believe that because in the past her after-tax income would have gone up by 62.3% to $66,863, that part-time worker would have been less willing to take on the job.

Please.

The only part-time workers who would in any way be affected by this tax cut are those earning $79,000, and who through working more hours would earn above $80,000.

Not exactly a key group in need of assistance.

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Rather than affecting those already earning close to 40% more than what the median worker in Australia earns, bracket creep is much more of an issue for those on low incomes, who will lose welfare benefits and go above the tax-free threshold.

The key issue of labour force participation is about getting people back into the workforce.

Does Senator Cormann really believe we have such a problem with part-time workers not taking full-time jobs earning over $80,000 that we need to spend $4bn to solve it?

When asked to provide evidence that the tax cut would actually create any incentive for part-time workers, Cormann merely drew attention to Treasury modelling, which provides no modelling whatsoever regarding increased labour participation, let alone a shift from part-time to full-time.

But if that is what Cormann argues is the “whole point”, then that is the basis by which the policy and the government should be judged.