A story that writes itself: Working Holiday visas, tax incentives and illegal labour

Sometimes you wonder how an idea came about.

There is a barney brewing over the working holiday visa program. A Senate inquiry into temporary visas, 4 Corners aired a show dedicated to highlighting exploitation of backpackers and the union movement are running multiple campaigns about the impact of temporary migrants on job opportunities for Australians.

The 4 Corners show in particular raised many responses and was extensively covered, rightly so I may add.

So I was surprised to hear in the Budget that the government had decided to tax working holiday visa holders in Australia 32.5 cents in the dollar, from the first dollar earned. This is because the government has changed their tax status to ‘non-residents for tax purposes‘. The measure will reportedly raise $540m over the forward estimates. Chris Bowen today outlined that the ALP will support this change.

Apart from whether this is fair or not, the fact this proposal has failed to draw an equal amount of airplay and outrage as the 4 Corners episode shows the disconnect that eats away at the heart of certain policy areas.

This rule change will create a bunch of incentives that will drive behavioural change from migrants. I predict this simple tax change will do more than any other policy measure related to working holiday visas to create an environment where exploitation thrives while also placing downward pressure on existing wages and conditions.

This will reduce the incentive to work. This might be viewed as a positive if you are concerned about jobs going to Australian-born residents. However if you operate a tourism or agricultural business, particularly in regional Australia where there is an incentive to work under current Working Holiday regulations, then this is a negative. There are not many industries wholly reliant on migrant labour in Australia but these two are the closest.

More importantly, this will reduce the incentive to work legally. An increasing number of employers will offer working holiday visa holders the opportunity to work off the books and be paid cash. Migrants themselves will ask for this, tipping employers who previously had not undertaken this practice into the black market for labour. By moving to cash, wage expenses for employers will be reduced while, in many circumstances, increase the net wages for working holiday visa holders.

A 32.5 per cent tax rate is a steep marginal rate from the first dollar earned. For example, if the piece rate on a strawberry farm works out to about $16 per hour, taking $12 per hour cash in hand is a revenue maximising measure for the visa holder given taxes of $5.20 per hour. I know what I would do.

This is not a small change. This is a massive change. Let’s assume working holiday makers earn on average $25,000 over a 12 month period in Australia. In 2014-15 the tax paid on $25,000 is $1,347. For a non-resident, this increases to $8,125.

For citizens and permanent residents, there are long-term incentives to work within the law, even if it reduces your net income. You get the safety of legal employment and all the benefits that entails. But for working holiday visa holders, this pressure is much less tangible given you can only work for a total of 6 months with any one employer. Even more striking, you can leave Australia at nearly any point with very little consequence.

Further, all of this is compounded when you consider exactly which industries working holiday visa holders work in. The top two occupations visa holders work in are regional farm workers and waiters in urban centres. These two occupations accounted for over a third of all labour activity based on the most comprehensive survey of the program, undertaken in 2009. Unfortunately we do not know more current trends however I’d be surprised if those proportions have slipped.

Regional agriculture and urban hospitality combined with poor incentives for workers to comply with taxation laws? I wonder what could go wrong. This story almost writes itself.

Yet I have seen virtually zero discussion of the implications of these changes. A couple of articles skirted the central issue and profiled a few migrants who mused about their feelings.

The increased risk of exploitation, drastic underpayment and erosion of wages and conditions of other workers is the cost of raising an extra $540m of revenue over the budget estimates, a figure which just quietly will fail to materialise. But chances are you wouldn’t know this because there simply has not been any discussion about these issues.

When a real policy change comes along that will have these effects, in the middle of a series of campaigns on the very same topic, there is something wrong with how we evaluate and discuss about policy.

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One thought on “A story that writes itself: Working Holiday visas, tax incentives and illegal labour

  1. Pingback: A short followup: Tax status of working holiday visas | Value for Money

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