A short followup: Tax status of working holiday visas

In my previous post, I suggested the government was heading down the wrong track by increasing the tax rate of working holiday visa holders from an effective marginal rate of zero per cent to 32.5 per cent.

Yesterday, the issue was raised in the Senate Economics Estimates hearing. The government confirmed the Budget measure would raise $540m over the forward estimates. Of the ~160,000 working holiday visa holders in Australia, 85,000 will work and earn on average $9000, raising on average $3000 per visa holder in tax revenue.

In this hearing, the Second Commissioner of the Australian Tax Office, Mr Neil Olesen, said:

“One clear benefit of this new arrangement is that question is out of play and you have got a very straightforward arrangement for these particular visa holders about the rate of tax to be paid. That is a very good thing for the employers, because there is really no ambiguity about the amount of tax they need to withhold, and it is a very good thing for the employees themselves, the backpackers, because they will be in no doubt about what the right rate of tax is that is applicable to them.” (Page 40)

To reiterate, the government has decided to introduce a 32.5 per cent tax hike on a population of people who do not have any political representation. The Second Commissioner of the ATO believes a $3000 tax hike to be “a very good thing” for these migrants because now there is no doubt as to which tax category they fall into. Sign me up?

Earlier, the ALP Senator Chris Ketter asked, “Would you expect that the change in the tax-free threshold might have an impact on the number of people who are being paid cash in hand?”. To which Mr Olesen replied, “I can readily see the incentive that might come from that.”

In addition to a Liberal government voting for a tax hike, we also have ALP support for the change despite the fact this will likely have significant behavioural effects on how these migrants work in the labour market, including pushing people into the cash economy and dragging down standard wages and conditions.

To top things off, this tax status change is going to have serious negative consequences for regional Australia. Despite this, I’ve yet to hear a peep out of the Nationals.¬†Basically because working holiday visa holders spend their entire income in the Australian economy, this measure will take $540m out of the economy and into government coffers, hurting those localities where these migrants are concentrated.

This is a bad outcome for a range of reasons and highlights how damaging the “debt and deficit” rhetoric is for Australian policy.

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