We Don’t Know: The backpacker tax edition

I imagine everyone is sick of the backpacker tax. This will certainly be the last time I think about it in awhile. But instead of focusing on the tax itself, I want to show a couple of examples of what we don’t know when migration policy decisions get made here in Australia and the consequences of this.

We don’t know where backpackers live. There are about 135,000 backpackers in Australia at the moment and we simply don’t know where most of them are (the exception are people who apply for a second visa and need to show their postcode). This isn’t necessarily a bad thing in itself but gets overlooked when making decisions about tax. Income tax can be influenced by the geography of the labour market and not being able to understand this broader context constrains the capacity to inform policy.

More importantly, we don’t know where, how much or for what price backpackers work. This is very important for income tax policy. What we do know is a very high level picture about average incomes ($13,300 per person) and we know limited aspects of industry coverage, again only related to the second visa application (as this is restricted to construction, agricultural and mining). There was a survey back in 2008 showing some industry and occupational information however the labour market has changed since then, as have migration trends. Basically, we don’t know much at all. This means any questions about tax incidence or the potential effects on labour participation are going to draw a blank. Would a higher tax rate actually make Australian workers more competitive as backpackers withdraw their supply? I didn’t see this argument mounted during the debate but I can imagine a set of circumstances in urban Melbourne and Sydney where this is the case. The farmers might suffer but a 19 year old kid who isn’t studying or working may find it marginally easier to enter the hospitality or retail industry.

We don’t know why backpackers come to Australia. It’s probably a mixture of a bunch of things: holiday, lifestyle, work, future residency options. The list goes on and many individuals will have different reasons. This can have a big effect on policy decisions. For example, the Productivity Commission found about 20 per cent of backpackers who arrived between 1991 and 2014 ended up with a permanent visa. These people will be motivated very differently from genuine tourists, with a number of labour market effects (and tax implications) to follow. I think it is plausible to think people seeking residency are more likely to work cash in hand and accept sub-standard working conditions than those just having a holiday. The much bantered discussion about ‘competitiveness’ and New Zealand’s tax rate doesn’t much matter if Australian minimum wages are substantially higher than alternatives and people are choosing Australia for the beaches instead of the tax rate. I imagine this last point is pretty important in the behavioural decision making process for many potential backpackers thinking about coming to Australia.

Getting into the weeds, we don’t know how many backpackers claim their superannuation when the leave Australia. This is despite an integral part of the final backpacker tax compromise incorporating changes to the superannuation rules and fees for backpackers. How can we make sound fiscal projections if no-one knows what the answer is to these questions? The ATO provided evidence to the Parliamentary inquiry into the legislation and could only say about 100,000 temporary migrants withdrew their super each year. These could be students, 457 visa holders, backpackers or even New Zealanders. As about 220,000 backpacker visas have been granted in each year recently, who knows how much revenue the Government will end up due to changing the superannuation withdrawal fee from 95 per cent to 65 per cent? #WeDontKnow

We don’t know how many backpackers want to come to Australia (but we know more do). If we are worried about the labour market in regional Australia, there are other options to encourage more people into the backpacker program. The following countries are ‘maxed out’ against their cap for the number of backpacker visas available: China, Chile, Argentina, Spain, Thailand, Poland, Portugal, Slovakia, Slovenia, Turkey and Malaysia. These last two have a combined population of over 100 million people and are only able to send 100 people each year to Australia under their respective agreements. Instead of fretting about tax rates which may or may not have large implications, opening up some of these tiny country caps would almost certainly attract more backpackers to Australia. A proportion of these would then head out to regional Australia. And after all, attracting more backpackers to Australia seems to be a primary goal of the Government judging by Scott Morrison’s post-vote Twitter activity:

morebackpackersforoz

Showcasing Coalition social media posts seems like an appropriate place to end. Hopefully we have all seen the last of the backpacker tax for sometime and if the most this stale debate has achieved is create a world-class example of poor policy process, then maybe some future government in the future can look back and not make the same mistakes.

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One thought on “We Don’t Know: The backpacker tax edition

  1. Meanwhile the AGE is showing further worker exploitation by those greedy mass producing industries called ”farmers”, but it’s not the mom and dad farmers who employ back packers, it’s the massive businesses and they use slave labour to help make massive profits from exports.

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