Implications of the backpacker tax

The Australian Federal government is currently wrestling with the political problem of what the appropriate rate of taxation should be for itinerant labourers, aka backpackers. These are predominantly young, European and Kiwi travellers having a working holiday in Australia.

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They are essential to the fruit industry as they provide a source of cheap labour during the picking season.  In addition to this, they also fill a gap in the labour market that Australians are not prepared to fill, primarily because the work is itinerant.

The government and the farming lobby are proposing a tax rate that is much lower than the one that working Australians would pay.  The argument is that the farmers are under financial pressure from supermarkets and need the tax concessions for their workforce to remain viable.  The causal loop diagram explains the dynamics of this argument.

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In effect, the argument from the farming lobby is that the survival of the  seasonal fruit  industry is dependent on tax concessions. It’s a form of protection for fruit growers. It is also a policy runs completely contrary to Malcolm Turnbull’s expressed enthusiasm for free trade.

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The reason for the pressure on fruit growers is fairly obvious. Price wars between the two major supermarkets, Coles and Woolworths, form a reinforcing loop that drives prices down to the detriment of the farmers.

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The farming lobby would argue that the price for inexpensive high-quality food is disproportionately borne by the producer rather than the consumer.

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It is probably a pretty fair argument given the monopoly powers of the two major supermarkets.

This situation also has some fairly important long-term consequences for food security in Australia. As the price pressure  on farmers increases and their profitability declines, people will exit the market. The supermarkets response to this will be to increase food exports.

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And here’s the crunch.

The implications of these tax concessions are clear. If the Australian consumer wishes to have the benefit of inexpensive food in supermarkets, then it will be necessary to subsidise the farmers who provide it.

 

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