More analysis has emerged today of the growing tax burden likely to fall on middle-income Australians as bracket creep, brought about through inflation, pushes them into higher tax brackets. From The AFR:
Single-income households on $70,000 to $75,000 will be worst hit by bracket creep, facing a 60 per cent increase in income tax within a decade, according to a KPMG analysis.
The KPMG report, Tax reform for our future success, suggests this would not only see government receiving a “windfall” gain from middle-income Australians, but workforce participation rates would plummet as result of people receiving lower take home pay…
The impact of tax bracket creep is worst for households with $70,000-$75,000 in income from one wage earner…
Additionally, as each household’s tax burden increases by more than income, the total tax revenue will rise by more than 34 per cent…
“What we need is comprehensive system of tax reform to spread the burden. If we don’t, real incomes fall. Then people will make different choices about how many hours they work, what sort of job they have and how they spend their money.”
As noted last week, similar findings have come recently from the Parliamentary Budget Office (PBO), PwC, the Australian Treasury, and the University of Canberra National Centre for Social and Economic Modelling, who all claim that without reform, average income earners will soon face a big jump in income taxes as bracket creep pushes them into higher tax brackets and increases their average tax rate.
Such a rise in income taxes would not only push the tax burden increasingly onto the working population, but it would also be highly regressive, as explained recently by Ross Gittins:
The average full-time wage next financial year, 2014-15, will be about $76,000. On the basis of reasonable assumptions about the growth in wages over the three years to 2017-18, you can calculate that someone on half the average wage would see the proportion of their wage that they lose in tax increase by 3.5 cents in the dollar.
For someone on the average wage the increase would be 2 cents in the dollar. On twice the average wage it’s 1.1 cents. And on six times the average wage it’s 0.8 cents.
Now that’s regressive.
Clearly, comprehensive tax reform is required to broaden the tax base and share the tax burden, as well as to improve productivity. As highlighted many times before, the Henry Tax Review found personal income tax (along with company taxes) to be highly inefficient, producing a “marginal excess burden” (i.e. the loss in consumer welfare relative to the net gain in government revenue) higher than most other forms of taxation (see next chart).
By comparison, raising or broadening the GST in exchange for cuts to personal income taxes (or giving back bracket creep) would result in clear efficiency gains, with tax expert, Professor John Freebairn, claiming that “changing the tax mix from (income taxes to indirect taxes) brings gains of 20c to 30c in the dollar and beats anything that a major corporation could do on productivity”.
There are also compelling reasons to shift the tax system towards resource rents and broad-based land taxes on Budget sustainability grounds, to reduce the tax burden on the shrinking working-aged population, and to improve efficiency, productivity, and equity.
As shown in the above chart, the Petroleum Resource Rent Tax (PRRT) is the most efficient tax around, with zero marginal excess burden, since it applies to a tax base that is completely immobile – land. Resource rent taxes are also more equitable than either consumption taxes or income taxes.
While not shown in the above chart, land taxes have similar tax efficiency and equity to the PRRT and municipal rates, since they are also levied on immobile land. Land taxes also offer the added benefit of effectively boosting land supply and helping to make infrastructure investment self-financing for governments.
As I keep arguing, the Government needs to begin a serious discussion on tax reform that includes taxes on land/resources alongside raising/broadening the GST, in place of less efficient and/or inequitable sources.
