Business Spectator’s Alan Kohler has written a curious piece today supporting the Abbott Government’s rumoured Budget deficit levy:
The deficit levy…should become a permanent tax increase.
Australia’s tax revenue is too low for the level of government spending that’s locked in…
Indirect taxes (GST and excise) are growing more slowly than GDP and, given its structure, increasing the GST rate is almost impossible. The rate of excise could be re-indexed but that would take too long and wouldn’t be enough.
The permanent income tax cuts and increased middle-class welfare given by John Howard during the temporary mining boom were reckless and now need to be reversed by his Coalition successor…
And Tony Abbott made things worse with yet another bunch of absurd election promises: more middle-class welfare (paid parental leave) and more tax cuts (carbon tax and mining tax)…
The Coalition must clean up its own mistakes and restore the revenue…
The next 10 years will be spent cleaning up the mess of the past 10 years.
No Alan, introducing a temporary debt levy is bad economics as it exacerbates current structural flaws in Australia’s tax system: increasing the burden on personal income taxes, when instead fundamental tax reform is required to spur productivity and broaden the tax base.
As explained previously, and acknowledged by Kohler above, Australia’s tax base is indeed shrinking. Two of the three main sources of tax revenue – company taxes and indirect taxes (mainly GST and fuel excise) – are either falling or about to fall. Company taxes will fade as the once-in-a-century mining boom unwinds, which will weaken mining company profitability and reduce the corporate tax take. GST revenues are also growing more slowly than the economy (and will continue to do so) as Australians spend a higher proportion of their earnings on GST-exempted items, such as health and education. Likewise, the relative tax take from fuel excise has been shrinking for more than a decade following the Howard Government’s short-sighted decision to end indexation prior to the 2001 Federal Election.
This leaves personal income tax as the only prospective source of revenue growth left for the Federal Government. In turn, the tax burden will increasingly be pushed onto the (shrinking) working population, turning Australia into a nation of working tax slaves without reform.
The first best solution is to shift Australia’s tax base away from productive enterprise (both individuals and companies) towards more efficient sources, such as land, resources and consumption. According to the Henry Tax Review, the marginal excess burden (i.e. the loss in consumer welfare relative to the net gain in government revenue) from the GST is just 8%, whereas it is near zero for taxes on land and resources. They also compare very favourably against the two biggest current sources of tax revenue – personal income tax (24% marginal excess burden) and company taxes (40% marginal excess burden) – offering the nation large productivity pay-offs from fundamental tax reform.
It is also curious that Kohler has not mentioned clamping down on Australia’s world-beating tax expenditures, by limiting tax lurks like superannuation concessions and negative gearing, which are both highly inequitable and serve little social purpose. Superannuation concessions, in particular, are already nearly as costly to the Budget as the Aged Pension. They are also growing much faster and overwhelmingly benefit higher income earners. Ending this lurk would do far more to restore the Budget back to long-run health than an effective increase in personal income taxes.
Kohler should be arguing for fundamental reform to Australia’s tax system, including reducing egregious tax concessions, in order to broaden the tax base and improve efficiency, productivity, and equity, rather than increasing the burden on an already shrinking working-aged population.
