The Australian has published a neat article today citing Parliamentary Budget Office (PBO) analysis warning of big rises in personal income taxes unless the Government embarks on widespread tax reform:
PERSONAL income tax is the only prospective source of revenue growth for the federal government, with all other major taxes either falling or about to fall.
…company tax has come off its record high while other important sources of tax revenue including superannuation, fringe benefits and consumption taxes all look weak…
“In the absence of explicit government policy decisions, average tax rates and personal income collections increase as a result of bracket creep,” the report says…
Resource rents once delivered almost 8 per cent of federal revenue, but now earn less than 2 per cent, reflecting the collapse of oil production and the failure of the resource rent tax to raise significant revenue.
GST is suffering partly because households are saving more and spending less. It is also being undermined by the increase in the share of their total outlays being spent on health, education and housing, which are not subject to GST.
As noted yesterday, similar findings have come recently from 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, brought about through inflation, pushes them into higher tax brackets.
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 articulated 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.
This is why I keep arguing for tax reform, in order 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”.
It is also concerning to discover from the PBO that the proportion of tax revenue raised from resource rents has collapsed over the past 30 years, from roughly 8% to 2% currently. 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.
Clearly, there are compelling reasons, therefore, to shift the tax system back towards resource rents, as well as broad-based land taxes (which have similarly tax efficiency and equity), on Budget sustainability grounds, to reduce the tax burden on the shrinking working-aged population, and to improve efficiency, productivity, and equity.
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.
