The Australian Treasury has thrown a hand grenade into the tax reform debate with new modelling showing that allowing income taxes to rise via bracket creep (aka “fiscal drag”) would be detrimental to growth. However, switching the tax burden from income taxes to an increased GST would also deliver few, if any, economic benefits. From ABC News:
…”bracket creep” will cut all economic activity, or gross domestic product (GDP), by 0.35 per cent in the “long term”.
That is in spite of an anticipated increase in government spending of 0.2 per cent of GDP, and comes on top of Treasury already reducing its estimates for long term GDP growth from 3 per cent to 2.5 per cent…
[However] the economic growth generated by an increase in the GST to 15 per cent would be zero — even after $30 billion is spent on personal income tax cuts.
It estimates $6 billion would automatically go to higher pensions and other government payments. But that scenario would only leave about half of all households fully compensated for the GST increase.
The effect on low income earners is much worse. For those in the bottom 20 per cent of household incomes, only 9 per cent — or 154,000 — homes would receive full compensation, leaving about 1.6 million low income households worse off.
It is understood that it was this modelling from the Australian Treasury that finally persuaded the Turnbull Government to dump plans to raise the GST, and counters business concerns that doing so endangers growth.
Fairfax’s Peter Martin is especially shocked at just how much the proposed GST lift would have harmed lower income earners, even if $30 billion of the proceeds were handed back to households:
High earning households do very well. In the top fifth, 81 per cent are better off. In the fifth below that, 80 per cent are better off.
In the bottom fifth, only 9 per cent are better off. Put another way, the change makes 91 per cent of the lowest-earning households worse off.
It makes 79 per cent of the next lowest earning households worse off, and 60 per cent of middle earning households better off.
Morrison had asked the Treasury to model a change that enriched middle and high earners at the expense of the least-well off.
Still, Treasurer Scott Morrison is insisting that bracket creep must be addressed, stating that “if you have higher and higher taxes… it will be a drag on growth”, and that “we have to find a way to mitigate that now.”
With the GST out of the equation, and the federal government unwilling to look at land/resource-based taxes, this leaves reforms to Australia’s myriad of tax expenditures – such as superannuation, negative gearing, the CGT discount, and other work-related deductions (e.g. FBT on company cars) – as the delivery system for income tax cuts.
While Morrison has made some sensible noises around superannuation and work-related deductions, comprehensive reform of property tax concessions would require Morrison to abandon his Property Council of Australia roots, which he has so far shown little willingness to do.
This leaves Morrison with a dilemma if he wants to deliver genuine relief of bracket creep to ordinary Australians. He’ll have to confront the very property tax concessions that he has for so long defended.
