…under current policy settings our reliance on income taxes – both personal and corporate – will continue to increase.As a result, without conscious change, the economic cost of raising tax from our current tax mix will also increase. Many studies, both in Australia and internationally, have suggested that reducing reliance on direct taxes would lead to higher incomes…
I have mentioned before that fiscal drag [bracket creep] is expected to pull someone on average full time earnings into the third tax bracket, with a marginal rate of 37 per cent (or 39 per cent including the Medicare levy), from 2015-16.And over the decade ahead, the average tax rate paid by that individual is expected to rise from 23 per cent to 28 per cent, an increase of over 20 per cent. Moreover, the increase in the average tax rate for lower income earners is generally greater than for higher income earners. One consequence of this is to make the personal income tax system less progressive…
A higher tax burden reduces the immediate reward for effort. At low levels of income, it can be a barrier to participation.
At higher levels of income, a rising personal tax burden increases the benefits from tax planning and tax minimisation. This is magnified even further if combined with a falling corporate tax rate…
The proposal to raise the GST, and therefore shift the tax burden away from less efficient personal and company taxes, makes good sense provided it is part of a broader reform program, which is presumably the case here.
It would be fairly easy to design reforms that raise/broaden the GST without unfairly punishing the poor via a combination of income tax cuts, welfare increases, broad-based land taxes, and unwinding egregious tax concessions that overwhelming benefit the wealthy.
As noted many times before, it is essential that Australia’s tax base is shifted away from productive effort – namely personal income and company taxes – which are both highly inefficient, to more efficient sources like consumption, land and resources (see below chart from the Henry Tax Review).
It is also inequitable to expect workers – whose share of the population will fall as the population ages and the proportion of retirees rises – to keep shouldering more and more of the tax burden. Nor is it sustainable in the longer-term.
The White Paper’s proposal to “raise taxes on superannuation”, which presumably means unwinding concessions, also makes perfect sense.
As noted on Tuesday, the Mid-Year Economic and Fiscal Outlook (MYEFO) revealed that the cost of superannuation concessions are forecast to balloon over the Budget forward estimates, with the concessional taxation of superannuation entity earnings forecast by the Treasury to cost the Budget a whopping $26,950 million by 2017-18, and the concessional taxation of employer superannuation contributions forecast to cost the Budget $22,300 million by 2017-18 (see below charts).
To add insult to injury, these superannuation concessions are skewed towards high income earners (see next chart from the Murray Financial System Inquiry).
Due in part to the 15% flat tax on superannuation contributions, which provides higher income earners with the lion’s share of concessional benefits:
Superannuation concessions in their current form are both highly inequitable and inefficient, costing the Federal Budget many billions in foregone revenue whilst reducing the progressiveness of the tax system. Therefore, it is heartening to hear that the Tax White Paper intends to tackle the super rort, along with broadening of Australia’s tax system.
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