Joe Hockey to cut income taxes?

By Leith van Onselen

The Australian has published an article today claiming that Treasurer Joe Hockey will take cuts to personal income taxes to the next election:

Australia’s top tax rate is “way too high’’ and the taxation system is compounding the headache of bracket creep as a disincentive to earn, Joe Hockey has conceded as he gave his strongest indication yet he is “aiming’’ to take tax cuts to the election.

Ahead of a special federal and state leaders’ summit this week in Sydney on taxation and the federation, the Treasurer said tax reform was “absolutely essential’’…

“The fact is … the Australian ­average worker on average ­weekly income will go into the second-highest tax bracket … in the not too distant future,” Mr Hockey told the Ten Network’s The Bolt Report. “That becomes a disincentive for people to earn more money. That’s unacceptable in the modern economy”…

Asked if there was any hope the government would cut marginal tax rates before the election, Mr Hockey said: “Well, not before the next election, but certainly we’ll be taking a proposal to the Australian people at the next election.’’

Meanwhile, as reported in Fairfax, the Chartered Accountants Australia New Zealand is to release modelling today in support of tax reform. Specifically, the accountancy body is calling to increase the GST to 15% and eliminate exemptions, which it argues could raise $256 billion for the Budget over four years. Households could then receive $171 billion in permanent tax cuts, pension and welfare boosts to fully compensate low income households for the impact of higher prices, with $94 billion then left over to abolish inefficient state taxes and fix state and federal budgets.

As I have argued for several years now, tax reform to broaden the tax base and shift the burden of taxation from inefficient personal and company taxes towards more efficient sources is absolutely essential.

Without reform, the reliance on inefficient personal income taxes to fund the Budget is projected to rise inexorably to a record 56% of total Australian Government tax revenue by 2024-25 (see below charts).

ScreenHunter_6771 Mar. 30 10.16

The main driver of this rise in taxes is bracket creep (aka “fiscal drag”), which occurs when inflation pulls workers into higher marginal tax brackets, increasing their average tax burden.

As argued by the Australian Treasury, the impact of bracket creep will be most severe on low-to-middle income earners, thus it is highly regressive in addition to being inefficient:

…average ordinary full-time earnings were around $75,000 in 2013-14, and are expected to be around $104,000 in 2023-24 (see Chart 2.8). Someone on average full-time earnings therefore had an average tax rate of 22.7 per cent in 2013-14, increasing to 27.4 per cent by 2023-24. By contrast, someone with only half that income earned $37,500 in 2013-14, increasing to $52,000 in 2023-24. However, their average tax rate will increase from 10.3 per cent to 17.8 per cent. Someone earning twice the average full-time wage is on $150,000, increasing to $208,000 in 2023-24, but their average tax rate will only increase from 30.5 per cent to 34.3 per cent.

For some people, particularly those on relatively low incomes, bracket creep can reduce incentives to work. At higher incomes, bracket creep increases the incentives for tax planning and structuring, and even overseas relocation. Bracket creep is therefore not just an issue because of its effect on progressivity, but because over time it exacerbates the other problems in the individuals income tax system.

ScreenHunter_6773 Mar. 30 10.21

Certainly, replacing revenues from personal income taxes with an increased/broadened GST, along with compensation to the poor, has merit. That said, there are other revenue bases that are far more efficient and equitable than the GST – namely taxes on land and resources – which should also be included in the tax reform mix.

ScreenHunter_97 Sep. 26 08.53

Moreover, any reform of the tax system should also include the tightening of Australia’s world-beating tax expenditures – including superannuation concessions, negative gearing, and the capital gains tax discount – which cost the Budget many billions of dollars in foregone revenue, favour the wealthy, and reduce the progressiveness of the tax system.

Unfortunately, the Abbott Government has already ruled-out reform these concessions both now and into the future, which means that any tax reform proposal is likely to be half-baked and merely tinkering around the edges.

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Unconventional Economist

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