Joe Hockey’s speech yesterday to the Tax Institute and Chartered Accountants Australia and New Zealand entitled “The economic case for personal income tax cuts” has been pilloried today by various commentators and experts.
Business Spectator’s Alan Kohler has labelled the speech “truly awful”, highlighting “a mess of muddled thoughts and contradictions” from the Treasurer.
Kohler, in particular, has taken aim at the Treasurer’s confused claim that bracket creep is a disincentive for hard work:
“Why should the reward for hard work and endeavour be swallowed up by higher taxes?”, [Hockey] asked, looking searchingly around the room.
The issue is precisely the opposite. Bracket creep excessively penalises lower income earners for the effects of inflation. It means that a pre-tax wage rise equal to the inflation rate can result in workers going into a higher tax bracket and thus going severely backwards in real terms.
If an individual moves into a higher tax bracket because they get a promotion or because they work longer hours or work harder, that is NOT bracket creep.
Kohler’s colleague, Callam Pickering, meanwhile has called on Hockey to “stop pretending” that he can simultaneously deliver tax cuts and balance the Budget:
Hockey’s rhetoric on bracket creep is somewhat absurd given the extent to which his current budget relies on bracket creep to get the budget close to surplus. Treasury secretary John Fraser estimates that bracket creep will improve the budget bottom line by around $25 billion over the next four years.
To put this into perspective, the federal budget estimated that the deficit would improve from $41bn in 2014-15 to $6.9 billion in 2018-19. In other words, around 30 per cent of the budget repair through to 2018-19 is due to bracket creep.
If the federal government wants to remove the effects of bracket creep and leave the overall budget unaffected then they need to find an additional $25bn in savings or revenue…
Unfortunately for the Coalition, spending cuts aren’t viable due to a hostile Senate, which is likely to become more partisan and fractured after the next election. Regardless, a deeply unpopular government is never going to win re-election on a platform of cuts to education and health care.
Fairfax’s Peter Martin has raised similar concerns:
…bracket creep isn’t covering rising government spending. [Hockey’s] own May budget booked $25 billion of bracket creep over the next four years, all of it to be directed to bringing down the deficit.
By saying he can do both, when the deficit isn’t projected to return to balance until 2020, he is saying he no longer regards the “budget emergency” as urgent.
Meanwhile, Certified Practicing Accountants (CPA) has slammed Hockey’s speech, accusing him of repeating rhetoric instead of fixing Australia’s “broken down tax system”:
“The Treasurer appears to be caught in a cycle of restating the problems rather than rethinking the solutions,” Mr [Alex] Malley said.
“The issue of income tax, GST, super [annuation], company tax, land tax is yet to be discussed … it really is being deferred and deferred and deferred.
“To actually start forcing a conversation around just personal income tax says to me that we’re in a downhill slide to an election and that’s not good for Australia, we need to make some tough decisions.
“To defer and distract again in relation to tax and tell us what we already knew at a five-star hotel in Sydney is not my idea of leadership.”
My views on Hockey’s speech were articulated in detail yesterday.
In short, Hockey should seek to lower the income tax burden by broadening the tax base and unwinding spurious concessions, rather than seeking to fund income tax cuts via slashing government expenditure.
Tax revenue is required to fund important public services that the community both expects and needs. And the size of tax revenue is a distant, secondary issue, to that of ensuring that important social programs are retained, well-targeted infrastructure is provided, and the tax base is broadened and based on the most efficient and equitable sources possible.
What Hockey is proposing: income tax cuts funded through lower expenditure is not a recipe for genuine tax reform, but rather a recipe for greater inequality. It is also unrealistic, given the pressures on the Budget from an ageing population.