Dumbfax’s Ross Gittins has penned an extraordinarily cynical piece today deriding Prime Minister, Malcolm Turnbull’s, attempts to engage in meaningful tax reform:
Trouble is, by the time [Malcolm Turnbull’s] knocked tax reform into political shape, it will have fallen well short of its proponents’ grand vision, won’t deliver the promised economic benefits and won’t make much difference to anything, apart from making the tax system less fair…
Right now, Turnbull is grappling with the desired shape of the GST increase. My guess is he’ll definitely want to increase the rate of the tax… he’ll go all the way to 15 per cent…
Of course, the GST increase will just be part of a much bigger package of tax reforms. Since the object of the exercise will be to change the “mix” of taxation – increasing indirect taxes on consumer spending while reducing direct taxes on income – it will include big tax cuts.
… he’ll probably include a crackdown on superannuation concessions and discounted capital gains tax favouring the well-off.
He’d also want to throw in abolition of some inefficient state taxes, such as the stamp duty on insurance policies.
He’s making it very clear that low- and middle-income families would be protected from the effect of the higher GST by adequate compensation, in the form of special increases in pensions, dole payments and family benefits. People on low wages would be compensated by tax cuts…
But just because Turnbull has the smarts, political credit and credibility to raise the GST and hope to keep his job, this doesn’t give him a magic wand to wave away the iron laws of arithmetic…
The sad truth is that the untiring advocates of a higher GST have plans to spend the proceeds many times over….
But not to worry. St Malcolm has promised to square the circle.
Is Gittins seriously proposing that doing nothing to the tax system is a better option than the reforms outlined above? Because if he is, he has erred in a serious way.
Blind Freddy can see that Australia’s current tax base is far too narrow and overly reliant on less efficient personal taxes, with the share of total revenue from personal taxes also forecast to rise significantly over the coming decade, according to Australian Treasury, to 56% of total Australian Government tax revenue by 2024-25:
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.
Viewed in this light, replacing revenues from personal income taxes with an increased/broadened GST (along with compensation to the poor) and a crackdown on tax concessions has great merit. The alternative is a rapidly growing tax burden on lower and middle income workers, who will be unfairly called upon to fund the expenditure needs of Australia’s growing army of retirees.
Moreover, does Gittins honestly believe that maintaining the status quo on superannuation concessions, capital gains taxes, and stamp duty would be better than reform along the lines outlined by him above?
Rather than a defeatist attitude, Ross, how about some advocacy of broad-based tax reform that improves both efficiency and equity?
