Budget tax cuts will worsen inequities

By Leith van Onselen

As reported in Fairfax today, Treasurer Scott Morrison has indicated that tomorrow’s Budget would adjust the $80,000 tax threshold upwards, in a bid to counter bracket creep, while also cutting company taxes:

Company tax will be cut in Tuesday’s budget to encourage new investment, Treasurer Scott Morrison says, but there’s no indication that people earning less than $80,000 can expect any tax relief.

…the budget will offer modest tax cuts for people earning over $80,000.

For those earning less, however, indications are that they will get no tax relief in the budget…

The cut to the company tax rate would be the first reduction in 15 years. The cut is expected to be small in year one and grow in following years.

The problem with the flagged personal tax cut is that most taxpayers earn significantly less than $80,001, meaning that it would represent another giveaway to higher income earners. As explained recently by Peter Martin:

Most earners get nothing like the average wage. Right now the average full-time wage is $78,000, but the typical full-time wage is nearer $65,000. The average is pushed up by a comparative handful of high-earning megastars. In the real world three quarters of us earn less than that “average”.

Most are at no risk of crossing into the second-highest tax bracket.

In fact, according to analysis of Treasury data by The Australia Institute, if the Coalition went ahead with its proposal, it would benefit the wealthy up to 10 times more than average wage earners, and women would benefit the least:

For someone for whom a recent inflation-adjusted pay rise has taken them to $82,000, the benefit of a new $100,001 threshold for the 37 cent rate is extremely small – less than the price of a cup of coffee per week at $1.70 or $90 annually. For someone earning above $100,001, the benefit will be tenfold at $17 a week or $900 a year…

Those earning above $100K would get an annual tax cut of 10 times the benefit of someone who, for example, had just tipped over into the second highest bracket with an income of, say, $82,000.

And because women take up more lower-paid jobs in the labour force, including more part-time positions, the benefit to them, in many cases, will be nothing at all.

The progressive think tank’s modelling shows the cost to the budget would be in the order of $1.7 billion annually, of which women will get about a quarter of the benefit, or 27 per cent – compared to men with 73 per cent.

So we have ourselves another Abbott-lite policy aimed squarely at upper income earners that would significantly erode equity at the same time as wrecking the Budget.

The Coalition’s plan to provide company tax relief is just as spurious as it would provide the lion’s share of benefits to international investors, whilst doing little for local business owners/investors. This is because the benefit of any company tax cut to domestic owners/investors would be offset by a reduction in imputation credits. By contrast, overseas investors who do not receive imputation credits would benefit fully from any company tax cut.

To quote former Prime Minister Paul Keating:

“Australia’s dividend imputation system works such that the company tax is, in effect, a withholding tax – a tax temporarily held by the Commonwealth which is returned to shareholders when their dividends are paid. So, whether the company tax is withheld by the Commonwealth at a rate of 30% or 25% is immaterial – the Commonwealth is going to return the money to shareholders anyway, regardless of the rate. But the shareholders who will receive a benefit are foreign shareholders”.

Hence, a company tax cut would primarily benefit foreigners, and by extension larger corporations at the expense of small businesses.This is because around 98% of small businesses (i.e. those employing four or less people) are wholly Australian owned and, presumably, indifferent to slashing the company tax rate. By contrast, 30% of large companies (i.e. those employing more than 200 people) are at least partly owned by foreigners, who would be the primary beneficiaries from the Coalition’s policy.

Janine Dixon from the Centre of Policy Studies at Victoria University also released modelling recently showing that cutting company taxes would actually reduce national income – the best measure of living standards:

ScreenHunter_12574 Apr. 13 07.44

The Australia Institute (TAI) also recently released analysis arguing that “international and Australian data on tax rates and macroeconomic indicators provides no support to corporate Australia’s ‘instinctive’ claims that lower company tax rates bring wider economic benefits”.

In particular, the TAI found that data from Australia and OECD countries shows that:

  • There is no correlation between corporate tax rates and economic growth in OECD countries.
  • Countries with lower company tax rates have lower standards of living, measured as purchasing power of GDP per capita.

In addition, Australia’s historical data shows:

  • Wages and mixed income has declined as a share of GDP as corporate taxes have been lowered.
  • Average unemployment rates have risen as company tax rates have lowered.
  • Growth in foreign investment as a share of GDP was strongest when Australia’s company taxes were highest.

Moreover, according to the TAI’s recent “Follow the Money” Podcast, the top 15 companies in Australia would receive one-third of the benefits of a company tax cut, with the CBA alone benefiting to the tune of $600 million per annum from a 5% cut to the company tax rate (from 30% to 25%).

Based on the above, it appears that the flagged tax cuts in tomorrow’s Budget are retrograde and would worsen inequities.

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Comments

  1. I overheard a couple of bogans the other day talking about how the voting decision was about choosing between the lesser of two knobs. They decided Shirten was the bigger knob.

    This is why Australia is screwed.

    Bogans vote against tgeir interests. The media keeps them dumb.

    • GeordieMEMBER

      At least they were talking about it and thinking about it. I’d rather that than “I vote Labour” or “I vote Liberal”. These mindless trogs should stay home, pay the fine, and contribute to the election by helping to fund it.

      • Personally I don’t vote for Labor or the Coaliton, but I don’t see why those that do are mindless? I could be wrong, but I’d imagine most rusted on Labor or Coalition voters vote the way they do because they know what their values are and which party best represents them. I don’t see a problem with that.

      • GeordieMEMBER

        @RobW – I don’t think I explained myself well.

        I refer to people who always vote for the same party because they always vote for that party. It doesn’t matter what party that may be. I’d rather people considered the policy choices on offer and made a decision as to what they thought was best for them or the country, rather than “tick and flick” voting.

    • the sad part is that it actually doesn’t matter who they vote for, Labor may make a policy that makes them temporarily better off via taxation, but I’m sure it will make them equally worse via some other policy that also benefits rich. Track record over the last few decades shows no difference whatsoever
      elections do not change anything because they are fake choices provided by the rich to create an illusion of democracy

      • While I broadly agree, I still think there are still subtle, but important differences between the two major parties. I think the Howard era led to Australia being a more selfiesh and dog eat dog nation than it might have otherwise been. I also think Howard and co also helped fuel greater inequity (through various tax concessions) than we would have seen under Labor. But yeah, it feels like you’re voting for different brands of the same neoliberal product.

    • “Bogans vote against tgeir interests. The media keeps them dumb.”

      Knowledge is power. The media can keep any person dumb on a topic where they don’t understand the alternative viewpoints.

  2. GeordieMEMBER

    The personal tax cut would benefit me directly yet I oppose it. These are not “changes to the taxation system”, they are tweaking numbers to win votes. Appalling.

    • StomperMEMBER

      Me too @Geordie – These policies favouring the rich and elderly are nothing short of intergenerational theft.
      Why there isn’t rioting in the streets is beyond me???

      • People don’t riot until they can’t afford food or shelter en masse. This is how it has always been.

    • Yep this change would benefit me, but it’s total bollocks. As I explained to my partner on an income of less than 80k, it won’t help you. Not happy Jan.

    • Anything that prevents money flowing directly to banks or landlords is “bracket creep”.

      • tonyddMEMBER

        Ohhh ! the banks, this is the real reason for the ‘tax reform’ a gift to banks, coz there gunna need it … !

        ”Moreover, according to the TAI’s recent “Follow the Money” Podcast, the top 15 companies in Australia would receive one-third of the benefits of a company tax cut, with the CBA alone benefiting to the tune of $600 million per annum from a 5% cut to the company tax rate (from 30% to 25%)”

  3. Isn’t it entirely obvious that the benefit from tax cuts generally go to the people who pay the most tax, i.e high income earners ?

    The commentariat feign shock and indignation whenever this obvious fact is pointed out to them.

    • rich pay no or very little tax anyway
      This will superficially benefit only upper middle class (but still middle class far far from the rich) that is just as slave as the poor

    • drsmithyMEMBER

      Isn’t it entirely obvious that the benefit from tax cuts generally go to the people who pay the most tax, i.e high income earners ?

      Raising the tax-free threshold would benefit low income earners far more than high income earners.

  4. The article, and most comments here, miss the point. The point is that 300,000+ full-time workers will move into the $80k+ / 37% tax bracket in the next 2 years, and even more after that if no changes were made. This is in addition to however many millions are already in it. This presents a large economic “drag” as those people reconsider anything that might otherwise have increased their income further. The negative impacts of “bracket creep” affecting large numbers of salary/wage earners are well understood. This is doubly the case when the numerous other tax rebates / benefits that may apply at this income level etc come into the equation as well.

    It’s not about what’s “average” – it’s about what is reasonable and effective in terms of taxation for a large portion of the full-time work-force, if you want an efficient taxation system that does not stifle incentive and economic growth.

    • Ronin8317MEMBER

      It is more likely wage growth in the next 2 year will be negative, so the Treasury pissed away money for no growth.

    • drsmithyMEMBER

      This presents a large economic “drag” as those people reconsider anything that might otherwise have increased their income further. The negative impacts of “bracket creep” affecting large numbers of salary/wage earners are well understood.

      Tell us about all the pay rises, promotions and new jobs you have turned down because the increased income would have put you into a higher tax bracket.

      There are several ways to trivially solve bracket creep forever. As none of them are ever pursued, it’s fairly obvious that either there isn’t really any significant issue with bracket creep, or that it’s an economic problem of political convenience only.

      • I quit a $200k++ management job a few years ago and went back to the individual / professional work I used to do for quite a bit less. The main reason was I didn’t really enjoy the higher paying job as much as I used to enjoy my previous type of work, and given that the extra $$ were actually not that much due to the near 50% tax rate above $180k, it just wasn’t worth it to me in the end.

        Obviously this is just an anecdote, and the economic thresholds / points-of-pain etc of these types of decisions vary from individual to individual, but they do exist. In my case if the tax had been lower that might have swayed me to stick at the higher paying gig. At the end of the day my personal choice of course, but if this sort of thing happens systemically it does effect the economy, and may even reduce taxation revenue for the government over-all.

      • drsmithyMEMBER

        The difference between earning $220k with a 45% MTR and $220k with a 37% MTR is about $100/wk.

        I can only speak with surety about myself, but I doubt that amount weighs heavily in the minds of people otherwise putting $2,500-$3,000 into their pocket every week when making career decisions.

        […] but if this sort of thing happens systemically it does effect the economy, and may even reduce taxation revenue for the government over-all.

        Only if there is work left undone. Did someone else step in to fill the vacancy you left ?

      • tonyddMEMBER

        Gonderb, but someone is doing that 200K job so in aggregate it makes no difference if you were to remain due to the lower tax rate. Zero sum !

  5. The Corporate Tax cut would be election losing if too dramatic. Keating’s words above should be imprinted on the walls of the Treasury offices in permanent ink.

    On the income tax cuts though, I reckon this will be a wedge tactic for the election. The Greens have already said that they will not agree to a tax cut so if the ALP (and Lazarus, Lambie and another) oppose it the govt will be able to go to an election saying the ALP want you to pay more tax.

    • The comment re foreign shareholder receiving franking credits, including the statement attributed to PK, are I think incorrect!!!

      Exhibit A: from the ATO website: “Franked dividends: If you are a non-resident of Australia, the franked amount of dividends you are paid or credited are exempt from Australian income and withholding taxes. The unfranked amount will be subject to withholding tax. However, you are not entitled to any franking tax offset for franked dividends. You cannot use any franking credit attached to franked dividends to reduce the amount of tax payable on other Australian income and you cannot get a refund of the franking credit. You should not include the amount of any franked dividend or any franking credit on your Australian tax return.”

      https://www.ato.gov.au/forms/you-and-your-shares-2013-14/?page=14

      • No it is correct. Currently non-residents only get an dividend withholding tax benefit from franked dividends but this only saves them 15% (for most non-residents) which is rather less than the 30% company tax paid. So if an Australian subsidiary makes 100 profit and pays 30 tax, it can pay a 70 fully franked dividend to it’s non-resident shareholder who ends up with 70.

        If instead the tax rate is 20%, the subsidiary can pay an 80 fully franked dividend so the non-resident is 10 better off at the expense of Australian taxpayers.

        In reality it’s all a bit more complicated than that (with things like debt loading and transfer pricing) but that’s the basic theory.

        The stupidity of cutting corporate rates in an attempt to attract foreign investors is that all the existing investors, who presumably are comfortable with the 30% tax rate, get a windfall bonus at the expense of Australian taxpayers. It is as stupid as Costello paying a baby bonus to everyone who was going to have a baby anyway in some vague attempt to convince a few more people to have babies.

        If there is a need for further foreign investment (and query this given that the government has been spruiking its FTAs which allows Australians to invest more easily overseas) then that should be done by targeted incentives in the industries where we can best use them.

  6. I’m surprised by this policy because with NG left this tax cut will not benefit almost any negative gearer since they already reduce taxable income to well below 80k

    • Strange Economics

      Not going to help the 1 year old negative gearers much. Thank god they are not touching the CGT discount. Then again gotta hope labour doesn’t get in before he turns 21…

  7. Perhaps, after being exposed in the Panama papers, some off-shore registered companies need tax cuts to pay for their next level of secrecy 🙂

  8. I don’t think you understand. This will actually help women because their husbands will be earning more.

  9. If we have a revenue problem, how is this proposed tax-cut going to assist us going forward?

    • When you’re a ‘starve the beast’ deficit junkie, every tax cut for the wealthy is a good tax cut. Simples!

  10. I’m confused as to why you’d only adjust the 80k threshold, presumably there’s plenty of people creeping over the lower brackets as well?

    • Tassie TomMEMBER

      Great point.

      You don’t have to cross into a new tax bracket to experience bracket creep – the deeper you get into the 32.5% bracket between $37,000 and $80,000 the higher your total tax burden will be. A very simplistic example (excluding Medicare, welfare etc), one earning $50,000pa pays $7797 tax = 15.6%, whereas one earning $60,000 pays $11,047 tax = 18.4%.

      We’ve got a little bit of deflation right now, but inflation can achieve this over time.

    • drsmithyMEMBER

      Adjusting the lower tax brackets “costs” more and, more importantly, helps the poors rather than those of a certain calibre.

  11. I can imagine the letters flowing in already to Paul Clitheroe..

    “Dear Paul,

    I am 56 years old and earn $300K p.a. but my taxable income is about $200K due to several NG investment properties…blah blah blah

    how will these tax changes affect me and my wealth? how can I best position myself to still be eligible for the aged pension?

    any other tips on how I squeeze as much out of the system as I sit pretty in the family house that’s worth $4Million ?

    yours truly,
    Bob the boomer

    • Nah mate, under achiever, surely the purpose of NG is to get that taxable income down under 80k.

  12. It doesn’t matter who leads the Liberals.
    Overall the leader can’t /won’t buck the very large minority/small majority of the Liberals who represent the very high earners, the very wealthy and large companies.
    The measures to benefit these with very large amounts of money will be dressed up as benefits to the middle class, but a very large amount of the nominal dollar benefit will go to the core constituency.
    The current proposals regarding tax cuts are more of the same.
    Turnbull has been captured and the Abbott lite description is close enough.
    He had the political capital to take the Liberals back to the real centre but has squandered it.
    Put the Liberals last.

  13. This is WRONG

    “The problem with the flagged personal tax cut is that most taxpayers earn significantly less than $80,001”

    Im certain that most small businesses run their business with nominal profit, if not at a loss. Not to mention the “cash” component of their earnings. If TRUE earnings were reported and there was NO cash economy, I would bet both my balls that the average wage would be closer to $100k.

    I know first hand. After doing a renovation on my house recently, pretty much every tradie asked for cash. This is even for components of work in excess of $30k.

    The moral to the story is that I dont believe “official” data suggesting that most taxpayers earn significantly less than $80k. That would be correct for PAYG employees because there is no hiding. But for SME and self-employeed people, the number is much higher!!!!!!!!!!!!!!

  14. Great article. Thank you MB. This is what Australia needs to see. No shadow of it in the MSM today. The lower end (and majority) gets punked again by its elected reps. Oh… better not comment as it is the politics of envy. What a grand swindle this is! And it just goes on and on and on!