Academics have questioned the Turnbull Government’s tax cuts for higher income earners, arguing that they are poorly directed if the Coalition’s goal is to support jobs and growth. From ABC Radio:
STEPHEN LONG: How much can you tax those at the top? Two years ago, the Government imposed an additional 2 per cent tax on the highest earners, labelling it a ‘temporary budget repair levy.’
Now Labor wants to make it permanent, but the Prime Minister is warning that it could hit, you guessed it, jobs and growth.
MALCOLM TURNBULL: You’ve got to be very careful that in your efforts to go after people earning over $180,000, you’ve got to be very careful that you don’t end up shrinking the whole pie.
MARIA RACIONERO: No, there is no evidence for that.
STEPHEN LONG: Maria Racionero is an Associate Professor in the Research School of Economics at ANU.
MARIA RACIONERO: Most of the evidence suggests that this process of top income earners to changes in the tax rate, in terms of their hours worked, is very small or minimal.
STEPHEN LONG: So to put it in plain English, you’re not likely to get people on higher incomes working more because you cut their tax.
MARIA RACIONERO: Yes, in fact most of the evidence that has been found in the literature suggests that indeed we could marginal tax rates at the top higher than they currently are.
STEPHEN LONG: The same principal applies to the tax cut announced in the May budget and backed by Labor, lifting the threshold at which the second highest rate cut in, to $87,000.
MARIA RACIONERO: These tax cuts are being portrayed as a relief to middle-income people but they are going to mostly benefit those at the top.
STEPHEN LONG: So this only applies to 30 per cent of taxpayers?
MARIA RACIONERO: The 30 per cent of taxpayers, if you take indeed everyone, in fact it’s less than that.
STEPHEN LONG: What proportion goes to the very top, say the top 10 per cent?
MARIA RACIONERO: Well, if you take into consideration that those who are going to benefit from the full tax bracket, from $80,000 to $87,000 are those who are at the top, plus also the other proposal of stopping the 2 per cent budget repair levy, about 75 per cent is going to go to the top 10 per cent.
STEPHEN LONG: Although high income earners don’t tend to work less when tax rates rise, the research shows they do increase their tax avoidance efforts.
MARIA RACIONERO: If tax avoidance is the reason why individuals at the top seem to have incomes that react more significantly to tax rates, it should not be dealt with through the tax scale, it should be dealt with directly.
STEPHEN LONG: By closing the loopholes that allow them to avoid tax?
MARIA RACIONERO: Yes.
STEPHEN LONG: What kind of tax cuts would give the most bang for the buck in terms of jobs and growth?
MARIA RACIONERO: If we really care about jobs and growth and we really care about encouraging participation, it is not at the top that we have to focus, it is at the lower and middle income range and particularly on second income earners.
STEPHEN LONG: Those second earners, mainly women, have a major disincentive to work under the current arrangements because many lose family tax benefits if they work more hours, and are actually worse off.
PATRICIA APPS: If you take a family in which the primary earner earns say $60,000 and the second earner goes out to work and earns the same amount, she loses half her income in tax, effectively, because of her loss of family benefits.
STEPHEN LONG: Patricia Apps is a Professor of public economics at Sydney University, and an internationally renowned expert in this field.
PATRICIA APPS: If you look at the effective marginal rate and in turn the average rate on the second earner, it’s extremely high.
Many second earners are facing effective marginal tax rates in excess of 60 per cent. In other words, well in excess of the top marginal tax rate under the personal income tax scale.
So the overall structure of rates for second earners is a disaster. This is where we should really be focusing in terms of economic growth.
The Turnbull Government’s thinking around tax cuts goes something like this:
- People will have more take home pay each week;
- So they’ll have more to spend on goods and services;
- Which boosts economic activity; and
- Creates more jobs.
In other words, classic “trickle-down” economics.
But there are problems with this logic.
First, the government will have to make-up the lost revenue in other ways, such as cutting expenditure on public services or raising taxes elsewhere. Hence, it will give with one hand and take with the other, thus mitigating the positive impacts on growth.
Worse, higher income people have a higher ‘marginal propensity to save’ (MPS). That is, they are more likely to save some of that tax cut than poorer people. Hence, it could actually lower growth compared to the government spending the money on services or infrastructure, or giving a tax cut to those on lower incomes, who have a lower MPS.
Second, just because you have lowered tax rates at the upper end, it doesn’t mean they will work more. They are just as likely to choose to work less, play golf, and receive the same take-home pay. So the impacts on labour participation is uncertain.
The academics are correct. If the goal is to boost aggregate demand, growth and jobs, then it would be better to fix-up incentives at the lower end of the tax scale to encourage would-be second income earners to move into the workforce, thus boosting labour participation.
The problem with all of this is that providing tax cuts further down the income tax scale is expensive because there are so many taxpayers, whereas it is relatively cheap to give cuts to higher income earners, where there are much fewer taxpayers.
Regardless, the Coalition’s tax cuts are ill-directed if the goal is to support jobs and growth.
