Ordinary workers to shoulder the tax load

By Leith van Onselen

The Australian Treasury’s tax discussion paper, released in March 2015, forecast that Australia’s reliance on inefficient personal income taxes would rise inexorably over the next decade (to 56% of taxes by 2024-25), making reform an imperative as the population ages and the share of workers across the economy declines:

ScreenHunter_6771 Mar. 30 10.16
Between 2014-15 and 2024-25, the percentage of taxpayers in the top two tax brackets (that is, with taxable income in excess of $80,000) is estimated to increase from around 27 per cent to 43 per cent under current policy settings. It is estimated that over 2 million more taxpayers will be in the third income tax bracket (taxable income from $80,000 to $180,000) in 2024-25, compared to 2014-15. There is also estimated to be around 750,000 more taxpayers in the fourth tax bracket (taxable income above $180,000) in 2024-25 compared to 2014-15 (Chart 2.7).
ScreenHunter_6772 Mar. 30 10.18

Treasury also noted that this bracket creep is highly regressive and 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

Yesterday, Wayne Wanders from The Wealth Navigator sent me through a Media Release showing that ordinary income earners have incurred (and are facing) the biggest increase in tax owing to bracket creep:

Mr Wanders said that bracket creep has meant that Australian taxpayers have paid billions of dollars in more tax than they realise.

For example, using data recently released by the Australian Taxation Office, Mr Wanders estimates that because of bracket creep, in 2014 – 2015 Australian taxpayers paid:

An extra $16.2 billion dollars in tax than they paid in the 2008 – 2009 year.

An extra $8.9 billion dollars in tax than they paid in the 2012 – 2013 year.

“This is substantially more than the $8.0 billion dollars in extra tax revenue that the increase in the Medicare levy is budgeted to raise in its first two full years” said Mr Wanders.

“And what’s worse is that whist the largest share in dollar terms of the extra $8.0 billion in revenue from the Medicare levy increase will come from high income earners, the bulk of the extra revenue from bracket creep in dollar terms comes from low and middle income earners.”

As I have argued frequently, the most obvious path to fiscal repair is to first fundamentally reform Australia’s world-beating tax concessions (e.g. superannuation, negative gearing, the capital gains tax discount, and fringe benefits), which cost the Budget many billions of dollars in foregone revenue and are skewed towards the wealthy and higher income earners. Fundamental reform in these areas would dramatically improve the progressiveness of the tax system and would counter concerns that budgetary reform is unfair and is placing the burden of adjustment unfairly on lower income households.

Second, Australia must look to broaden the tax base so that it is built around more efficient and equitable sources. This requires a shift in sources from productive effort (e.g taxes on labour) towards taxes on land, resources, and consumption, along with adequate compensation for the poor (in the case of raising/broadening the GST). Under this approach, the overall tax take could be raised at less economic cost than via bracket creep. The tax burden would also be shared more evenly across the population, rather than relying on a diminishing pool of workers to shoulder the load.

Unfortunately, neither the Coalition nor Labor have offered comprehensive plans for tax reform, and have instead offered piecemeal measures –  the Coalition by cutting company taxes and Labor on unwinding negative gearing and the CGT discount.

The end result is that instead of trying to broaden the tax base, both sides are doing the opposite by relying on never-ending increases in personal income tax via bracket creep, while the base of workers shrinks as the population ages and the proportion of retirees rises.

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Comments

  1. We always hear that Australia is one of the few countries in the world that allows things like negative gearing and that that’s one of the reasons why it is a bad thing.

    What you never hear, esp from the ALP and Greens, is that we have pretty much the lowest and narrowest GST in the world.

    • Exactly. And try saying it’s our most efficient form of taxation even with the various exclusions. They don’t care at all. Economists should really highlight the benefits of efficient taxation. GST’s regressive nature can easily be fixed with income tax.

      Besides Corporate, Income and GST there shouldn’t be any other taxes, they make up >90% of govt income, everything else is just window dressing.

      This isn’t solely a left thing, the conservative base hate it also, absurd income tax rates they can wait out, GST is forever.

  2. How would you compensate poor voters? Via a $5000 cheque annually?

    Income tax cuts are pathetic because not everyone has a job – only 8.2 million have a full time job in AUS and probably 1 million of them are “skilled” foreigners.

    I wonder if the ALP is against the idea of giving out $5000 cheques annually (or $1250 quarterly). I never felt like I got an income tax cut because I did not have a job when the carbon tax was put in!

    (No, I did not vote for Abbott)

    • Income tax rates have the same net impact as company tax cuts. The trickle down economics only happens from the employee to the company this time 😛

  3. fitzroyMEMBER

    Great article UE. The taxes on capital are pitiful, including taxes on land. Taxes on labour, including the GST are crushing. Why we punish work and not newly printed cash is beyond me.

    • footsoreMEMBER

      I’ve read a few times that land should not be tied in with capital, and that having the two combined is a flaw in neoclassical economics. Unfortunately I can’t find a clear description of this and my team ride is about to end. Can anyone add to this? It’d be much appreciated.

      • fitzroyMEMBER

        Can’t help you there footy, I’m not even an economist and I’m in the trenches at the moment hence the early start. Cheers.

      • From Adam Smith, economists have considered there are three factors of production: labour, capital and land & natural resources.

        The distinction lost is between capital, which is savings, and land & natural resources, which deliver economic rents. Neo-liberal economists (can someone please come up with a better phrase?) merge these distinct elements as derived from their studied agnosticism over investment.

        Yes, capital can be placed to rent-seeking in land & natural resources, instead of investing in enterprise which grows the economy. In fact, government has an obligation to foster enterprise capital formation and discourage empty rent-seeking wherever it is found.

        Better to specifically tax the natural endowment and remove bad taxes. Ken Henry found 120 taxes with no place in a modern tax system. Choose freely from his list.

    • “We need to encourage investment” would be ScoMo’s answer – ignoring that the world is awash with investment capital desperately seeking opportunities to earn passive income.

      Long term the reverse has to happen. We have to encourage people to work longer and to have less reliance on passive sources of income in their old age.

      • In England in the 1880s, 73% of the men over 65 were still working (Varda Muhlbauer et al., Women and Aging). The baby boomers have enjoyed far better diet, better health care, and better living and working conditions than their 19th century ancestors, so we ought to be able to have even more in the work force. The average job is also a lot less physically demanding. The real issue now is that there aren’t enough jobs. I recall reading that the UK introduced their aged pension to reduce unemployment among younger people.

    • HadronCollision

      You can’t tax FR cash/leverage as it would disadvantage the insiders and rent seekers most closest to the point of creation (and who it benefits most)

  4. It’s pretty simple really: We need to forget the concept that Income Taxes are the moral and socially just way to Tax people, because they’re not!
    Return Tax to its traditional base namely Land and assets.
    We need to Tax the F#ck out of wealth and capital gains while leaving incomes alone.
    Imagine an Australia where the Landbankers paid the most tax, imagine how this one tax would forever change the landscape for affordable housing. If Tax is a moral imperative than taxing the gains generated through Land use changes is the obvious place to find the money we need to run our governments.

  5. armchair economist

    Workers are serfs. Was always thus and will always be thus! Accept your place in society and be thankful for what you are allowed to have.

      • scootytootyMEMBER

        From the masters point of view, they pay the worker, the worker pays their tax, therefore the master is paying his fair share of tax through the workers.

  6. I knew I should have gone and got a trade at TAFE…. its obviously the best tried and tested method of minimising income tax in this country.

    • This. The trades is god’s career in this country. They bloody know it too. I’ve seen people say “is that enough” after being charged 400 dollars for an hour or two’s work. Jesus. What is wrong with them.

    • footsoreMEMBER

      My workmate let slip that he paid $24,000 cash for his renovations recently. No GST and who knows what other dodges that tradie uses. As Leith points out above, there are many areas where the government can get revenue that they won’t move on. Until there is a system wide reform plebs, like myself, will keep seeing our wealth taxed (I consider income tax to be just as much a wealth tax and any other) while others just keep accumulating.

  7. I am no expert on the matter but one thing that seems to be seldom talked about is how family trusts are used, particularly by the wealthy to avoid/dodge paying tax.
    Surely we are long overdue for a review of family trusts and how they are used?

  8. Don’t know if I forgot to hit submit or my comment got lost in space or binned but the income growth assumptions in this Treasury analysis are flawed.
    They assume a 3-3.5% compound annual wage growth over 10 years to 2023.
    Wage growth is at record lows.
    The analysis provided by treasury is only as good as the accuracy of he underpinning assumptions.
    In this case, pretty ordinary.

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