Tax cuts should signal the beginning, not the end, of tax reform
There seems to be a worrying political complacency about tax reform at the moment.
While there might be some political differences around the composition of the tax cuts that were delivered at the start of the month, there seems to be uniformity in the fact that the task is now done.
Certainly, there have been no plans announced for any further changes, with tax reform seemingly put in the “done and dusted’’ file.
However, tax cuts are not the same as tax reform and even just weeks after these cuts have been introduced, the value of them is already gradually starting to wane.
Burden on personal income tax getting too big
The Treasury Intergenerational report from last year pointed out that personal income taxes will hit 60% of the overall federal tax base unless there are further policy changes and these tax cuts will only have a minor impact on that trajectory.
Indeed, the Parliamentary Budget Office’s computer modelling shows that the average taxpayer will lose $2000 to bracket creep by 2028 unless there is another round of tax cuts.
That happens because even though the rates of tax and where they cut in might change, the process of creeping up through those fixed dollar amount brackets keeps happening as inflation and wage rises push earners up the tax scales.
Bracket creep hits all workers
Bracket creep is also a problem for workers right across the income spectrum.
Even though it might be top income earners who literally pay the highest price in terms of dollars lost through bracket creep, it is low-income workers who get hit with a larger proportional impact on their incomes.
All told that will add up to an extra $29 billion paid over the next four years and $350 billion over the next decade unless there is more tax reform – either through finally indexing the tax scales for inflation or wages or through further pay backs of bracket creep in the form of further tax cuts.
Bracket creep is a potent force for extra tax collections over time and is particularly effective at times of wages growth and strong employment.
No doubt the political imperative is to simply pocket these extra provisions from bracket creep to be distributed back in the form of “generous” tax cuts down the track but even that has proved elusive over time.
Taxes hovering close to a record
In the past year alone, households paid a near record of 16.4% of their gross income to income tax and while there should be a downward blip in that figure from the national accounts, the effectiveness of the latest tax cuts will weaken over time.
Even the increased threshold for the top marginal tax rate from $180,000 to $190,000 doesn’t fully compensate for 15 years of bracket creep and that pattern is likely to continue unless there is a round of real tax reform rather than the odd electoral tax cut bauble that is offered up occasionally.
It may seem churlish to complain about the tax system just after a round of tax cuts but there are real consequences for a lack of real tax reform.
They are actually demonstrated by the fact that during the 16 long years that the $180,000 threshold for the 45% tax rate remained the same, the number of people earning more than $180,000 has trebled.
Before the tax cut they paid 40% of the country’s personal income tax, almost double the share of 2008.
It is not just high-income earners who suffer – the average tax rate was at a 25-year high before the tax cuts.
This same process will happen again without further tax cuts or, better still, tax reform.
Lack of reform hits younger generations
For example, is it really appropriate to land the younger generations with an ever-increasing percentage of the tax burden over time, simply because we can’t be bothered changing the tax mix?
After all, it is not as if there aren’t plenty of opportunities for reform.
One small one, which could make a big difference, would be to reform the current burdensome and messy range of relatively minor tax deductions which make out tax return system so complex that it takes an army of accountants to simply prepare and submit our annual returns?
Many people would be more than happy to lose some of those minor deductions or have them built into their returns if it meant that the vast majority of straight forward tax returns could be submitted efficiently by taxpayers themselves using the tax office’s excellent data collection resources.
Taxes on wealth rather than income
Changing the mix just a little towards collecting taxes on wealth rather than income would also be a positive step – perhaps starting by getting rid of the halving of capital gains tax when an asset has been held for more than a year.
Also, there are multiple examples of how the States could be involved and persuaded to get rid of some of their most egregious, narrow, costly and inefficient taxes, perhaps in tandem with a modest increase in the existing rate of GST.
The possibilities are literally endless and if the focus is on efficient, broad based and fair tax collection then they can also be electorally popular as well.
Putting the focus now on another, more comprehensive suite of tax reform is a great idea and is an infinitely superior option to sticking with the current tax scales that condemn all Australians to an endless cycle of paying more tax over time in the faint hope that the scales will be changed at some time in the future.
It is also a ticket to courageous posterity for governments – many more people remember the tax reforming governments of Hawke/Keating and Howard/Costello than those that followed or preceded them.