Tax ‘Cuts’ Are Rises To Pay For Spending

Written by:
18 May 2018
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The budget is littered with titbits mostly designed to garner political support. There’s the targeted, low and middle-income tax offsets which will provide relatively small tax cuts for those earning up to $125,000 per year.

There’s the proposal to raise the top threshold of the 32.5 per cent tax bracket from $87,000 to $90,000, which will stave off bracket creep for one or two years.

And then there is the proposal to raise the top threshold of the 19 per cent bracket from $37,000 to $41,000 from July 2022. This, again, will prevent a small number of low-income households from entering a higher tax bracket, for about a year or two.

These changes will benefit a healthy number of Australian workers. But they are marginal, won’t last long, and do absolutely nothing to address the deeper, structural issues in Australia’s tax system.

This is where the heftier proposed changes come in. There are two measures in the budget which stand to make a more substantial difference to people’s lives.

The first is the proposal to increase the top threshold of the 32.5 per cent bracket from $87,000 to $120,000 commencing in 2022. This would come close to removing bracket creep for many middle-income earners, providing them with years of tax relief compared with the status quo.

The second hefty change is to eliminate the 37 per cent tax bracket from 2024-25. This would constitute the most substantial change to the income tax system for years. And it would mean that by 2024-25, around 94 per cent of taxpayers would face a top marginal tax rate of 32.5 per cent or less compared with 63 per cent if the system was unchanged.

Yet it is precisely these more substantial changes that are being so roundly criticised. In his budget reply speech, Opposition Leader Bill Shorten claimed the tax cuts were handouts to the wealthy. This is misleading.

While it is true that those who earn a higher income will receive a greater benefit in absolute terms, this is because they pay far more tax than lower-income earners to begin with. In fact, the top 10 per cent of income earners pay 45 per cent of total income tax. And analysis by KPMG found a staggering 60 per cent of Australian households pay zero or negative net income tax.

Despite its benefits, though, the government’s budget leaves a lot to be desired.

For one thing, it continues with the debt-fuelled spending binge instigated by the Rudd government in 2008-09. Indeed, this budget is the highest taxing, spending, and debt budget in Australia’s history. Over the past decade, under both the Coalition and Labor, government debt has risen by an eye-watering 380 per cent. And the much bragged about spending restraint of 2 per cent in real terms per year is hardly anything to write home about.

It is also bizarre that the government has pushed the most meaningful parts of its tax plan years out into the future. Much better to go hard and fast and put substantial changes to the Senate immediately, rather than the weak and timid piecemeal approach it has chosen.

Moreover, while the budget provides tax cuts, Australians will still see their overall tax burden rise. Prime Minister Malcolm Turnbull and Treasurer Scott Morrison say they are cutting taxes. But what they are really doing is increasing taxes at a slower rate than what otherwise would have been the case.

Real taxes per capita are set to rise by close to 5 per cent over the next four years. Taxing you more is taxing you less.

The reason taxes will continue to rise is because spending will continue to rise. Higher spending is the true cause of higher taxes. Every extra dollar of spending must be paid back with higher taxes, either today or deferred into the future via the accumulation of government debt.

The iron-clad reality of public finance that no one wants to recognise is that the only way to permanently reduce taxes is to permanently reduce spending.

Permanent and sustainable tax cuts will not be in the offing until a broader discussion is had about what spending is going to be reduced. And no amount of tinkering with offsets, marginal rates or bracket creep will change that fact.

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