Opinion
While the public popularity of cutting income taxes is obvious, the economic arguments are thin on the ground.
It has become accepted wisdom in political circles that income taxes should be cut. Marginal tax rates are increasing and something needs to be done about bracket creep is the mantra.
Both the Government and Labor seem likely to offer personal income tax cuts to the electorate at the 2016 election. The Government may announce some in the budget or before and Labor has quietly been collecting revenue in a series of announcements that leaves them scope to also offer tax cuts.
The bracket creep drum beat has been going on for so long that both sides feel compelled to offer something.
The extra revenue from an increase in the GST is off the table, but the associated bracket creep scare campaign has done its job so well that the politicians feel they must deliver a cut. Regardless of the fact that the extra GST revenue is not there anymore, politics demands it.
But it doesn't have to be this way.
The economic case for personal income tax cuts collapsed with the GST. The real significance of the modelling released by the Treasurer was not that the increase in the GST didn't deliver growth (it's actually a drag on growth), but rather that tax cuts that would be associated with it delivered so little. With the GST revenue no longer available, any tax cuts on offer will now be even smaller, as Mr Morrison has told us. Ipso facto the growth dividend will be even smaller.
So if the growth dividend isn't there, what is the argument from Government that income tax cuts are needed?
For the Government to give tax cuts at a time when the deficit is about as big as it was under Labor would be a complete betrayal of the debt and deficit mantra of Deputy PM Barnaby Joyce. They simply can't have it both ways.
While much has been made of further bracket creep projections, all scenarios start with the current tax rates. Why not instead look at the past 10-15 years? Over that time the tax free threshold and the income level at which the top marginal tax rate kicks in have tripled.
If the tax free threshold had increased just at the rate to cover bracket creep since 2003 it would be $8,223 not the current rate of $18,200. This means that Australians have been more than compensated for bracket creep.
And at the top end? If the top rate had increased at the rate of the inflation it would only be $82,225, not $180,000. For all the railing about Australia's top marginal tax rate, only 3 per cent of workers are in it. In 2003 under John Howard, 15 per cent of the workforce paid the top rate.
Taxes have been slashed. And they were slashed at the height of the mining rivers of gold. If those arguing we have a debt and deficit problem really believed it, they would be agitating against income tax cuts. Instead the shock jocks plough on with their bracket creep scare campaign.
The reality is that Costello's unaffordable tax cuts backed by Rudd have more than offset bracket creep for many years to come.
So of course the reason for offering tax cuts is political. People want tax cuts and if one side offers them, the other side must match them. This is the standard political wisdom.
But it doesn't have to be this way. I don't think there is a clamour for tax cuts from the general public right now. There is in fact a new accepted understanding that there is a revenue problem, that services and infrastructure need to be built.
Of course if you offer a free ice cream to a child they will take it. But if you asked the child's parent would you be willing to pay for this ice cream so I can buy the ingredients to make some more and pay for the petrol to drive back the next day so there will be more ice cream tomorrow, the parent would no doubt agree to pay a reasonable price for the ice cream.
Well I think the public are like those parents willing to pay a bit more to build better schools, hospitals and makes our cities liveable and loveable.
We now know that moving the second highest marginal tax rate threshold from $80,000 to $100,000 would give a much bigger benefit to those on larger incomes. Those on $80,000 or less get nothing. When the median wage for full time workers is $69,000 and even less if part time workers are included, this type of tax rate change could only be described as unfair.
Treasury modelling showed a very low effect on labour supply and GDP because of reduced tax rates. But even if you accept there is a link, most economists would suggest it is much stronger when it relates to people deciding to go back to work and use childcare.
Women are more likely to be working part time. Few of these are likely to be earning more than $80,000. The economic case for such tax cuts is threadbare compared to the return on investing in alternatives like cheaper childcare and the better labour supply and growth dividend it would deliver.
Most Australians don't want a low wage, low tax society and all that comes with it. The richer a society the more prosperous it is and the higher the amount of tax that is generally needed. It is the price of civilisation.
There are big economic reform issues - participation, long term unemployment, education, heath, infrastructure, investment in liveable cities, energy transformation, building a dynamic start-up culture, the economic opportunities from protecting landscape and wildlife. Cutting income taxes just isn't one of them. It would be a shame if too much of our election year debate was taken up with discussing them. Best get them off the table so we can get on to the smorgasbord of better ideas.
Ben Oquist is the executive director of The Australia Institute. Follow him on Twitter @BenOquist
Posted
It has become accepted wisdom in
political circles that income taxes should be cut, but the truth is
there isn't really an economic case to be made for such a move, writes
Ben Oquist.
While a lively debate has raged over
recent months about the inequity of reducing progressive income taxes in
favour of a regressive GST increase, less time has been spent
discussing whether reducing income tax, the proposed sweetener, is
economically desirable.While the public popularity of cutting income taxes is obvious, the economic arguments are thin on the ground.
It has become accepted wisdom in political circles that income taxes should be cut. Marginal tax rates are increasing and something needs to be done about bracket creep is the mantra.
Both the Government and Labor seem likely to offer personal income tax cuts to the electorate at the 2016 election. The Government may announce some in the budget or before and Labor has quietly been collecting revenue in a series of announcements that leaves them scope to also offer tax cuts.
The bracket creep drum beat has been going on for so long that both sides feel compelled to offer something.
The extra revenue from an increase in the GST is off the table, but the associated bracket creep scare campaign has done its job so well that the politicians feel they must deliver a cut. Regardless of the fact that the extra GST revenue is not there anymore, politics demands it.
But it doesn't have to be this way.
The economic case for personal income tax cuts collapsed with the GST. The real significance of the modelling released by the Treasurer was not that the increase in the GST didn't deliver growth (it's actually a drag on growth), but rather that tax cuts that would be associated with it delivered so little. With the GST revenue no longer available, any tax cuts on offer will now be even smaller, as Mr Morrison has told us. Ipso facto the growth dividend will be even smaller.
So if the growth dividend isn't there, what is the argument from Government that income tax cuts are needed?
For the Government to give tax cuts at a time when the deficit is about as big as it was under Labor would be a complete betrayal of the debt and deficit mantra of Deputy PM Barnaby Joyce. They simply can't have it both ways.
While much has been made of further bracket creep projections, all scenarios start with the current tax rates. Why not instead look at the past 10-15 years? Over that time the tax free threshold and the income level at which the top marginal tax rate kicks in have tripled.
If the tax free threshold had increased just at the rate to cover bracket creep since 2003 it would be $8,223 not the current rate of $18,200. This means that Australians have been more than compensated for bracket creep.
And at the top end? If the top rate had increased at the rate of the inflation it would only be $82,225, not $180,000. For all the railing about Australia's top marginal tax rate, only 3 per cent of workers are in it. In 2003 under John Howard, 15 per cent of the workforce paid the top rate.
Most Australians don't want a low wage, low tax society and all that comes with it. The richer a society the more prosperous it is and the higher the amount of tax that is generally needed. It is the price of civilisation.
Taxes have been slashed. And they were slashed at the height of the mining rivers of gold. If those arguing we have a debt and deficit problem really believed it, they would be agitating against income tax cuts. Instead the shock jocks plough on with their bracket creep scare campaign.
The reality is that Costello's unaffordable tax cuts backed by Rudd have more than offset bracket creep for many years to come.
So of course the reason for offering tax cuts is political. People want tax cuts and if one side offers them, the other side must match them. This is the standard political wisdom.
But it doesn't have to be this way. I don't think there is a clamour for tax cuts from the general public right now. There is in fact a new accepted understanding that there is a revenue problem, that services and infrastructure need to be built.
Of course if you offer a free ice cream to a child they will take it. But if you asked the child's parent would you be willing to pay for this ice cream so I can buy the ingredients to make some more and pay for the petrol to drive back the next day so there will be more ice cream tomorrow, the parent would no doubt agree to pay a reasonable price for the ice cream.
Well I think the public are like those parents willing to pay a bit more to build better schools, hospitals and makes our cities liveable and loveable.
We now know that moving the second highest marginal tax rate threshold from $80,000 to $100,000 would give a much bigger benefit to those on larger incomes. Those on $80,000 or less get nothing. When the median wage for full time workers is $69,000 and even less if part time workers are included, this type of tax rate change could only be described as unfair.
Treasury modelling showed a very low effect on labour supply and GDP because of reduced tax rates. But even if you accept there is a link, most economists would suggest it is much stronger when it relates to people deciding to go back to work and use childcare.
Women are more likely to be working part time. Few of these are likely to be earning more than $80,000. The economic case for such tax cuts is threadbare compared to the return on investing in alternatives like cheaper childcare and the better labour supply and growth dividend it would deliver.
Most Australians don't want a low wage, low tax society and all that comes with it. The richer a society the more prosperous it is and the higher the amount of tax that is generally needed. It is the price of civilisation.
There are big economic reform issues - participation, long term unemployment, education, heath, infrastructure, investment in liveable cities, energy transformation, building a dynamic start-up culture, the economic opportunities from protecting landscape and wildlife. Cutting income taxes just isn't one of them. It would be a shame if too much of our election year debate was taken up with discussing them. Best get them off the table so we can get on to the smorgasbord of better ideas.
Ben Oquist is the executive director of The Australia Institute. Follow him on Twitter @BenOquist
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