Opinion & Commentary
Tax changes are just a redistribution
The government’s carbon dioxide pricing policy came wrapped in a package labeled ‘reform’. We are asked to accept that carbon pricing itself is a reform, and that the government has taken the opportunity to introduce some tax reform at the same time. But this is a good example of how governments have come to see reform as something they must constantly talk about, while actually doing something else.
On the carbon pricing side of the equation, even if one accepts the huge leap from one (middling size) country’s carbon price, tax or trading scheme to the management of global warming, the government’s scheme is highly imperfect. Any such scheme will impose a deadweight cost on the economy, but the uneven application of this particular scheme through selective exemptions, offsets, and subsidies introduces additional distortions of resource allocation that will harm productivity. These certain costs must be set against the uncertain benefit, if any, of an amelioration of global warming.
In principle the economic costs could be offset by changes on the tax side of the equation, but the proposed changes are disappointing and hardly amount to ‘reform’. The large increase in the tax-free threshold in itself is welcome, but is less than it seems because the low income tax offset (LITO) already results in an effective tax-free threshold of $16,000. Increasing this to $18,200 and converting it to an actual threshold that applies to everyone is a step forward, but in addition the government retains a smaller LITO of $445, which creates an effective tax-free threshold of about $20,500. The LITO adds complexity and detracts from transparency. The government should have taken the Henry review’s advice and ripped LITO out of the system altogether. As long as it exists, governments will be attempted to expand it again in the future.
The biggest disappointment is in what the changes do or don’t do to both headline and effective marginal tax rates. The only income range to see any reduction is from $16,000 to approximately $20,500. But that is to be paid for by increases in both headline and effective marginal rates up to $30,000 and from about $67,000 to $80,000. In other ranges there is no change. It is marginal rates that influence economic behaviour, and cuts in marginal rates at all income levels should be at the top of the tax reform agenda if governments are serious about encouraging work force participation, investment in human capital, and risk taking. The carbon pricing scheme will not generate enough revenue to fund large cuts in marginal rates, but even token cuts would have been a step in the right direction.
The government’s changes have the appearance of fiddling with the personal income tax scale to produce pre-determined dollar savings for taxpayers at politically sensitive income levels. Principles of good tax design have played a secondary role to expediency. Taken as a whole, the package has more to do with income redistribution than with reform to enhance economic efficiency and simplicity. Whether by chance or design, it snubs the most highly skilled and productive by leaving them a tax cut of $3 per year (yes, that’s per year), making it the one-cup-of-coffee per year tax cut for individuals above $80,000.
It is to be hoped that by October, when the government stages its tax reform ‘forum’, the carbon price circus will have left town and the forum can focus on real tax reform. There is no shortage of opportunities for good reform. One set of ideas is spelt out in a new publication from the Centre for Independent Studies, Taxploitation II – Tax Reform for Incentive, Productivity and Economic Growth. Among them is a proposal to move -- over time and without jeopardising fiscal sustainability – to a simple personal income tax scale with an actual tax-free threshold something like that now proposed and marginal rates of 15, 27 and 35%, with all thresholds then being automatically indexed. At the same time, the Medicare levy should be abolished, as recommended by the Henry review.
Taxploitation makes a strong case against capital gains tax, and argues that if it is to be retained the 50% concession should not be removed as is sometimes suggested, while cost-basis indexation should be restored. It also makes the case for a meaningful cut in the company income tax rate -- not the puny 1 percentage point cut to which the government is now committed but more like the cut to a 25% rate as recommended by the Henry review.
Then there is state taxation, which is as ripe for reform as any area of Commonwealth tax. The highest priority should be given to finding a way to get rid of stamp duties (on property, insurance and motor vehicles), while reducing the states’ dependence on Commonwealth grants and giving them greater responsibility for their own revenue raising.
It is to be hoped that the October forum focuses on these big tax issues, rather than being distracted by secondary issues such as how best to tax alcohol in a nanny state.
Robert Carling is a research fellow at The Centre for Independent Studies.
