Opinion & Commentary
Budget should deliver us a break
Income tax reform should be tackled in the federal budget.
View this through the prism of election-year politics if you must, but it also happens to be an economic reform that can help keep the long expansion going by adding to productive capacity.
A country's income tax structure says a lot about its commitment to personal economic freedom and to keeping the excesses of government in check.
Ronald Reagan and Margaret Thatcher understood this when they started a counter-revolution against absurdly high income tax rates. The results largely survived changes of government and spread around the world, eventually reaching Australia. But there is more to be done.
"Timid" is the word that comes to mind in describing Australian personal income tax reform since the 1980s. The Government has substantially lifted the thresholds at which progressively higher tax rates apply, without doing much to cut those rates.
Lifting thresholds is not a substitute for rate cuts. As long as high and steeply progressive rates remain, government can feast on the proceeds of bracket creep while occasionally pretending to reduce the burden by adjusting thresholds.
Over the past 10 years the income tax rate structure has been lowered, in stages, from 21.5/35.5/44.5/48.5 per cent to 16.5/31.5/41.5/46.5 per cent.
The cut has been significant at the bottom but less so further up the scale. There was no movement in the top rate until last year, when the calls for action became too strong to ignore, and the Government made a small cut in the top two rates.
Was the case for cutting rates so feeble as to be so easily satisfied?
Treasurer Peter Costello defended the timidity of last year's reductions by arguing they brought Australia's top rate into line with the average for OECD countries.
This misses the point. The case for reform rests on the need to improve incentives for individual effort, acquiring skills and taking risks. It also rests on reducing the resources wasted on tax minimisation strategies.
For these reasons, there remains a strong case for a lower and flatter tax scale. The aim should be a top rate in the 30s and a middle rate in the 20s. Concerns about inflation and interest rates should not be a stumbling block. Reform is compatible with a continued budget surplus.
The revenue cost of cutting marginal rates can be paid for by a combination of base-broadening measures (curbing deductions and concessions), the growth of revenue generated by a strong economy, phasing in the cuts over time and restraining government spending.
The reality is that the Government will aim for a more modest surplus and adopt expenditure-increasing and/or tax-reducing policy changes consistent with it.
It is time to pay more attention to the taxpayers' interests.
Robert Carling, a former commonwealth and state treasury official, is a visiting fellow of the Centre for Independent Studies.
