Opinion & Commentary
Structural problems unresolved
It was a strange budget. The Treasurer addressed almost every concern that critics had expressed about our tax and benefits system – but resolved virtually none of them.
There was, for example, a strong case for reducing the top rate of personal income tax. This is high by international standards, and it acts as a disincentive for people already here as well as for potential skilled migrants thinking of coming here. The gap of 18.5 percentage points between the top personal rate and the company rate encourages tax avoidance, and because many high earners pay the company rate, it does not even target those with most money.
So what did the Treasurer do? He reduced the top rate by 2 points. This will resolve none of these problems – but it will allow the government to defend its record in future by claiming that our top rate is no worse than the OECD average. Mission accomplished.
It’s much the same story with the raising of the tax thresholds. This was popular, for it ensured that taxpayers across the income range all got something out of the budget. But it did nothing to address the fundamental principle behind calls for indexation.
Every year the government takes more tax without ever having to admit it. Wages go up 3 or 4 percent each year, but if thresholds stay fixed, the proportion of our earnings going to the Treasury creeps imperceptibly upwards. This is taxation by stealth and it is dishonest.
The Treasurer can now claim that he has raised thresholds above the rate of inflation. But we should not have to rely on his goodwill every year. Brackets should be indexed automatically every year – but the government has set its face against that, for it would then no longer be able to claim the credit for handing back the proceeds of bracket creep as headline tax cuts.
A third concern of critics focused on superannuation. The complaint has been that Australia is the only developed country to tax retirement savings when they go into a fund, when the fund makes profits, and when the money is withdrawn.
This budget has fixed that, but in the least effective way. Most countries allow contributions to be made tax-free so that workers can take full advantage of the magic of compound interest over the 30 or 40 years of a working life. But what we will be doing by siphoning money out of contributions is diminishing the size of people’s savings (even though the government says it is keen that we should save). Again, the Treasurer has headed off his critics, but has not resolved the problem.
Finally, the biggest problem of all has been the way our progressive tax system interacts with our means-tested benefits system to create the western world’s worst ‘effective marginal tax rates.’ The result is that work is discouraged and self-reliance is undermined.
Here the Treasurer has tinkered at the margins by increasing the amount a family can earn before it starts to lose Family Tax Benefit to $40,000, and by enhancing the Low Income Tax Offset. But this simply shifts the disincentives to a slightly different income range. Above $25,000, workers will still be paying a 34% tax rate, and over $40,000, families will still be losing at least 50 cents in every additional dollar earned.
In his budget speech, the Treasurer said he was introducing a “Tax Reform Plan.” What we got was a long way short of that. It’s good to get some of our own money back from this, our country’s highest-taxing government of all time. But the structural problems remain unresolved.
Professor Peter Saunders is social research director at The Centre for Independent Studies.
