Ideas@TheCentre
Tax cuts will help achieve productivity goal
Despite decades of tinkering and sporadic reform, the personal income tax system remains in need of sweeping change. At the top of the list should be across-the-board cuts in marginal tax rates, automatic indexation of thresholds for inflation, and elimination of some of the myriad selective tax breaks (deductions, offsets, rebates, concessions, and so on ) that now clutter the system and unfairly favour particular categories of taxpayers. Although the government’s major review of the tax and transfer system (the Henry Review) has not yet been released, there is no indication so far to suggest that the review will take this direction.
In the 2007 election campaign, the Labor opposition adopted an ‘aspirational’ income tax scale with a tax-free threshold and three marginal rates: 15, 30 and 40%. In government, Labor has backed away from this goal. The structure from July 2010 will be 15, 30, 37 and 45% plus the Medicare levy. They should not only reaffirm the aspirational scale as the cornerstone of tax reform but go further.
Most taxpayers should face a marginal rate of 27% and the top rate should be no more than 35%. The case for such a reform is that the current personal income tax structure imposes excessive economic costs through disincentive effects in relation to work, saving and investment. Cutting marginal rates would support the government’s stated and admirable goal of boosting productivity growth to 2%.
Tax reform should not be allowed to jeopardise Australia’s fiscal strength and the return to budget balance. On their own, cuts in marginal rates would leave a large hole in the budget. However, the budget impact can be reconciled with fiscal responsibility by phasing in the changes over several years, tightly limiting the growth of government expenditure, and recouping some of the lost revenue by cutting back on selective tax breaks.
Australia’s personal income tax system has undergone sporadic change and reform over many years, but there is still much unfinished business that needs to be addressed.
Robert Carling is a Senior Fellow at The Centre for Independent Studies. His paper The Unfinished Business of Australian Tax Reform was released this week.
