Ideas@TheCentre
Glimmer of hope
As the federal government celebrates the parliamentary endorsement of Australia’s second major new tax in recent months – the minerals resource rent tax – it is appropriate to reflect on the fact that around the world, the last few years have been depressing times for advocates of tax reform consistent with limited government, incentive and individual liberty.
One key indicator of a country’s commitment to these principles is its top personal income tax rate. Many countries, particularly in Europe, have lifted their top marginal rates in recent years as they grapple with large budget deficits and act on concerns about inequality of income distribution. In the United States, the Obama administration would have increased the top federal rate had the Congress not stopped it, and will still attempt to do so if re-elected in November.
The libertarian view is that increasing top marginal rates is a populist reaction, is the wrong way to address legitimate concerns about inequality, will harm economic growth prospects, and will raise little revenue anyway.
There is now a glimmer of hope for libertarians that these arguments are being heard. The UK budget announced this week brings the top rate down from 50% to 45%, and foreshadows a further cut to 40%. The background to this move is that the 40% top rate, established by the Thatcher government in 1989, was raised first to 45% and then 50% by the Brown/Darling government during the global financial crisis. HM Treasury now finds that the increase has raised much less revenue than expected, and has encouraged high earners to relocate from the United Kingdom.
This is a world first: the reversal of a populist tax hike implemented during the global financial crisis. But it is no more than a glimmer of hope, for at the same time the socialist candidate for president of the French Republic is proposing to lift the top rate to an eye-watering 75% if he wins, which at the moment seems likely. This is a move back to the 1980s, when confiscatory marginal rates were the order of the day in all developed countries until more sensible policies took hold.
In Australia, the top marginal rate of 45% (plus Medicare levy) has not been increased (apart from the flood levy, which is supposed to be temporary), and there is no talk of it being increased. We should recall, however, that the Rudd government came to office with the ‘aspirational’ goal of a top marginal rate of 40%. That was quickly dropped, but it should be restored as policy, as part of a sweeping income tax reform that reduces all marginal rates and then indexes thresholds for inflation every year. Instead, the government is increasing the tax-free threshold and lifting some marginal rates, and indexation has been forgotten.
Robert Carling is a Senior Fellow at The Centre for Independent Studies.
