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Sugar hit from stage 3, but the country needs a tax reform diet
By Shane Wright
Tax cuts are not tax reform.
Many treasurers have, over the years, claimed that simply reducing tax rates or increasing thresholds was some sort of policy achievement up there with floating the dollar or giving the Reserve Bank its independence from political control.
The tax cuts hitting pay packets from July 1 were first announced by then treasurer Scott Morrison in his 2018-19 budget as part of his seven-year plan to deliver “lower, simpler, fairer” personal income tax. But the “three-stage plan” was always a misnomer.
Scott Morrison with the 2018-19 budget that contained the seven-year tax plan.Credit: Mark Graham
The first stage included the creation of the low- and middle-income tax offset to woo voters at the 2019 election. But the government was quiet about the time limit put on the offset, which would ultimately swell to $1500 in 2022 as Morrison and Josh Frydenberg again tried to buy their way to electoral success.
The second stage was an increase in the thresholds around the 32.5 per cent tax rate which, ultimately, only returned some bracket creep to people earning more than $87,000 a year. By the time stage 2 was under way, most of stage 1 was to have ended.
Stage 3 was always the biggest and most expensive part of Morrison’s original plan.
One of the reasons it was so expensive was that it paid back the best part of a decade of bracket creep to the nation’s highest-income earners. The $180,000 threshold for the 45 per cent tax rate has been unchanged since 2008-09, an awfully long period.
Over that period, the number of people earning more than $180,000 has trebled. They pay 40 per cent of the country’s personal income tax, almost double the share of 2008.
The average tax rate has hit a 25-year high with a rapid increase over the past two years in part due to the way the now defunct low and middle-income tax offset operated.
Once the tax cuts get under way, average tax rates will fall more than 6 per cent to about 18.2 per cent across all taxpayers. And then they will re-start their upward marching.
Paul Keating’s tax reforms of 1985-86 overhauled the entire system and delivered changes that helped the economy.Credit: Amanda Watkins
The personal income tax system has become just a rinse and repeat of bracket creep adjustments with neither major party prepared to properly look at improving how we are taxed.
It’s not just personal income tax. Taxes on superannuation, on companies, on finite resources and even on alcohol and tobacco are groaning under years of tinkering and short-termism.
And that has fed into an economy that itself is struggling to generate the tax revenues sufficient to do what voters want and the country needs, such as an improved defence force or much better services for those in aged care.
If you want real tax reform that delivered tangible economic benefit, you have to go back to either John Howard’s GST of 2000 or Paul Keating’s tax revolution of 1985-86 which included cutting the top marginal tax rate and introducing capital gains tax and dividend imputation.
There are options out there.
Ken Henry’s unloved, dust-collecting review of the tax system advocated a three-threshold personal income tax system that, adjusted for inflation since then, would give Australia a $35,000 tax-free threshold, a 35 per cent rate up to $256,000 and a 45 per cent rate beyond that point.
But Henry didn’t just advocate changes to thresholds and rates.
He argued concessions such as the low-income tax offset should be axed, a standard deduction should be introduced that would mean millions of people would not need to use an accountant to complete their annual tax return, insurance taxes should be abolished and a resource rent tax should cover everything from iron ore to gravel.
Ken Henry’s original tax plan advocated wide-ranging reforms that would have delivered major economic benefits.Credit: Arsineh Houspian
It also backed examination of a cash flow tax on businesses that could then be used to finance the abolition of payroll taxes.
We know the complexity of this country’s tax structure and its inherent problems act as a huge incentive for people to spend money on gaming the system. Two-thirds of Australians use an accountant to get their tax done, a huge waste of money, time and resources. Only one or two other nations are so dependent on accountants as Australians.
Our system encourages everyone to engage in tax planning.
Want proof? Experts at the Australian National University and the University of Sydney this year revealed that self-employed people and children who drew income from a trust were 50 times more likely to declare an income just under $180,000 than if there was no change in the tax rate at that point.
London to a brick that when stage 3 starts, there will be a lemming-like march of people declaring an income a few dollars short of the new $190,000 threshold for the 45 per cent tax rate.
Australia has a tax system that is holding back the economy, encouraging people to spend their time working on avoidance schemes while hindering governments’ ability to pay for the services demanded by voters.
Sadly, the stage 3 tax cuts won’t do anything to address these problems.
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