DAN TEHAN | Australian Financial Review | October 19, 2015
Across the world, developed economies are moving away from a reliance on income tax for the lion’s share of their revenue. This shift is happening as governments recognise that income is a volatile basis for taxation and that taxing income can distort the incentive to work. In the OECD, we are now in the small minority of countries that are continuing to over rely on this direct form of taxation.
Developed countries are readily cutting at the top and bottom of their income tax rates to limit tax instability and to stimulate job growth. In New Zealand they have cut from the top and after nearly a decade of reform their top income tax bracket now sits at 33 cents in the dollar. This has been part of a recovery that has led to an unexpected budget surplus being delivered early by John Key’s government.
In the United Kingdom they have started to cut at the bottom and David Cameron has promised to lift the tax free threshold, the Personal Allowance, to £12,500 by 2020. The aim is to then align the minimum wage with the tax-free threshold, effectively making the minimum wage tax free.
The motivations for these changes are simple. In an increasingly competitive world, income tax is just too volatile for budgets to rely on. In a recession, decreasing tax receipts put a pinch on the government at the same time as the demand for services increases. In times of growth, the pressure of increasing costs punishes people through bracket creep.
In Australia, the government saw $14.3 billion wiped in income tax receipts between 2008/09 and 2009/10. Indirect taxation didn’t even flinch. Likewise, by 2018, Australians will be paying $25 billion extra in income tax due to bracket creep. This will push the average workers income tax rate from 23 percent to 28 percent.
For those on the minimum wage, which the Productivity Commission puts at $33,327, bracket creep will mean that taxes will go from 19 cents to 32.5 cents in the dollar by 2023/24.
Make no mistake: this reliance on income tax hurts those on low incomes as well as the nation. What’s more, the people in the lowest tax brackets are also those who need tax relief most.
Ken Henry’s 2010 review of the tax system found that income taxation needs to be built around a common sense welfare system. It recommended detangling the complex redistribution system that is the income tax and welfare scheme.
To adjust this, the report found that lifting the tax free threshold to $25,000 would mean that people who both report to the Australian Tax Office and Centrelink would be better targeted by transfer payments.
As the Productivity Commission reported earlier this month, currently a single person who moves from Newstart to a minimum wage job will have an effective participation tax rate of 51 percent. This is a ridiculous punishment for having someone get themselves off welfare and into work.
If it was a couple with two school-age children, when one of the parents gets off Newstart and into a minimum wage job they will lose benefits and pay tax that will result in them paying an effective participation tax rate of 59 percent.
The globalisation of our economy has shown that we need a more stable and reliable tax base to create sustainable revenue and incentivise work. Getting the right tax mix requires an across the board reassessment of our taxation priorities. We need to be more flexible, less reliant on income tax and reflect the changing world around us.
Like the UK, it is time we recognised that if we want to place work over welfare, placing income tax on those on minimum wage or below must be looked at. Targeting income tax relief in Australia would not only increase the incentive of work over welfare but it would put us in line with the rest of the world, pushing us closer to a simpler and more productive tax system.