DAN TEHAN | Canberra Times | February 5 2016
In the lead up to the 1985 Tax Summit Paul Keating highlighted the burden that income tax can have on the economy: “Australia faces a clear choice – that it either does something about the high marginal rates impacting on average weekly earnings and finds another base in the tax system or it doesn’t,” he said.
Australia now faces another clear choice – that it continues economic reform to reduce marginal rates impacting on average weekly earnings by reducing direct taxation in favour of indirect taxation or it doesn’t.
However, if we choose to do nothing, in the words of former Treasury Secretary Martin Parkinson we would be “sleepwalking into a real mess”.
Income taxes are still as much of a problem today as they were in 1985. When Keating outlined Australia’s tax choice it was the same forces of marginal tax rates that were hurting living standards. Income taxes today are continuing to punish workers through bracket creep and deterring those on welfare from working.
Very few people talk of the regressive nature of this aspect of income taxes. Perhaps this is because bracket creep bleeds you slowly over time.
Currently we have five tax brackets: zero cents, 19 cents, 32.5 cents, 37 cents and 45 cents. Unless you’re earning over $180,000, bracket creep will mean that inflation and wage rises slowly push you into higher tax brackets. The problem is that for average and lower income workers, they are already slowly bleeding.
Bracket creep will take $5.5 billion from Australian workers this year and over $25 billion between now and 2019. This means that workers earning the average annual wage of $80,000 will see an extra $3,800 go the tax office each year.
With no changes, in seven years these average earners might be earning thirty percent more in wages but end up paying fifty percent more in tax.
Perversely, the worst hits are felt by the lowest paid taxpayers. People earning just above and below the minimum wage, between $30,000 and $37,000, will pay an extra 19-36% more tax.
Worst of all, there is no surplus in the current budget that could provide relief from this wage pinch.
Equally, the inefficiencies of income tax also hurt those looking to better themselves by finding work. As the Productivity Commission reported last year, a single person who moves from Newstart to a minimum wage job will have an effective participation tax rate of 51 percent.
If it is a couple with two school-age children, when one of the parents gets off Newstart and into a minimum wage job, the family will lose benefits and pay tax that will leave them with an effective participation tax rate of 59 percent.
These are simple perverse punishments for doing the right thing and finding a job.
Australia needs to find a tax mix that will allow us to get rid of these ridiculous inefficiencies. Tax reform that ignores a major change to our tax mix will not achieve the growth we need nor deal with the problems we have.
Only tax reform that includes all options allows us to address the major flaws in our tax system, particularly bracket creep.
It would allow the potential for the tax rates to be changed to provide simpler and fairer distribution. This would be significant as the current the average annual wage sits in between two tax brackets – 32.5 percent and 37 percent.
The Henry Review conducted under the previous government pointed to the potential gains of reducing the tax brackets from five to three. Henry’s model aimed to have the majority of income earners in a single bracket of 35 percent with a higher tax bracket for those earning over $180,000 and a tax-free bracket for those earning under $25,000.
Keating is right that the end of the mining boom has trimmed our nation’s income and we must therefore address our spending. But we should also use tax reform to move to a revenue base that is more efficient and encourages growth. As Mr Keating knows full well, tax reform is not raising taxes for revenue’s sake but cutting out the outdated and inefficient in favour of economic growth and sustainability.
We face a serious choice between reform and the status quo. Reform may be hard but the status quo will lead to higher taxes for average earners and long term economic decline.