While a lot of the front page political coverage has been about weasel words on wheat or woes with the workplace laws, the tax reform issue has still been ticking away underneath. It’s now less than a month until the federal budget, and the agitation and lobbying for tax reform is still fairly strong, despite the occasional comment by the Prime Minister which appears to be aimed at hosing down expectations.
I’ve written a number of pieces on taxation previously (click here to read them) and summarising some of the different views. It seems to me that, while there are many different views about what type of tax reform is needed, there is near consensus that significant structural changes are desirable.
I don’t agree with the false choice that is often set up between ‘tax cuts’ versus ‘more spending.’ There is definitely an argument for more spending in some areas, and obviously there is sufficient surplus to enable that to occur responsibly. However, this can occur alongside some structural changes to the tax system, particularly as some changes can be revenue neutral or positive.
Before setting out some of the ongoing commentary in this area, it’s worth noting just what the average earnings of Australians are. This article by Andrew Leigh lists the current median income as $26 000 per year. This means half of all Australians earn less than this amount. It is much lower than the figure often given as the ‘average wage’ in the media. This is usually the mean of full-time earnings – currently standing at $1078 a week, or approx $56 000 per year. This figured is distorted by the extremely high earners and by its exclusion of part-time workers and the unemployed.
To put the current push from some quarters for more cuts to the top tax bracket in some context, while 50 per cent of people earn under $26 000 a year, Leigh says “only 4 per cent of Australian adults have a six figure salary” (of which I am one, in case anyone isn’t aware). He also says that the median income of households is $66 000 a year.
It’s also worth remembering that many employed people are casual workers, so their earnings are not necessarily secure. To take this report in The Mercury as an example, one in five workers in Tasmania are casual, half of whom wanted a permanent job.
Andrew Leigh also makes a suggestion that I’ve been pushing for for a while – scrapping the need for most people to provide annual tax returns:
Like New Zealand, Australia could dramatically simplify the tax filing system, saving many of us the hassle of poring over the Tax Pack for a weekend, and reducing the $3 billion dead-weight cost of the personal income tax system that comes from compliance costs alone.
The conservative Centre for Independent Studies reportedly released a new book today called Taxploitation: The Case for Income Tax Reform, which appears a bit less radical than some of the suggestions in material they’ve released in the past. They’re still pushing big cuts at the top level, but some of their other suggestions are ones which I think many people across the political spectrum would support, such as a winding back of some of the existing $39 billion in tax breaks and a revision of tax brackets every year in line with inflation” (i.e. reducing bracket creep). They also suggest lifting the tax-free threshold – this is the amount people can earn before they’re required to pay income tax.
In other items over the last month or two:
. This piece by Nicholas Gruen on Club Troppo explores whether ‘fiscal churn’ is really as big a problem as people often suggest. Fiscal churn is a term used to describe paying money in tax and then getting it back again through measures like family payments or other government grants. It is one of the common arguments used to highlight inefficiency in the current tax system.
. Tim Colebatch challenges the view that taxes are innately bad for economic growth, quoting research by Monash Uni tax lecturer, Neil Brooks, that disputes this common assumption.
. Ross Gittins reminds us of the long-term dangers in letting public infrastructure run down, which he says has occurred in part from governments at the higher levels shifting costs and responsibilities onto local councils without also providing them with the necessary funds to deal with it.
. Gittins also rails in this column against the suggestion by Nick Minchin and others to remove the tax on employer superannuation contributions.
. George Megalogenis has done another of his detailed pieces taking a longer-term view on the effect of tax changes over the life of the Howard government. It includes the assessment that “the Howard-Costello tax and handout system has, in fact, delivered more money where it counts to dual-income families than to single-income families.”
. In this piece in The Age, Tim Colebatch makes two key statements – firstly that “the most urgent tax reform is not cutting the top rate, but cutting the much higher tax rates and welfare clawbacks that low and middle-income earners face, in part because low-income earners are the only group paying higher average tax rates now than 10 years ago“; and secondly that “Australia is not overtaxed, and future taxes are more likely to rise than fall as a share of our income.”
And finally, just for an example from elsewhere, this report details a change New Zealand has just announced:
new investment tax breaks aimed at boosting savings among lower income earners. The changes will come at the expense of those directly investing large sums offshore in countries including Australia.
Finance Minister Michael Cullen says the overhaul was aimed at making investment tax rules fairer for smaller investors.
They will see the tax on earnings from managed funds drop from 33 per cent to 19.5 per cent.
The tax on capital gains from Australian and New Zealand shares has been removed altogether, but those investing more than $40,000 directly in Australia will pay more tax.