The Greens tax policy, released on Wednesday, would hit high income earners and target corporate tax avoidance.
The Greens plan would bring in “a Buffett rule” to ensure higher income earners paid their fair share of tax by limiting deductions made by those earning more than A$300,000.
“This will force high income earners to pay a minimum rate of tax and stop those on high incomes from deducting their taxable income to zero,” the policy says. The move would raise $9.5 billion over the forward estimates.
A Buffett rule – that would put a floor under the tax the very wealthy had to pay – has support within the left of Labor but is not ALP policy. It has been opposed by opposition leader Bill Shorten and shadow treasurer Chris Bowen but may be raised by the left at the July ALP national conference.
In the Greens policy, another $14.3 billion would come from targeting property investors, with the capital gains tax discount phased out over five years, and negative gearing scrapped for future purchases and phased out for multiple properties.
Trusts would be taxed as large corporations, at a 30% rate, raising $3.8 billion over the forward estimates.
The policy says: “Despite what the Liberals say, Australia is a low taxing nation. It is the 8th lowest-taxed among the 35 OECD nations. Australia’s combined tax-to-GDP ratio is 28.2% for all levels of government in 2015. The OECD average is 34%.
“If Australia collected the same amount of tax as the average OECD nation then we would need to collect an additional $94 billion per year”.
Greens leader Richard Di Natale said that Australia had a “tax avoidance system” rather than a “tax system”.
“Big corporations and the super-rich have rigged the rules for themselves, and the old parties are too frightened to do anything about it.
“Big corporate donations, vested interests and the revolving door between parliament and big business has made it so that the wealthier corporations and individuals get richer and richer, while inequality just gets worse”.
The Greens oppose the corporate tax cuts and advocate changes to the petroleum resource rent tax, ending fossil fuel subsidies, mainly paid to multinational mining companies, and the introduction of a mining super profits tax at a rate of 40%.
They put forward measures to target corporate tax avoidance, saying it is estimated corporations avoid about $8 billion of tax a year.
The federal government’s return to a budgetary surplus by 2020/21 will mainly be due to a projected increase in personal income tax revenue, according to a report from the Parliamentary Budget Office (PBO).
The PBO modelling shows that people in the middle of the income spectrum will bear the brunt of this, due to bracket creep. This occurs when tax thresholds (including the tax free threshold) stay constant while income grows due to inflation.
But the PBO modelling includes assumptions about inflation and wages growth that do not bear a resemblance to what is happening in the economy. Both inflation and wages growth have been depressed for some time, and there’s little reason to believe there will be a sudden increase.
The fundamental assumption driving the PBO projections is nominal (not adjusted for inflation) income growth of between 4% and 5%. This consistutes 2% to 2.5% annual inflation and 2.5% to 3% percent annual increase in real income.
The difference between nominal and real incomes is important as it is increases in real income (adjusted for inflation) that result in higher standards of living. But taxes are levied on our nominal incomes, regardless of inflation. Because of this difference, bracket creep means that real incomes after tax (otherwise known as disposable income) will actually fall.
What the PBO report projects
To calculate how much tax we will be paying in the future, the PBO first makes assumptions about inflation and real earnings growth and uses these to project individual incomes. Current income tax rates are then applied to these projected incomes, and the increased amount paid by each individual is added together.
According to the PBO’s modelling, the average individual tax rate will increase by 2.3% from 2017–18 to 2021–22. And every income group will see their tax rates increase over this period.
The largest tax increase is expected for individuals in the middle incomes, who have an average taxable of A$46,000 in 2017/18. This group are projected to face an increase in their average tax rate of 3.2% by 2021–22. Their average tax rate is expected to increase from 14.9% to 18.2%.
Meanwhile, those in the second lowest and two highest income quintiles are expected to see their average tax rate rise between 1.9% and 2.5%. The average tax rate for individuals in the lowest income group is projected to rise by only 0.2%, as most of their income remains below the tax free threshold.
The increases in average tax rates are even greater if a comparison is made with 2016/17, the latest year for which individuals have been paying tax. As you can see in the previous chart, when compared to 2016/17, individuals in the middle income quintile will see their average tax rate rise by 3.8%.
As you can see, the largest burden of the tax brack creep will fall on “average Australians”. This is because they will see their nominal (before adjusting for inflation) incomes rise. Typically, the lowest income earners do not earn enough to get above the tax free threshold and the highest income earners already pay a large portion of their tax at the top marginal rates.
Because of increasing inflation and wage growth, the Parliamentary Budget Office projects that even the lowest income earners will be liable to pay income tax by 2019/20.
The 2% to 2.5% inflation assumed in PBO’s forecast is in the mid-point of the Reserve Bank’s target range of 2% to 3%, so this is not entirely unreasonable assumption.
But both PBO’s inflation and wage growth (2.5% to 3%) assumptions are currently way above the levels seen in the economy. According to the ABS annual inflation currently stands at just 1.8%, and the earnings of all Australian employees is growing at 1.6% per annum.
And a number of theories have been put forward to explain low real wage growth including, the degree of underemployment, reduced job security, declining bargaining power of unions and increased potential competition, either from advances in technology or from international competition.
But regardless of the reasons for the persistently laggard growth in wages and inflation, there are also no signs that these rates will rise significantly any time soon, let alone to the levels assumed by the PBO.
Given the information contained in the PBO report we can’t calculate exactly what the impact of these tax increases will be for individuals.
However, it is clear that if the current wage and price conditions persist the actual tax revenue will fall way short of the projected figures for all years up to and including 2021/22 and make a Budget balance even further off.
We can also make some extrapolations based on averages. As a simple example, consider someone on an annual income of A$84,000 in 2017/18 (which is around the current average earnings in Australia). Under the assumption that nominal incomes increase by only 2% per year, the tax paid (including Medicare levy) in 2020/21 would be A$23,158.
However, if you compare this to nominal income growth of 5% (which is what the PBO assumes) the tax paid would be A$26,357 in 2020/21.
That is, tax collected from this individual would be 12% less under a low growth scenario than under the PBO’s more optimistic scenario. In the years 2018/19 and 2019/20 the tax collected would be respectively 4% and 8% less. This illustrates how precarious the projection of a balanced Budget in 2020/21 is.
Whatever the outcome, it is for certain that income earners will see any nominal increases eroded not just by inflation, but also through bracket creep.
The government’s idea of raising the Medicare levy, while also removing the 2% budget deficit levy on incomes above A$180,000, is less “transformational” and more signature Liberal policy. It shifts the tax burden towards middle income earners, as opposed to Labor’s plan to direct higher tax rates towards higher income earners.
Rather than introducing a simple flat rate rise of 0.5% in the marginal tax rate across all taxpayers, the government has chosen to increase the Medicare levy. The reason lies in the fact that the levy contains the equivalent of a low-income tax offset due to the phasing out of the low-income exemption.
For example, in the current financial year, the thresholds for the phasing out of the Medicare levy exemption is A$21,665 for singles and A$36,541 (plus A$3,356 for each dependent child/student) for families. At these thresholds, tax rates rise by the rate of the withdrawal of the exemption, which works out to be 8% (calculated as 10% less the 2% Medicare levy rate).
In the case of a two-child family, this means an 8% rise in the marginal tax rate at an income from A$43,253, to an upper income limit of A$51,803. If a Medicare levy increase of 0.5% were introduced in the current tax year, the upper income limit for the higher marginal tax rate would rise to A$54,066.
In combining a rise in the Medicare levy with the removal of the budget deficit levy, the government is therefore proposing a rise in marginal tax rates across a wide band of middle incomes and a marginal tax rate cut for the top.
This direction of tax reform is a continuation of the incremental shift in the overall tax burden towards middle income earners over recent decades. And because the threshold for the Medicare levy exemption is based on family income, the reform will reinforce the move towards higher effective tax rates on low income second earners in a family.
This shift in the tax burden from top to middle income earners, and to middle income families, will undermine aggregate demand and, in turn, “jobs and growth” in the future.
In contrast to the government’s policy, Labor’s policy limits the rise in the Medicare levy to incomes above the top two bracket points and retains the budget deficit levy. Raising taxes on top incomes is not only a fairer policy, but a more efficient one in the conventional economic sense.
The impact of taxes on hours worked declines as earnings get higher, and has close to no effect on the hours worked by those with top incomes. And by avoiding higher taxes on second family earners, Labor’s policy should have a less negative effect on second earner hours of work and therefore the tax base.
The government’s and Labor’s tax reforms therefore represent very different policies.
Opposition Leader Bill Shorten has said Labor will oppose the budget’s increase in the Medicare levy hitting taxpayers on incomes under A$87,000.
And he has flagged a Labor government would reimpose the deficit levy on high-income earners, that automatically expires on June 30. “Labor will not support spending $19.4 billion on the wealthiest 2% of Australians,” he said in his budget reply on Thursday night.
Labor says that a combination of the pared back levy rise and the deficit levy would deliver an extra $4.5 billion over ten years “without putting the burden onto families earning modest incomes”.
The combination would mean that, under Labor’s proposal, those on incomes of more than $180,000 would pay a 49.5% marginal tax rate.
After the opposition hedged its position last week, Shorten has confirmed a Labor government would put an extra $22 billion into schools above the amount the government has pledged, going back to the original ALP plan.
In an extensive attack on key budget measures, Shorten said Labor will oppose the government’s cuts to universities, its proposed increase in student fees, and the change in the repayment threshold that “hits women, Indigenous Australians and low-income earnest the hardest”.
In power, it would reverse the government’s new cuts to TAFE.
Labor would also oppose the budget plan to give a tax break for people saving for their first home. Shorten said this was a “cruel hoax”, a joke and an insult, representing just $565 for each first home.
He said the 0.5% boost in the Medicare levy – imposed to fund the National Disability Insurance Scheme and to take effect from mid-2019 – would affect every Australian down to an income of $21,000.
It would mean a worker on $55,000 would pay $275 extra a year, while someone on $80,000 would face an extra $400.
“Labor cannot support making people on modest incomes give up even more of their pay packets,” he said. Labor would only support the levy rise for those in the top two tax brackets.
Shorten said the budget “fails the fairness test” and it “fails the generational test”.
It was a “budget of big government, higher tax and more debt” and “devoid of values altogether”.
He dismissed the government’s measures to protect Medicare, saying that Malcolm Turnbull “only discovers his heart when he feels fear in it”.
The opposition leader was at pains to counter the widespread observation in commentary that this was “a Labor budget”.
He confirmed Labor would not oppose the budget’s tax on big banks, which has sparked a furious reaction from the banking sector.
But it was worried that “the weakness of this government will turn $6 billion tax on the banks into a $6 billion charge on every Australian with a bank account or a mortgage”.
The banks knew they could run over the top of this weak prime minister, he said.
“He’s giving them a levy with one hand, a tax cut with the other and a free pass for bad behaviour. I’ll give them a royal commission.”
He said that “if the banks pass on a single dollar of this tax to Australian families then that should be the end of this treasurer, this prime minister and this government”.
Shorten said that since budget night Labor had identified $1 billion in measures it would not support, including the $170 million set aside for a marriage equality plebiscite to which the Senate has refused to agree.
Earlier, in Question Time, the opposition extracted from the government the fact that the cost of its ten-year corporate tax cut – the first part of which is already legislated – would be $65 billion over the upcoming decade, compared with nearly $50 billion over a decade when announced a year ago.
In his budget reply, Shorten said: “This is a recipe for fiscal recklessness on a grand scale. It is a threat to Australia’s triple A credit rating – and therefore a threat to every Australian mortgage holder”.
Labor’s plan to close tax loopholes that let big companies shuffle money internationally would deliver $5.4 billion over a decade.
Shorten announced that a Labor government would cap at $3,000 the amount people could deduct for the management of their tax affairs. Although affecting only one in 100 taxpayers, this would save $1.3 billion over the medium term.
Finance Minister Mathias Cormann called on Shorten to submit his speech to the Parliamentary Budget Office for costing.
“If Bill Shorten is serious he needs to come clean with the Australian people about how much bigger the deficit would be over the forward estimates period as a result of the announcements that he has made,” Cormann said.
He said Labor’s numbers did not add up and it would put the triple A credit rating at risk.
Social Services Minister Christian Porter said that Labor had not outlined enough to fund the NDIS.