A temporary income tax hike is the bitter but equitable pill Australia should swallow



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Jonathan Karnon, Flinders University

We’re all in this pandemic together. But we’re currently leaving it to a small proportion of the community to shoulder most of the economic pain.

It’s an approach that’s compounding social and intergenerational inequity.

To date the Australian government has committed A$320 billion to support households and businesses during the COVID-19 pandemic. The Commonwealth’s net debt had been projected to peak this year at $392 billion and then decline. Now that debt is set to almost double.




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Paying the debt will likely take decades. The burden will fall mostly on younger generations, through higher taxes or reduced public services such as health care and education.

Younger workers are also bearing the brunt of the immediate economic effects. Industries with the biggest proportion of young workers have been hit hard. In arts and recreation services, a quarter of workers are under the age of 25. In retail it’s about a third. In accommodation and food services it’s almost half.

In the past, governments have imposed temporary levies after natural disasters to pay for recovery efforts.

But the peculiar dynamics of this crisis open the opportunity to introduce a temporary levy now. This would enable those with secure incomes to share the pain and reduce the double impost on the younger generation.

Levy time

A temporary income tax levy is not unprecedented.

In 2014 the federal government implemented the “temporary budget repair levy” to reduce the budget deficit (then A$37 billion). Gross national debt was about $320 billion. The levy increased the marginal tax rate on the top income bracket (more than $180,000 a year) from 45% to 47%. It collected about A$3 billion over three years.

Given the magnitude of the deficit we now face, a similar levy makes sense.

An example levy is illustrated in the table below (based on income tax data from 2016). A 1% levy is applied to annual income between A$18,200 and A$37,000, a 2% levy to income between A$37,000 and A$90,000, a 3% levy up to A$180,000, and a 4% levy to income of more than A$180,000.



For someone on a median full-time income of A$1,463 a week, this would mean paying an extra A$17 a week in income tax.

Over a six-month period such a levy would raise about A$6.5 billion.

Consumption block

The main argument against raising income taxes is that it reduces incentives to work and lowers consumers’ disposable income, which dampens economic activity (and ultimately government revenue).

This, and the politics of tax, means governments usually wouldn’t dream of raising taxes during an economic crisis, because that would further reduce consumer spending and compound the downturn.

But the COVID-19 economic crisis is unique. It is suppressing spending by those with secure incomes because people are staying home.

Analysis published by The Sydney Morning Herald and The Age shows consumer spending fell to 13% below normal in late March. One-off government stimulus payments totalling A$5 billion reversed the downward trend in the first week of April. However, the effect of the one-off stimulus payments is likely to be temporary as higher-income earners, who didn’t receive a stimulus payment, continued to reduce their spending.

If people are spending less because there are fewer opportunities to spend, this novel aspect of the crisis reduces the likelihood a temporary increase in the income tax levy would have any negative economic effect.

Positive effects

Right now the costs of the COVID-19 crisis are being disproportionately borne by a small proportion of the population – the 700,000 Australians who have lost their jobs and about the same number relying on the JobKeeper wage subsidy.

Many of those who have lost their jobs were already in low-paid and insecure jobs.

As previous research on the longer-term effects of natural disasters has found, these types of economic shocks widen inequalities, with most people never making up the income they lose. A levy would reduce this inequity.




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An advantage of introducing a levy during the crisis is there is clear time-frame to end it. It could be tied to social distancing regulations, ending when spending patterns return to normal.

Alternatively, the government could set a specific date to review the levy. It has already done this for funding initiatives such as telehealth consults during the crisis.The Conversation

Jonathan Karnon, Professor of Health Economics, Flinders University

This article is republished from The Conversation under a Creative Commons license. Read the original article.

Government set to call Senate’s bluff on income tax bill


Michelle Grattan, University of Canberra

The Senate on Thursday is set to pass intact the government’s A$144 billion three-stage income tax package – but whether the plan is fully delivered will depend on who wins the election.

On Wednesday the Senate voted 36-32 for an amended package that removed the third stage of the plan. This stage, implemented in 2024, gives tax cuts to higher income earners, flattening the tax scale so the same marginal rate would apply through incomes from $41,000 to $200,000.

But the government has declared the legislation must be passed as a whole, and the House of Representatives on Thursday will reject the amended package.

After intense lobbying of the crossbench, the government is considered to have the required backing to carry the original bill when it is re-presented to the Senate.

Senate leader Mathias Cormann on Wednesday won Senate support for a motion for the bill when it is returned on Thursday to be voted on without further debate. All the crossbenchers except South Australian independent Tim Storer voted for this. Debate on the legislation was also cut short on Wednesday.

Centre Alliance senators Stirling Griff and Rex Patrick voted to strip out stage three, but are now set to vote with the government.

Griff said what while “we are going to make our final decision on the floor”, “we are not going to say no to low and middle income earners getting tax cuts.”

He said stage three was two elections away, and so there was plenty of time to try to knock it out.

Storer lashed out at the Centre Alliance senators. Centre Alliance is the renamed former Nick Xenophon Team – Storer was on its ticket at the election.

“They supported an amendment to remove Stage 3 of the bill … but say they will vote with the government to approve the bill in its entirety when it returns to the Senate,” he said. “We can only conclude Centre Alliance’s initial opposition to Stage 3 was all for show”.

Labor this week committed a Shorten government to repealing the last two stages of the plan if it had been legislated. Instead, Labor would maintain and enhance the first stage, directed to middle and lower income earners.

The first stage starts this year and gives a tax offset to a maximum of $530 for taxpayers earning up to $90,000. Labor would then build this to a maximum offset of $928. The ALP alternative would cost $73 billion over a decade.

An analysis by the progressive think tank The Australia Institute said that almost 95% of the benefits of stage three “go exclusively to top 20%, while 75% of taxpayers get no benefit at all”.

“We’re not splitting the bill,” Treasurer Scott Morrison said. “Our personal tax plan is not about creating winners and losers, setting winners against losers. It is about ensuring that all Australians win.”

Malcolm Turnbull said the government would reject any amendment “because we want all Australians to get the benefit of a comprehensive tax reform. We want to ensure that 94% of Australians don’t have to pay any more than 32.5% for every extra dollar they earn. We want to reward and encourage aspiration”.

“Aspiration is what is driving the Australian economy,” he said.

The ConversationBill Shorten said: “Labor is going to support tax reductions for lower paid workers, 10 million of them. …We have a better plan. We’re going to provide a tax refund, a tax cut, of $928 a year … for most people. That means over three years, that’s nearly $3,000.”

Michelle Grattan, Professorial Fellow, University of Canberra

This article was originally published on The Conversation. Read the original article.

Greens release annual figures for income tax package


Michelle Grattan, University of Canberra

The Greens have released year-by-year costings of the budget’s income tax cuts, which the government has previously declined to produce publicly.

The estimates have been prepared by the independent Parliamentary Budget Office, at the request of the Greens. The opposition has repeatedly sought annual figures, but the government resisted the demands.

Treasurer Scott Morrison said after the budget: “It is not the practice of any government to provide itemised year by year costs over the medium term, because they’re not reliable.”

Treasury secretary John Fraser told a Senate estimates hearing: “Our confidence in specific years is not such that we feel comfortable providing those figures.”

The government initially released only the cost over the forward estimates ($13.4 billion), and a total decade-long figure (2018-19 – 2028-29) of $140 billion.

Subsequent Treasury estimates were produced for the various stages of the plan: $16 billion for first stage, rising to $102 billion when the second stage is included, with the final figure for all three stages being $144 billion.

The PBO annual estimates are in the table below.

Personal Income Tax Plan budget analysis by Parliamentary Budget Office

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The PBO numbers will go to the Senate Economics Legislation Committee hearing on Wednesday. Labor also asked for PBO calculations.

The Greens said the PBO costings showed that stage 2 of the plan would lose $80 billion in revenue over the next ten years while stage 3 would lose $41.6 billion.

The party called on Bill Shorten and Labor to join the Greens “in ruling out support for Turnbull’s personal income tax cuts”.

Labor has said it supports stage one, is making up its mind about stage 2, and does not like stage 3. But it has not clarified what its position would be if the government sticks to its position that it won’t split the bill.

Greens leader Richard Di Natale: “It is beyond belief that the Labor Party is even considering supporting the second stage of Turnbull’s personal income tax cuts that will turbocharge economic inequality in Australia and lead to the loss of $80 billion in revenue for our schools, hospitals and essential services.

“Nearly $40 billion of this second stage will go to the wealthiest one-third of income earners.”

Di Natale said Labor was also floating the idea of passing the whole package through the Senate. “This would see Labor also support the third stage of the plan, which is worth $41.6 billion over five years, with the amount going to the wealthiest Australians compounding by an extra billion dollars each year.

The Conversation“In the final year of the Turnbull’s tax cuts, almost 70% of the entire benefits flow to people earning over $90,000,” he said.

Michelle Grattan, Professorial Fellow, University of Canberra

This article was originally published on The Conversation. Read the original article.

The Coalition’s income tax cuts will help the rich more, but in a decade everyone pays more anyway


Ben Phillips, Australian National University and Matthew Gray, Australian National University

Does the Coalition’s tax plan favour high earners over those with lower incomes?

Depending whom you listen to, the tax cuts, unveiled in last month’s federal budget, lead to either a flatter, more regressive tax system under which low-income earners will be even worse off relative to high earners, or the opposite, with a progressive outcome. It can’t be both.




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While there are tax cuts proposed from July this year, the most substantial cuts are planned for 2022-23 and then 2024-25. As this is several years away, it becomes tricky to analyse their likely impact.

The main issue is wage inflation, which in turn leads to “bracket creep”. We tend to think about the change in terms of what it means for today’s incomes, but that’s not realistic. An annual income today of A$80,000 will be around A$110,000 by 2027-28 if the government’s wage projections prove to be accurate.

Using our model of the Australian tax and welfare system, PolicyMod, we projected the incomes of each person in the 20,000 families in the underlying model survey data (the Australian Bureau of Statistics’ Survey of Income and Housing 2015-16).

We did this for each year until 2028-29, using the federal budget’s wage assumptions. We then used this to forecast the outcome of the proposed tax cuts, and compared it with the effects of maintaining current tax rates.

Our results are remarkably similar to the forecasts of Treasurer Scott Morrison. He has projected a total tax cut between 2018-19 and 2028-29 of A$143 billion, whereas our model puts this figure at A$140 billion.

Whose tax is being cut?

Who will actually receive these tax cuts, and will they really benefit? Our modelling shows around 50% of the adult population pays income tax in a given year. So clearly the benefit goes to the top half of the taxable income distribution.

What’s more, if the tax cuts are only returning bracket creep for many taxpayers, then they are not really tax “benefits”, because they will not make those people better off in real terms.

This is clearly shown in the chart below, where the bottom 50% of taxable income individuals will have a negligible share of tax savings. Around 33% of total savings between 2018-19 and 2028-29 go to people in the top 5% of incomes. In 2028-29 it is 38%.


Author provided

If this were the end of the story, we might conclude that the tax cuts are grossly unfair. But it’s not quite as simple as that, because people with the highest taxable incomes are not necessarily the “wealthiest” people.

A more reasonable test considers whether the income tax cuts are real or “imagined”. If they are real, average tax rates should be lower. The fairness of the tax cuts can then be judged by the share of the tax burden across the income distribution.

If high earners are paying a larger share of tax than low and middle earners, then we have a more progressive tax system. A less progressive system, in contrast, is a flatter system – although not necessarily a totally flat income tax rate.

But determining whether the proposals are progressive or regressive still doesn’t fully answer the question of whether they are “fair”.

Fair tax hikes for all?

The chart below shows that tax rates will increase for all income groups, although they will rise more slowly if the Coalition’s tax plan is delivered. Crucially, higher earners will feel this difference most keenly. By 2027-28, the top 5% of earners average tax rate will be 2.1 percentage points lower than under the current regime, whereas for the bottom 50% the difference is just 0.2%.


Author provided

Another way of looking at progressivity is to consider the share of tax paid. The chart below shows that under the current policy trajectory, higher-income groups pay a lower share of tax in future years compared with 2017-18. This occurs naturally due to bracket creep, which tends to impact low- and middle-income people more than those with very high incomes.

In the current financial year the top 10% of earners pay 58% of personal income tax. By 2027-28 this is projected to fall to 54.8% if the tax regime remains unchanged. Under the Coalition’s tax plan it is only marginally lower still, at 54.3%.


Author provided

Anyway, it is purely hypothetical to extrapolate the current tax regime as far ahead as 2027-28. It is highly likely that future governments will change the tax code for a range of reasons, including overcoming bracket creep.

Note also that some “low-income” people may live in high-income households. However, our earlier analysis looking at households rather than individual earners also suggests that the Coalition’s tax proposal is marginally less progressive than the current system.

The chart below shows that the Coalition’s tax policy will have only a limited impact on the tax shares at different income levels by 2027-28. Perhaps a more relevant comparison is with the current tax shares for 2017-18, where a clearer pattern emerges of low- and middle-income earners paying a larger share of taxation.


Author provided

The upshot is that the Coalition’s policy only partly overcomes bracket creep, with taxes still set to increase overall in the long term. The proposed policy does slightly more to overcome bracket creep for higher-income individuals. But it also locks in a higher tax share for those on low and middle incomes, and a lower share of the tax burden for higher earners.

The ConversationOn that basis, the proposals will lead to a slightly less progressive income tax regime than the one we currently have. But it will still be a long way short of a flat tax, and pretty much everyone looks set to be paying more income tax a decade from now.

Ben Phillips, Associate Professor, Centre for Social Research and Methods, Australian National University and Matthew Gray, Director, ANU Centre for Social Research and Methods, Australian National University

This article was originally published on The Conversation. Read the original article.

Government ‘dares’ the Senate on its corporate and income tax packages


Michelle Grattan, University of Canberra

The government will put both its company tax legislation and its income tax package to the Senate before parliament rises in late June, Finance Minister Mathias Cormann has confirmed.

Cormann also sought to scotch suggestions that the tax cuts for big businesses might be dropped if they were defeated then, saying “we are totally committed to the reform”.

He told reporters on Monday the corporate tax cuts were “even more important and more urgent now” than when the government took its package to the election as its central policy in 2016.

Within Coalition ranks there are doubts about persisting with the company tax measure if it can’t be legislated. The chances of the legislation passing the Senate plummeted last week when Pauline Hanson went back on her commitment to back it. But on Monday she appeared to be sounding a little less adamantly opposed, and invited people to contact her office with their views.

With three Senate votes Hanson has a veto.

Cormann committed the government to take the plan to the Super Saturday July 28 byelections if it was defeated in parliament.

He again ruled out a compromise that set a $500 million annual turnover threshold, which would give the package a greater chance of success. That would exclude the highly unpopular banks, as well as other big companies, from the cut.

Cormann said such a threshold “would be a barrier to growth. If you put an artificial ceiling on the growth that a business can aim for by essentially providing a disincentive to further growth beyond that threshold, you are putting a brake on jobs growth”.

The government has already legislated for tax cuts for firms of up to $50 million turnover. That limit was a deal with Senate crossbenchers.

The company tax cuts as well as the competing government and opposition income tax packages are set to be core battlegrounds in the byelections.

The government is also holding firm on not dividing up its three-stage income tax legislation. “We will not split the package”, Cormann said.
“Bill Shorten has to make a decision whether he wants to stand in the way of personal income tax relief for low and middle income earners.

“He has to make a decision whether his anti-aspiration, politics of envy vendetta is more important to him than providing cost-of-living pressure relief to low and middle income earners.”

Stage three of the government’s income tax package is the most controversial part because it flattens the tax scale. The benefits for low and middle incomes earners are in stage one, which the opposition supports. Labor, while highly critical of the third stage, has not said what it would do in the Senate if the government refuses to have at least that stage split off.

The government this week will continue talking with crossbenchers over the two tax packages.

Campaigning in Braddon, one of the byelection seats, Shorten said Malcolm Turnbull’s “corporate tax cuts are dead, buried and cremated – he is just too silly and arrogant to realise that.”

“‘Every extra dollar that goes to the Commonwealth Bank, or Westpac or ANZ or NAB, is a dollar less we have got in our in our kids’ schools, it’s a dollar less we’ve got to help the pensioners with their power bills, it’s a dollar less to help people when they are sick,” the opposition leader said.

Newspoll, published in Monday’s Australian, asked people whether the proposed changes to company tax rates should come into effect as soon as possible, in stages over the next 10 years, or not at all. More than a third (36%) said as soon as possible, 27% said in stages and 29% said not at all.

The poll had Labor back with a 52-48% two-party lead, compared with 51-49% in the last two polls.

The ConversationIt also saw Anthony Albanese heading Shorten as better Labor leader, 26% to 23%. Tanya Plibersek was also on 23%. The prospect of the byelection has stirred some leadership muttering in the ALP.

Michelle Grattan, Professorial Fellow, University of Canberra

This article was originally published on The Conversation. Read the original article.

Turnbull wants to take middle-income earners’ income tax both up and down


Michelle Grattan, University of Canberra

If you were running a well-honed political strategy you’d surely have your prime minister announce his plan to give middle-income earners income tax relief in a major speech around Australia Day, forming a launchpad for 2018. You wouldn’t be tossing it out there at the fag end of a disastrous year, amid the general chaos.

But Malcolm Turnbull is operating on tactics rather than strategy.

Regardless of how long the tax aspiration had been in the pipeline, his Monday night speech to the Business Council of Australia did its job of securing a “look-over-here” effect, when Turnbull was under fire for cancelling next week’s House of Representatives sitting.

It achieved the front–page headlines despite being totally without detail.

Apart from general sentiments about the desirability of lower personal income tax, all Turnbull said in the way of specifics was: “In the personal income tax space, I am actively working with the treasurer and all my cabinet colleagues to ease the burden on middle-income Australians, while also meeting our commitment to return the budget to surplus”.

How much this will amount to in the end and when taxpayers would get something tangible remain to be seen. Asked on Tuesday when he thought he would deliver the tax cuts, Turnbull said: “Well, this is going to be our focus next year. Obviously we’ve got the budget coming up, as always, in May. But we are determined to make sure that there is more money in the pockets of hardworking Australians.”

If in the event the tax relief became an election promise, rather than pre-election money in the pocket, would voters be sceptical?

In the meantime, Labor – which proposes a higher tax regime – had plenty of ammunition, not only to assert that Turnbull was looking for a distraction but to remind people that this year’s budget actually flagged an increase in personal tax. This is in the form of a higher Medicare levy to help fund the National Disability Insurance Scheme.

From July 2019 the Medicare levy will rise from 2% to 2.5%. This will be a nice little revenue-earner, raising A$8.2 billion over the forward estimates.

As Deloitte’s Chris Richardson points out, after finding deep spending cuts too hard a road in trying to repair the budget, the government in May opted for higher taxes (although it had just passed some of its business tax cuts from the 2016 budget and was still pressing the rest).

Richardson dubs the May strategy Plan B, after Plan A, based on spending cuts and epitomised by the 2014 budget, had been abandoned.

“Surely they can give Plan B longer than six months,” Richardson says. It seems not.

Richardson says tax cuts are not needed to stimulate the economy, and are counter-productive for fiscal repair – which is dependent on projected revenue growth.

“The figures show that what gets us to [the projected] surplus in 2020-21 is higher taxes. The move from deficit to surplus between 2016-17 and 2020-21 is a swing of 3% of national income. Of that, 2.5% is from revenue and 0.5% from spending cuts,” Richardson says.

Personal income tax cuts would be costly. On Tuesday former minister Eric Abetz, speaking on Sky, suggested the priority should be on income tax cuts over the company tax cut for big business that’s stymied in parliament. Any retreat on the business tax cut would be a major backflip from the government.

A Parliamentary Budget Office paper released a few weeks ago notes that the average tax rate for individuals is estimated to increase by 2.3 percentage points from 2017-18 to 2021-22.

There are increases in every income quintile although they vary. The largest increase is expected in the middle quintile (taxable incomes from $37,000 to $56,000) where taxable income is expected to be an average $46,000 this financial year. These taxpayers are projected to see their average tax rate increase by 3.2 percentage points by 2021-22, the paper says.

As for the Medicare levy increase, it “has the greatest impact on individuals in the third, fourth [$56,000 to $85,000], and fifth [$85,000 and over] income quintiles. Medicare levy concessional arrangements eliminate this impact for the first income quintile and limit the impact for the second,” the paper says.

So we have the government simultaneously planning a tax rise while now talking about tax relief for middle-income earners.

The ConversationAnd that takes us to the question of whether Turnbull can manage this new tax debate he has opened. This includes making sure he and his treasurer are on the same page, and the backbench doesn’t run off prematurely and in multiple directions. At an earlier stage of his prime ministership, a debate about tax directions didn’t go well. He can’t afford that sort of mess now that he has so little political capital.

https://www.podbean.com/media/player/nqtdd-7bf599?from=site&skin=1&share=1&fonts=Helvetica&auto=0&download=0

Michelle Grattan, Professorial Fellow, University of Canberra

This article was originally published on The Conversation. Read the original article.

Income tax relief on Turnbull’s agenda


Michelle Grattan, University of Canberra

Malcolm Turnbull has raised the prospect of personal income tax relief to help middle-income earners, saying he is “actively working” on it.

As the government is still trying without success to get the remaining part of its company tax plan through parliament, which would deliver lower tax to big companies, Turnbull has moved to hold out the prospect of relief for individuals.

Speaking to the Business Council of Australia on Monday night, he noted the government had already lifted the second-highest income tax bracket threshold from A$80,000 to A$87,000, keeping some half-a-million people from moving into a higher bracket. It had also spared people facing a permanent top marginal rate of 49.5% by not making the temporary deficit levy permanent.

“You know our plans on corporate tax,” he said. “In the personal income tax space, I am actively working with the treasurer and all my cabinet colleagues to ease the burden on middle-income Australians, while also meeting our commitment to return the budget to surplus.”

He said his commitment to all Australians was: “Whether you are starting out in your first job, a worker providing for their family, or a business hiring staff, our goal is always to leave more money in your pocket, not in ours.

“Higher taxes penalise people who are trying to get ahead. But when you reward hard work and enterprise, you encourage hard work and enterprise.

“It’s pretty simple – more investment, more jobs. That’s the key.”

He recalled that his earliest foray into the personal income tax debate in 2005 as a fairly new MP was not uniformly welcomed. He did not spell out that then-treasurer Peter Costello was furious.

But the concerns that underpinned a report he released then still existed: “The tax system remains complex and compliance is a burden, our marginal tax rates are high, bracket creep is a constant challenge that needs to be addressed”.

Turnbull said that “just because we’re in challenging fiscal times doesn’t mean we should raise the white flag on making the tax system work better”.

A Treasury analysis showed Australia risked being left behind by the rest of the world in the competitiveness of its business tax, he said, citing in particular the US and the UK.

The Conversation“If we don’t reduce our corporate rate to 25% as planned – in our Enterprise Tax Plan – over the coming decade, the only advanced nations that will exceed Australia’s tax rate are Japan and Malta.”

https://www.podbean.com/media/player/nqtdd-7bf599?from=site&skin=1&share=1&fonts=Helvetica&auto=0&download=0

Michelle Grattan, Professorial Fellow, University of Canberra

This article was originally published on The Conversation. Read the original article.