The budget’s dirty secret is the hikes in tax rates you’re not meant to know about



File 20190418 28090 vaki39.jpg?ixlib=rb 1.1
The wheels of the economy will grind more slowly because of undeclared tax rate hikes in the budget.
Shutterstock

Steven Hamilton, George Washington University

As I mentioned a few days ago, Treasurer Josh Frydenberg and Prime Minister Scott Morrison recycled three pretty big tax ideas in the 2019 budget, each one originally from the 2018 budget but supercharged, and in one case doubled.

The ideas were:

  • eventually eliminating the 37% bracket to make the tax system flatter;

  • upsizing the Low and Middle Income Tax Offset to A$1080; and

  • increasing the value of business investments that may be written off.

Today I’ll deal with the second: the Low and Middle Income Tax Offset, also known as the LMITO or lamington.

In last year’s budget it was to be worth up to $530 per person, but this year the government intends to more than double that to $1,080. And they’d do so retrospectively, so that by the time people put in their 2019 tax returns, many will get a tax cut more than twice as big as originally expected.

(As it happens, the operative word is “intends”. In budget week Morrison said the Tax Office would be able to make the changes “administratively” without the need for legislation. He didn’t have time to introduce the leglislation and Labor would broadly support it. Last week in its official pre-election overview of the government’s finances, the public service said no. It would need “the relevant legislation to be passed before the increase to the Low and Middle Income Tax Offset can be provided for the 2018-19 financial year”.)

The idea of the lamington

But let’s examine the idea of the lamington anyway because it does have bipartisan support and will become law and part of the tax scales. On one hand, it will deliver a welcome boost to taxpayers on middle and low (but not the lowest) incomes. On the other hand, it will push up a key marginal tax rate and kill incentives in a way the Treasurer hasn’t yet acknowledged.

The offset is a gift of $530 (soon to be $1080) slipped into the tax returns of everyone who earns between $48,000 and $90,000.

People earning more than $90,000 will get less of the offset as their income climbs, up to an income of $125,000 when it the offset will vanish. Low earners will get $200 (soon to be $255), climbing to the maximum of $530 ($1080) as their income climbs from $37,000 to $48,000. People with an income too low to pay tax won’t have any tax to offset, and so will get nothing.

Described in dollar terms as I just have, it’s easy to understand. You can work out the tax cut you’ll get, and the Coaltion has helpfully prepared tables to let you see.

But it is possible to describe the changes in another way, not in dollar terms, but as a new set of marginal rates. And this is where they get interesting, and unattractive.

As a longer-term goal, the Coalition says it wants most taxpayers to pay the same unchanging marginal rate of 30% for all incomes between $45,000 and $200,000. It believes that high marginal rates and frequently changing marginal rates sap incentive.

By 2024 it wants the tax scale to look like this:



Commonwealth budget papers

Frydenberg says the lower, flatter scale would incentivise “people to stay in work, to work longer, to work more”.

So you would think he wouldn’t want to make it bumpy, or lift the marginal rate, which is exactly what his LMITO does.

What the lamington does to those rates

You won’t find the following chart anywhere in the budget papers, but it is what the offsets in this budget and in the last one will do to the tax scale for the next four years before they are replaced by the flatter scale.

First, here’s what we are told the rates look like today:



Australian Tax Office

Now, here’s what they will actually be when you take account of the existing Low Income Tax Offset (or LITO) and the promised supersized Low and Middle Income Tax Offset (LMITO) in the budget.



Derived from Commonwealth Budget Paper 2, 2019

The graph is lumpy in part because the LMITO is clawed back at the impressive rate of 3 cents for each extra dollar earned between $90,000 and $125,000.
This means it adds 3 cents to the marginal tax rate in that range, pushing it up from 37 cents to a high 40 cents, before at higher incomes it falls back to 37 for taxpayers earning more than $125,000.

Bizarrely, it means the party that has pledged to abolish the 37% rate because it saps incentive has decided to first boost it to 40% over a substantial range of incomes.

The graph is lumpy further down the income scale for another reason: as the LMITO climbs between $37,000 and $48,000, the separate LITO is is clawed back.

Below are the “including offsets” and “excluding offsets” scales together, to enable you to see the differences. The tax rates people will face are those including offsets.



Derived from Commonwealth Budget Paper 2, 2019

The graph clarifies the trade-off at the heart of the lamington: it targets tax relief at low and middle earners at the necessary cost of higher rates further up the income scale.

How much of a problem is it? Well, that depends.

It’s a classic example of what economists call the equity-efficiency trade-off.

Arthur Okun, an adviser to US President Lyndon Johnson, described it thusly: redistributing income is like transporting water from one place to another in a leaky bucket – you can do it, but you’d better be prepared to lose some water as you ae doing it.

In much the same way, you can restrict tax cuts to low earners, but that means high earners have to face higher marginal rates which to some degree will shrink economic activity.

The critical question is how much it will shrink economic activity, how leaky is the bucket?




Read more:
Mothers have little to show for extra days of work under new tax changes


It worsens incentives for the roughly 700,000 Australians earning between $90,000 and $125,000. For every additional dollar each of them earns, the government will take away an extra 3 cents. That might not sound like much, but the evidence suggests it will have an effect.

How? Well, the tax rate increase lowers the benefit of generating additional taxable income. And there are a range of ways to avoid generating additional taxable income. The most obvious is working fewer hours, for example by not working overtime or by working fewer days per week. Secondary earners (often women returning to work after maternity leave) are particularly prone to that kind of response.

But it also could mean not going for promotions or pay rises where they take effort, for example by not gaining extra skills or not putting in additional work effort. And, as I found in a recent study, it could involve claiming more deductions to put a brake on your taxable income.

What will the lamington cost us?

Relying on data for the Australian tax system, I find that a 3 percentage point increase in the marginal tax rate results in an average reduction in taxable incomes of around 0.6%. For someone earning $125,000 per year, that amounts to a reduction in taxable income of $750 per year, by any of the means described above or others.

If we assume the average affected person earns in the middle of the relevant range, that implies an aggregate reduction in taxable income of almost half a billion dollars a year from the 3 percentage point tax increase. That means around $300 million less in consumption and saving and around $200 million less in income tax revenue, all because of LMITO.

That half a billion per year is the real, measurable, and unavoidable cost of targeting the Coalition’s tax break. When economists talk about “distortions” or “deadweight losses” created by tax increases, that’s what they mean. It is the cost of fairness. Whether that cost is worth paying is an open question. The government has evidently decided that it is. And now we can decide at the ballot box, ideally armed with proper information.

But it is of concern that the presentation of the policy – while politically attractive – obscures the genuine increases in marginal tax rates the Coalition’s changes will bring about, and thereby their real economic costs.

Eliminating most offsets and concessions, as recommended by the Henry Tax Review in 2010, would do the tax system good. And it do all of us good by making it easier to see what we are being asked to vote for come election time.




Read more:
A simpler tax system should spark joy. Sadly, the one in this budget doesn’t


The Conversation


Steven Hamilton, Assistant professor, George Washington University

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

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PAKISTAN: MUSLIMS ATTACK PASTOR’S HOME, RELATIVES


After shooting into air, assailants strike mother, sister-in-law with rifle butts.

LAHORE, Pakistan, June 12 (Compass Direct News) – In a growing culture of violence here, a traffic incident in Punjab Province this month led to Muslim assailants later mounting an attack on the home of a Christian pastor they have increasingly resented for his evangelism and justice ministries. The attackers threatened more violence if the pastor does not drop assault charges.

A few of the 17 assailants struck the mother and sister-in-law of pastor Riaz Masih with rifle butts after the pastor’s brother, who lives at the same multi-housing complex as Masih in Kila Sardar Shah, Sheikhupura district, on June 1 complained to a local councilor about the official nearly driving into his sons. Christian leaders said the roadside incident was only the fuse igniting hostilities that have grown due to meetings held by Christ for All Nations Ministries (CANM).

The meetings have attracted many youths, including some Muslims. Pastor Masih is national coordinator of CANM, a self-supported church-planting ministry. Saqib Munawar, chairman of CANM, said the attack on the pastor’s home in the remote village is an indication that as Islamic extremism rises amid a military attempt to flush Islamic militants from the Swat Valley in the country’s northwest, a growing culture of violence means minor incidents more easily erupt into attacks.

“As the Swat operation is going on, hostilities against Christians are on the rise,” Munawar said. “Extremism, which has flourished in the last few decades, is now creating problems for all Pakistanis. This attitude has promoted violence in the country.”

Pakistanis are becoming more violent, he said, and extremism has increased partially in response to evangelism efforts by Christians, he said.

In the triggering incident, pastor Masih’s 17- and 18-year-old nephews were standing on the side of a road with their backs to traffic in Kila Sardar Shah when Malik Younus, a village councilor, passed in a vehicle that nearly struck them. The teenagers immediately complained to Younus that he should have at least honked to warn them to step aside.

Younus got out of his vehicle and beat them, Munawar said. They complained to their father, Mushtaq Masih, who then called Younus. Younus threatened to beat them again, and Mushtaq Masih responded that he would have no choice but to call police. Younus became furious, according to Munawar.

Within an hour Younus, his brother Malik Falak Sher and 15 other men armed with automatic weapons and wooden clubs arrived at the multi-family complex where Pastor Masih and his brothers live with their families. The pastor was some distance from home when his 12-year-old daughter called and told him that the Muslim attackers were outside firing into the air.

Rushing to the scene, Masih approached the house from the backyard as the assailants were breaking down the main gate. The pastor managed to lock himself with members of his family inside a room, but his sister-in-law – wife of his younger brother Ilias Masih – and his mother were outside at the time.

Having broken down the main gate and wall and had entered the courtyard, the assailants struck the two women with rifle butts and demanded to know where the boys and their father were. Pastor’s Masih’s brother, Mushtaq Masih, had also locked himself and his family in a room. The attackers were trying to break down the doors of rooms in pastor Masih’s home when one of them called off the assault and they left.

The family reported the assault to police, but officers have done nothing as they have close ties with the attackers – and the assailants also have links with various local government leaders, Munawar said. The intruding Muslims warned pastor Masih and his family that if they contacted police and media, they would face “retribution.”

The Station House Officer told Compass that Younus and his cohorts had been released on bail; he would not comment further.

Munawar said the Masih families will likely seek a settlement instead of jail terms.

“The family will probably go for an out-of-court settlement, as they have to live,” he said. “However, fears are that such flare-ups may hit back, which would certainly hamper our evangelical efforts.”

Rumors spread that a former member of the Punjab Assembly, Agha Gull, was involved in the traffic incident, but Gull told Compass that he was in Iraq at the time of the incident and had nothing to do with it. Gull said someone told him that a clash took place on the road, but that “none of the parties came to me.”

Justice Ministry

Certain that the remote village Muslims would not have access to Compass news, pastor Masih told Compass that the antagonists were upset with him also over his efforts to take back lands stolen from Christian families. There are four Christian families in the village of 40 to 50 families.

The Christian villagers had paid for land they have lived on since 1989, but they never received documents for the transfer, leaving the real estate in the hands of Muslim businessman Syed Izhar Shah – whom villagers say is involved in land theft in collaboration with those who instigated the June 1 attack, Younus and his brother Sher.

Last year pastor Masih offered 20,000 rupees (US$250) to the landowner to legally transfer the property with proper documentation, but the owner declined. Pastor Masih’s father has also paid some 10,000 rupees for his share of the land. Additionally, Akram Masih, who heads one of the four Christian families in the area, has paid an additional 27,000 rupees (US$335) in an effort to legally obtain his share of the land, but the landowner forbid him to take possession as well.

Younus and Sher are behind a land-grab designed to drive the few Christian families from the area, pastor Masih said. They have illegally taken over a nearby, eight-acre tract of land zoned for a housing tract called Royal Town. Christian villagers had paid for this land also in 1989 – and also without receiving documentation – and the legal land owner, Syed Izhar Shah, is pressuring them to either pay the current price or leave the village, pastor Masih said.

“The attack has been unleashed on the weakest, because there are only four Christian families living in this village,” said pastor Masih. “They are vexing us so that we leave the area.”

Pastor Munawar said that anti-Christian hostilities resulted in the cancellation of CANM’s youth program, which was scheduled for last Monday (June 8).

“The fate of our next program, scheduled on June 21, is also hanging in balance,” he said.

Munawar added that last year’s annual youth program, held in May, had been secured by armed Christians after an area Muslim tipped them off that their worship could be targeted. The guards were provided licensed .222 Remington rifles.

Report from Compass Direct News

CRICKET: AUSTRALIAN TEST TEAM IN DECLINE


I have been saying it for some time now – both on and off this Blog – the Australian test cricket team is in decline and coming back to the field. The recent test series results against India, New Zealand and now South Africa seem to show that it is indeed so. It had to happen – just as it happened to the world dominating West Indian team of yesteryear. Teams rise to the top and come back to the mix as another rises to the top.

Which is the top team now? Is it South Africa or is it India? England pretended to make a claim for the top ranking a little while back, but these two teams seem far more serious in their respective attempts. A test series between these two teams will perhaps show us the answer.

In the mean time it is likely that South Africa will defeat Australia in the current test series in Australia to the tune of 3 – 0. That is my prediction.

The ridiculous inclusion of Andrew Symonds while injured in the last test match came home to bite Australia when Brett Lee went down injured. Lee now appears to be out injured for some time and will join Stuart Clark on the sidelines – as will Andrew Symonds belatedly. Shane Watson will also be on the sidelines and his inclusion in the last team is as bewildering as that of Symonds, given that Watson was also injured and requires surgery.

It seems incredible to me that the replacements coming into the Australian team are simply those replacing injured players. The inclusion of Doug Bollinger is one that I have thought logical for some time, while Ben Hilfenhaus and Andrew McDonald are unexpected in my view.

If the selectors are going to keep Mitchell Johnson and Peter Siddle (which I suspect is a given), then I would also include Bollinger and Hilfenhaus, as well as McDonald. Who would go to make room for these three? Lee and Symonds (as well as Watson) have already been forced out due to injury. I would put Hilfenhaus in ahead of Nathan Hauritz. We just don’t have a spinner that currently cuts it at international level.

The selection that really bothers me is that of keeping Matthew Hayden in the side – if the selectors don’t know that it is time for him to go then surely Matthew Hayden must know! Even if he scores a reasonable or big score in the final test it is time for Hayden to make way for Phillip Hughes. Hayden has done little to justify his continual selection in the test team for some time and it is now becoming a sad tragedy to see this former great test opener heap embarrassment upon himself and the national team with each failure. It seems any big scores are now punctuated by a plethora of insignificant contributions with the bat from Hayden.

And one other thing – the attempt by Mike Hussey to take that skier in the last test – if you can’t see it in the sun there is little he can do about it. It looked embarrassing but there was little Hussey could do to change what was. The bigger concern for Hussey is his own poor form in the batting department. He must begin to contribute more soon too or he also could face the chop.

BELOW: The Michael Hussey attempted catch

BELOW: Graeme Smith speaks to Mark Taylor after South Africa won the second test and the series