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



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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?




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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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Potentially unaffordable, and it still won’t fix bracket creep. The Coalition’s $300 billion tax plan assessed



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The budget tax cuts aren’t tax reform, and probably can’t be paid for over the longer term.
Mick Tsikas/AAP/Shutterstock

Danielle Wood, Grattan Institute; Kate Griffiths, Grattan Institute, and Matt Cowgill, Grattan Institute

The big surprise in last week’s budget was the size of new income tax cuts – A$158 billion over a decade, in addition to the A$144 billion already promised in last year’s budget.

A lot of the plan doesn’t take effect until 2024-25, so it’s easy to dismiss as tax cuts on the never-never. But given it’s a central plank of the government’s campaign for re-election, it deserves closer scrutiny.



Grattan Institute

The plan comes in three stages.

The major part of stage 1 is the Low and Middle Income Tax Offset – giving everyone earning less than $126,000 a cheque in the mail come July and then for the following three years. Stage 2 (2022-23) would lift the top threshold of the 19% and the 32.5% brackets. The biggest cuts would come in stage 3 (2024-25) when the government removed the 37% bracket and cut the 32.5% rate to 30%.

Everyone earning between $45,000 and $200,000 would face the same 30% marginal tax rate.


2019 Budget infographic

Unsurprisingly, in absolute terms the biggest beneficiaries would be high-income earners. More than half the benefit would go to the top 20% of earners, those with taxable income over $87,500 a year.

But to better understand what the plan would do to the progressivity of the system, we need to consider what would happen to rates without the plan.

Without change, the average tax rate would increase across the income distribution, as wage growth pushed people into higher tax brackets.

The plan would prevent some of that bracket creep by lowering future tax rates.

Most taxpayers would be better-off than without a change – but high-income earners would benefit the most.




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NATSEM: federal budget will widen gap between rich and poor


It goes part-way to addressing bracket creep for low and middle income earners. Someone in the middle of the income distribution would pay 3.6% more tax in 2029-30 than today, instead of 6.1% more without the plan.

But Australia’s highest earners – the top 15% of taxpayers – would escape bracket creep entirely, paying the same average tax rate or less in 2029-30 than today.



Grattan Institute

This result would be a shift in the proportion of tax paid at different points in the income distribution.

Middle earners, those earning between the third to top and the third to bottom ten percents of the income distribution, would pay a larger share of tax in 2029-30 than they do today: 23% compared to 20%.

But high-income earners, those in the top fifth of the income distribution, would pay a smaller share of tax: 65% in 2029-30 compared to 68% today.

It’s more a tax cut than tax reform

The government has been keen to sell the tax package as a “huge reform” because it removes an entire tax bracket.

It says flattening the tax scale would create a greater incentive for higher-income earners to work. But unlike earlier tax reform packages, there has been little in the way of clear articulation or modelling to demonstrate that this would be the case. And there are reasons to doubt that it would be the case.




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


The people who would benefit most from the tax reform would be in the top 6% of the income distribution in 2024-25. Barring major changes to gender work patterns in the next five years, they would be disproportionately men, working full time. But as the Henry Tax Review pointed out, the people who are the most responsive to changes in effective tax rates are second-earners (mainly women) working part-time.

Proper reform of the income tax system would lower the economic barriers to second-earners working more: the increase in tax, the cuts in family and childcare benefits and higher childcare costs that accompany working more.

And it might not be affordable

The budget numbers point to a decade of surpluses, exceeding 1% of GDP by 2026-27, even with the tax cuts. But the surpluses rely on payments as a share of gross domestic product falling steadily over the decade, from 24.9% of GDP today to 23.6% by 2029-30.

Achieving such a reduction would require significant cuts in spending growth across almost every major spending area, during a period when we know that an ageing population will increase spending pressures, particularly on health and welfare. The Parliamentary Budget Office says ageing will add 0.3% of GDP a year to spending by 2028-29.

The approach marks a change since the 2016-17 budget, when the government forecast that payments would grow as a share of GDP over the decade because of the ageing population. There have not been enough significant savings measures in the past three budgets to explain the turnaround. It appears to be more driven by assumption than by reality.




Read more:
Expect a budget that breaks the intergenerational bargain, like the one before it, and before that


If we were to make the still-conservative assumption that spending remained merely constant as a share of GDP at 24.9%, the third stage of the tax cuts would push the budget back into deficit in 2024-25.

The bottom line

The pre-election tax package finally does something about bracket creep – but solves it only for the highest of earners.

It passes up the opportunity for more comprehensive reform. And most disconcertingly, it punches a sizeable hole in government revenue just at the time an ageing population will start to demand that more money be spent.




Read more:
What will the Coalition be remembered for on tax? Tinkering, blunders and lost opportunities


The Conversation


Danielle Wood, Program Director, Budget Policy and Institutional Reform, Grattan Institute; Kate Griffiths, Senior Associate, Grattan Institute, and Matt Cowgill, Senior Associate, Grattan Institute

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

What will the Coalition be remembered for on tax? Tinkering, blunders and lost opportunities


Robert Breunig, Crawford School of Public Policy, Australian National University and Kristen Sobeck, Crawford School of Public Policy, Australian National University

This article is part of a series examining the Coalition government’s record on key issues while in power and what Labor is promising if it wins the 2019 federal election.


Politicians often invoke the word “reform” to convey the significance, or gravitas, of a particular policy change they are proposing.

However, the tax policies implemented over the six years of the Abbott-Turnbull-Morrison government should be more aptly described as: no reform, lots of tinkering, two blunders and some lost opportunities.

To be fair to the leaders of the Coalition, both Abbott and Turnbull began their prime ministerships professing a large appetite for tax reform.

In opposition Abbott and his treasury spokesman Joe Hockey had promised a major inquiry. Hockey said it would pick up where Labor’s Henry Tax Review left off:

We thought the Henry Tax Review was going to be a proper process. Now, that has obviously been an abject failure. We’ve said – Tony Abbott announced
in Budget and reply speech – we will have a proper process for proper tax reform, and whatever comes out of that process, which will be a white paper, we will take to a subsequent election, seeking the mandate of the
Australian people – their approval.

Treasury’s Re:think tax discussion paper, which is as far as the tax white paper process got.
Source: Commonwealth Treasury

It got as far as a discussion paper, seeking submissions.

When Turnbull assumed the leadership, the draft white paper, which would have followed the discussion paper, was scuttled, and the process ended.

Tinkering…

Instead what resulted were marginal changes to personal income tax. One of the brackets was expanded and a new low and middle income tax offset was added.

Marginal changes to superannuation tax further added to the complexity of the tax system as a whole. The current superannuation system disproportionately rewards higher income earners because most contributions are taxed at the same low rate (15%) regardless of the taxpayers’ income tax rate.

The Coalition’s response was to apply a 30% tax on contributions for those earning $250,000 or more (down from the previous threshold of $300,000) and to cut the cap on concessional contributions from $30,000 ($35,000 for those aged 49 and over) to $25,000. And it capped at $1.6 million the amount that could be transferred into the “retirement phase” where fund earnings in retirement were exempt from tax.

It made the system much more complex, and it could have been done more simply, perhaps by reimposing tax on super earnings in retirement (at a low rate) or by taxing by contributions at a standard discount to taxpayers at a marginal rate, as recommended by the 2009 Henry Tax Review.

Alongside these marginal changes, there was also a failed attempt to cut the company tax rate (only the tax rates for small companies were cut) and a muddled discussion about the progressivity of the income tax system.

All in all, many a tinker, but no reform.

Blunders…

Human-induced climate change is compromising the sustainability of our planet. The only way to solve it is by changing incentives using the economic toolkit at our disposal. The Carbon Tax was a good tax. It shifted the costs of pollution onto those who created it, instead of subsidising processes that damaged the environment.

No solution to climate change is possible without corrective taxes.

At some point we’ll have to climb that mountain again, assuming the mountain is not underwater before politicians come to their senses.

The repeal of the Minerals Resource Rent Tax was also a step backwards. By taxing rents (excess profits) instead of profits, it avoided the disincentives created by traditional company taxes. And, it was a good example of the kind of taxes that could eventually replace or supplement company tax.

…and lost opportunities

Changing the GST could have ensured at least one significant contribution to overall tax reform. At 10%, the rate is relatively low by international standards and applies to a shrinking share of spending, as more and more of our money is spent in places or on goods that aren’t taxed.


Value-added (GST) tax rates in OECD and selected Asian countries.
Re:think, Treasury tax discussion paper, March 2015

These factors, combined with the fact that GST is difficult to evade and less costly to administer, suggest that broadening the base is low hanging fruit on the tax reform tree, ripe for picking.

Instead, it may as well be forbidden fruit from the Garden of Eden. We’ve gone in the wrong direction by adding even more exemptions and cutting short talk of increasing the rate.

The failed debate on company tax cuts was another missed opportunity.

What remains is a system that applies different rates to different company sizes, one of few remaining dividend imputation systems in the world, and no discussion about the sustainability of corporate income tax revenue in the future.

All up, the government’s approach over the past six years has largely been piecemeal. It also managed to dismantle two of the most significant tax reforms that could have contributed to a more sustainable tax base in the long run.

Would Labor be better?

It remains to be seen whether a Labor government will be able to achieve more. Some of the party’s proposed changes, such as the treatment of capital gains, head in the right direction, but what it is offering falls short of comprehensive reform.

At the same time, many of its proposed changes will add additional complexity, fail to account for interactions within the entire tax system and use tax exemptions to reach goals that could be better achieved with payments.

Many an international tax reform was engendered by crisis, so there’s hope, of a sort. The opportunity still remains to get in early before weaknesses inherent in the current system become grossly apparent.

What we’ve got is unfair and its complexity rewards those with the resources to pay to understand and exploit it. It is overly reliant on income and company tax in place of indirect taxes, like consumption tax, and it tries to achieve too many disparate objectives, without consideration for the workings of the family and social security payments system.

There is much scope to improve things. What we need most are fearless leaders, from all sides of the political spectrum, who treat comprehensive tax reform as important and can work together to achieve it.




Read more:
What will the Turnbull-Morrison government be remembered for?


The Conversation


Robert Breunig, Professor of Economics and Director, Tax and Transfer Policy Institute, Crawford School of Public Policy, Australian National University and Kristen Sobeck, Senior Research Officer, Crawford School of Public Policy, Australian National University

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

View from The Hill: budget tax-upmanship as we head towards polling day


Michelle Grattan, University of Canberra

For the government this “election budget” is an exercise in juggling. On the one hand, it is throwing out voter bait. On the other, it is running hard on the theme of economic responsibility.

For the second budget in a row, there are highly generous tax cuts, amounting to A$158 billion over a decade. This is on top of the earlier $144 billion.

The government wants this election to be all about tax.

The tax cuts you will get, now and later. The “higher taxes” that Bill Shorten would impose – by cracking down on negative gearing and cash refunds for franking credits. And by claiming that Labor’s climate policy is a “carbon tax”.

A theme in Treasurer Josh Frydenberg’s speech was that the government was taking its initiatives “all without increasing taxes”.

Under the budget’s tax cuts, low- and middle-income earners would pocket up to $1,080 within weeks of the election – for families with a dual income, this amounts to $2,160.




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Tax giveaways in Frydenberg’s ‘back in the black’ budget


The government points out that its tax cuts are the most generous since John Howard’s time. But two things might be noted about this comparison. The 2007 tax package has since been much criticised for being irresponsible – and Howard did not win the election of that year.

Despite earlier speculation, the Coalition won’t try to rush any of the tax package – which includes a reduction in the 32.5% rate to 30% from July 2024 – through parliament this week.

The government wants to set up as much of a contrast between itself and Labor on tax as possible. Frydenberg told a news conference the tax bills were “a package” covering the immediate tax relief and the rate change. The government was asking the public “who do you trust?” to deliver lower taxes.

Finance Minister Mathias Cormann said: “We are just not prepared to haggle with the Senate in the next 24 hours.” It was up to the Australian people to back the government in, he said.

But in a game of bluff and counter-bluff on tax, Labor could simply match the immediate relief – which it did instantly.

This neutralises part of the tax argument, although the government can still highlight the contrast between its longer-term tax regime and Labor’s “higher taxing” agenda.

On economic responsibility, the budget’s boast is for a $7.1 billion surplus next financial year – the first surplus in 12 years. “The budget is back in the black and Australia is back on track,” Frydenberg told parliament, as he outlined the growth of surpluses to a total of $45 billion over four years.




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We can be sure that in the election campaign Labor will match or even better the budget’s surplus figures.

Shadow treasurer Chris Bowen has learnt from the experience of the last election, when the Labor program came in with a slightly worse fiscal bottom line over the forward estimates than the government’s. The difference wasn’t huge but it was enough to be a political handicap.

The budget’s economic projections seem credible enough, although there is the perennial question over its forecast for wages growth – 2.75% in 2019-20 and 3.25% in 2020-21.

The fact that early in the imminent election campaign the departments of Treasury and Finance produce a detailed economic outlook imposes a discipline on the pre-election budget. A government that tried to fiddle the forecasts would quickly get caught out.




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Frydenberg’s budget looks toward zero net debt, but should this be our aim?


Frydenberg’s speech was notably sombre about the outlook for the economy, despite saying the fundamentals were sound.

“There are genuine and clear risks emerging both at home and abroad,” he warned, highlighting the cooling of the residential housing market and global trade tensions.

His words are a reminder of how quickly things can change – including the prospect of strong surpluses projected into the future. Good economic times suddenly turned bleak in the early days of the Rudd government, as a result of the global financial crisis.

The budget provided a nice reality check on the beat-up the government indulged in over the medevac bill. Remember all the hyperbole Scott Morrison sprouted, when he said he was going to have to spend more than $1 billion reopening Christmas Island?

The budget includes just $178.9 million to manage the transfer of people from Nauru and Papua New Guinea for medical treatment, $3.2 million to increase the police presence there and $3 million to reinforce the campaign to discourage people getting on boats.

The government says that if it is re-elected it will repeal the medevac bill and close the Christmas Island facility by July 1 – returning any people who have been transferred back offshore.

Questions to the office of Home Affairs Minister Peter Dutton this week about whether anybody had been transferred under the new legislation received the response that no comment was being made.

Morrison told his party room on Tuesday, before the budget, that three dates were available for the May election – May 11, 18 or 25. The general expectation is that he will announce the poll quickly. The budget might look benign, but the government does not want an extended period of Senate estimates next week which would facilitate picking it apart.The Conversation

Michelle Grattan, Professorial Fellow, University of Canberra

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

Tax giveaways in Frydenberg’s ‘back in the black’ budget


Michelle Grattan, University of Canberra

The Morrison government has delivered an election-launch budget with big personal income tax handouts to attract voters and a A$7.1 billion 2019-20 surplus to display its economic credibility.

The budget – the first brought down by Treasurer Josh Frydenberg – doubles the tax relief that average earners were due to receive within weeks, from $530 in last year’s budget to $1,080.

This outbids the relief that Labor promised last year. But the opposition immediately announced it would support the tax cuts that begin on July 1 “for working and middle-class people”.

“This is essentially a copy of what we proposed last year, and they are simply catching up to us,” Labor’s Shadow treasurer, Chris Bowen, and finance spokesman, Jim Chalmers, said in a statement.

“The Liberals are so out of touch that they’ve given a much smaller tax cut to two million Australians earning less than $40,000. Labor will fix this and give these working people the tax relief they deserve,” Bowen and Chalmers said.

Four things you need to know about the budget, according to The Conversation’s Business and Economics Editor, Peter Martin.



Read more:
View from The Hill: budget tax-upmanship as we head towards polling day


People with incomes between $48,000 and $90,000 will be eligible for the maximum $1,080. About 4.5 million people will receive the full benefit.

In July 2022 the government will lift the top threshold of the 19% tax rate from $41,000 to $45,000

From July 2024 it will cut the rate of the middle tax bracket from 32.5% to 30% – leaving a rate of 30% between $45,000 and $200,000, beyond which it will be 45%.



The cost of the tax relief is $19.5 billion over the four-year forward estimates period and $158 billion over a decade.

Frydenberg told parliament: “The budget is back in the black and Australia is back on track.

“For the first time in 12 years our nation is again paying its own way.”

Earlier, in the government parties’ meeting, Scott Morrison told his MPs the available election dates were May 11, May 18 and May 25 and he would determine when the election would be in a short while.

The surplus of $7.1 billion is for the coming financial year. In the current year, ending June 30, the budget is expected to come in with a deficit of $4.2 billion.




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Iron ore dollars repurposed to keep the economy afloat in Budget 2019


The surpluses will build over time – projected to total $45 billion over the next four years. “Surpluses will continue to build towards 1% of GDP within a decade,” Frydenberg said. The government’s goal was to eliminate Commonwealth net debt by 2030 or sooner.

He said the government’s economic plan restored the nation’s finances without increasing taxes, strengthened the economy and created more jobs, and guaranteed essential services, while tackling the cost of living.

For the 2019-20 year, economic growth is forecast at 2.75% and wages are forecast to increase by 2.75%. Unemployment is expected to be 5%.

One major saving in a budget that avoids widespread cuts is changing the social security income assessment model, saving more than $2.1 billion over five years.

The change will simplify and automate the reporting of social security recipients through the Single Touch Payroll. From July 2020, recipients who are employed will report income that is received during the fortnight rather than calculating and reporting their earnings. The government says this will greatly reduce overpayments.

The budget anticipates a substantial amount of additional revenue – $3.6 billion through cracking down on tax avoidance by large corporations, multinationals and high-wealth individuals.

As the government flagged ahead of the budget in a series of specific announcements, the budget includes an extensive infrastructure program, which it says it has boosted to $100 billion over the decade.

Frydenberg announced a four-fold increase in the Urban Congestion Fund – from $1 billion to $4 billion.

The fund will include a $500 million Commuter Carpark Fund to “improve access to public transport hubs and take tens of thousands of cars off our roads”.

Budget measures also target small and medium-sized businesses with an increased and expanded instant asset write-off. The write-off will rise from $25,000 to $30,000 per item and be extended to businesses with a turnover of up to $50 million.

There would be a $525 million skills package, including the creation of 80,000 new apprenticeships in industries with skills shortages. Incentive payments to employers will be doubled to $8,000 per placement. New apprentices will also receive a $2,000 payment.

Ten new training hubs will be established connecting schools, local industries and young people in regional areas with high youth unemployment. The government is also promising $62 million to boost students’ literacy, numeracy and digital skills, as well as further funding to increase the participation of women and girls in science, technology, engineering and maths.

There is also $453 million to extend preschool education, enabling 350,000 children to have 15 hours of early learning a week in the year before school.



Responding to Labor’s promise to unfreeze the Medicare rebate, the budget provides $187.2 million over four years to reintroduce indexation to all remaining general practitioner services.

It offers $527.9 million over five years for the recently announced royal commission into violence towards and abuse of people with disabilities.

The budget contains a new $3.9 billion Emergency Response Fund to “ensure additional resourcing is available to support future natural disaster recovery efforts”.

A $100 million Environment Restoration Fund is to deliver “large-scale environmental projects”, including protecting the habitats of threatened species, the coasts and the waterways and cleaning up waste.

Frydenberg warned about the economic outlook, saying: “The fundamentals of the Australian economy are sound but there are genuine and clear risks emerging both at home and abroad.

“The residential housing market has cooled, credit growth has eased and we are yet to see the full impact of flood and drought on the economy. Global trade tensions remain.”

Bowen and Chalmers said: “Scott Morrison has delivered an election con, filled with the same Liberal cuts.

“This is a Budget from a government that has given up governing. There is no plan for wages, no plan to tackle power prices, no plan to address climate change, and no plan for the future”.

Business was basically positive. The Business Council of Australia described it as both “a strong and responsible budget that delivers a surplus, lowers personal income taxes and invests in jobs, health, education and infrastructure. This is the payoff for the community from spending discipline and hard work.”

The Australian Industry Group said the stimulus inherent in the budget “is a timely and welcome boost for a slowing economy at a time of wavering business and household confidence”. But it criticised the cut in migration.

The ACTU slammed the budget as failing the fairness test. “It’s a cynical attempt to buy votes, but Morrison and Frydenberg are giving with one hand and taking away with the other.”

The Brotherhood of St Laurence attacked the budget for failing to do for more for the disadvantaged, including providing no increase to Newstart.The Conversation

Michelle Grattan, Professorial Fellow, University of Canberra

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

View from The Hill: Those tax cuts should follow proper process, officials tell government


Michelle Grattan, University of Canberra

Once again, the public servants are trying to force the politicians to do things by the book. But the government would prefer to cut the inconvenient corner.

The heads of the Treasury and Finance departments on Wednesday warned the government that the first round of its tax cuts – due to be paid within weeks of the election – must be legislated before they can go out.

The edict is in the Pre-election Economic and Fiscal Outlook (PEFO), the official update prepared in the first stage of the election campaign.

PEFO is presented by Treasury secretary Phil Gaetjens and Finance secretary Rosemary Huxtable and doesn’t have any political input. It’s a rare dose of spin-less numbers in the campaign.

Morrison argues the Australian Taxation Office can act before the tax legislation passes. He said on Wednesday that “what happens traditionally with the Tax Office, is where there is a bipartisan commitment to matters, they can often go ahead and administer the tax arrangements on that basis”.

But in PEFO the officials said that while many of the budget’s tax measures can be legislated later without affecting the estimates, “the immediate relief […] requires the relevant legislation to be passed before the increase to the low and middle income tax offset (LMITO) can be provided for the 2018-19 financial year.

“If not legislated prior to 1 July 2019 the revenue cost of this measure would need to be reassessed,” PEFO says.

Officials have been clear about how they see things since immediately after the budget, when the Australian Taxation Office told The New Daily: “The ATO requires law in order to deliver the measure as announced, and, as such, it cannot be delivered administratively”.

It isn’t the first time this issue over the process of implementing tax cuts has arisen. Morrison would remember that well – he was treasurer when it happened in 2016.

That year saw a prolonged face-off between the Turnbull government and the ATO, as the government pressed for income tax cuts to be delivered ahead of parliament passing them.

It was the same story. The measure (for those earning $80,000 to $87,000) was in the May budget, to come in July 1. There was no time to legislate before the July 2 election.

Turnbull said the tax cuts would be delivered “administratively”. But the PEFO of that year said “the [Taxation] Commissioner has indicated that the […] targeted personal income tax relief measure requires the relevant legislation to be passed before the change will be incorporated into the income tax withholding schedules”.

In the end, delivery was delayed, but it came before the legislation’s passage, when the Tax Office was (sort of) persuaded the cuts had bipartisan support.

The first round of the 2019 tax relief does have bipartisan support in the broad, but there are a couple of twists. Labor proposes more relief for low income earners, and the government’s tax plan is a long term package, with Labor rejecting the later stages.

It is more likely than not the 2019 tax cuts will end up delivered on time. “It’s certainly our intention to legislate them,” Morrison said. Whichever side wins, parliament is expected to sit at the end of June to deal with them. The PEFO stand is just making sure of that.

Unsurprisingly, the PEFO validated the numbers in the budget brought down early this month, including the forecast $7.1 billion surplus next financial year.

A minor adjustment was made in this year’s forecast deficit, from $4.2 billion to $4.3 billion, because of the extension immediately after the budget of the energy payment to those on Newstart and a number of other payments.

In what was in general a groundhog day in the campaign, Bill Shorten on Wednesday said he had used the wrong words when on Tuesday he claimed Labor would not increase tax on superannuation – overlooking the $34 billion of proposed changes the opposition has announced.

His gaffe, leapt on by the government, received wide coverage, marring his first week in the campaign.

“I thought I was being asked, have we got any unannounced changes to superannuation,” Shorten said.

“But obviously we have changes which we outlined three years ago, and of course I should have picked the words better, no question. We have no proposals other than what we’ve already announced previously.”

He also argued that ALP policies closing down concessions and loopholes in superannuation “is not some massive increase in taxation”.

Meanwhile the treasurers of Victoria, Queensland, Western Australia, the ACT and the Northern Territory have written to Treasurer Josh Frydenberg asking him “to confirm that there will be no further funding cuts to hospitals, schools, infrastructure and other essential services.”

This follows analysis undertaken by the Grattan Institute arguing the government’s budget projections would need a cut to spending of about $40 billion a year by 2029-30.

“As we are in the process of finalising our respective budgets, it is imperative that you are transparent about any planned cuts in payments to states and territories,” the Treasurers say.

“States and territories should not be forced to fill funding gaps created by cuts by the Commonwealth Government across our respective hospitals, schools and transport networks.”The Conversation

Michelle Grattan, Professorial Fellow, University of Canberra

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

Your income tax questions answered in three easy charts: Labor and Coalition proposals side by side



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To start with each side offers a “lamington” (Low and Middle Income Tax offset), then the differences get serious.
Shutterstock/Grattan Institute

Danielle Wood, Grattan Institute; Kate Griffiths, Grattan Institute, and Matt Cowgill, Grattan Institute

The two major parties have kicked off the election campaign with very different policies for cuts to personal income tax.

The Coalition promises its tax plan will deliver “lower, simpler, fairer taxes” while Labor says its plan is all about the “fair go”.

But putting aside the spin, how do the promised tax cuts compare? Will they make the tax system more progressive, or less? And what do they mean for the budget bottom line?

Tasting each plan

The Coalition plan comes in three stages.

The major part of Stage 1 is the Low and Middle Income Tax Offset (the LMITO, or “lamington” as some are calling it), which gives everyone earning less than A$126,000 a cheque in the mail come July and then another one in each of the following three years.

Stage 2 (2022-23) will lift the thresholds of the 19% and the 32.5% brackets.

The biggest cuts come in stage 3 (2024-25) when the 32.5% tax rate is cut to 30% and the 37% bracket is removed entirely.

The effect would be that everyone earning between $45,000 and $200,000 would face the same 30% marginal tax rate from July 1, 2024.




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


The Labor plan gives a slightly higher offset (up to $95 a year more) for people earning less than $48,000 and then matches the lamington for people earning $48,000 or more.

Under Labor the lamington will be permanent, but Labor will not proceed with stages 2 and 3 of the Coalition’s tax plan.

From July 1, 2019, Labor will also increase the top marginal tax rate paid on incomes above $180,000 from 45% to 47% for an unspecified time, making it essentially a return of the Abbott government’s “temporary deficit reduction levy”.

The Coalition’s plan will cost the budget about A$298 billion over the next decade. Labor’s plan is at the moment much cheaper at about A$63 billion over the same period.



Who wins, who loses?

How will different taxpayers fare under the two plans? That depends on what point in time we compare them.

If we focus on the next three years, there will be no difference in tax under the two plans for most people. The lowest income earners won’t pay income tax under either party’s policy.

About a quarter of taxpayers with taxable incomes of between $22,000 and $48,000 will be up to $95 better off under the Labor plan.

At the other end of the income spectrum, the top 5% of taxpayers earning more than $180,000 will pay more under Labor (equivalent to about $400 additional tax for someone earning $200,000).

The big differences between Labor and the Coalition’s tax policies open up when we get to stage 2 (2022-23) and particularly stage 3 (2024-25) of the Coalition’s plan.




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


By the end of the next decade, assuming both parties make no further changes to income tax policy:

• The third of taxfilers earning up to $40,000 will pay no tax or be slightly better off under Labor’s plan because Labor retains the Low and Middle Income Tax Offset.

• The third of taxfilers earning $40,000-$90,000 will be a bit better off under the Coalition’s plan. A taxpayer in the middle of the income distribution, earning $63,000 a year by 2029-30, will be approximately $432 a year better off under the Coalition.

• The third of taxfilers earning more than $90,000 will be at least $1,000 better off under the Coalition, and people in the top 8% will be over $10,000 better off.

The Coalition would refund bracket creep only at the top

The top 15% of earners would be fully compensated for bracket creep under the Coalition’s plan, paying the same average tax rate or less in 2029-30 as they do today.

But middle income earners would still face higher average tax rates than today.

If Labor were to make no further changes to income tax policy over the decade, Labor’s plan would see around 80% of taxpayers facing higher average tax rates in 2029-30 than at present. Top income earners would receive almost no insulation from bracket creep. This is why Labor’s plan results in a much healthier bottom line.

But it is difficult to imagine that any government could resist offering tax cuts to compensate for the effects of bracket creep over such an extended period.

Shadow Treasurer Chris Bowen has already indicated that a future Labor government would consider tax cuts on a budget-by-budget basis, meaning that today’s policy doesn’t necessarily tell us what policy will be in a decade’s time.



The Coalition would make the system less progressive

The “progressivity” of a tax system — the degree to which it reduces income inequality — can be measured by the Reynolds-Smolensky Index. It shows the tax system will at first become more progressive under both parties’ policies — meaning that post-tax income will become more equally shared.

This is because of the boost to the Low and Middle Income Tax Offset. But the final two rounds of tax cuts, at this stage offered only by the Coalition, will make the system significantly less progressive as the benefit is concentrated among higher income earners.

What Labor is offering at the moment will make the system more progressive and only becomes slightly less so over time.



But both sides are virtue signalling

Despite the hype, the personal income tax system will look pretty similar for the next three years regardless of which party wins office.

Labor will tax high income earners more and low income earners slightly less. But for around 70% of people, personal income tax rates will be identical in three years time whether Scott Morrison or Bill Shorten is prime minister.

The big differences lie in the distant future, beyond 2024-25. Since it is almost unimaginable that either side of politics would leave its tax policies unchanged through another two elections the differences in the announced plans have more to do with signaling philosophy than reality.

The Coalition’s philosophy is about restraining tax as a share of the economy, even if that means it will need to shrink government spending as a share of GDP (in ways that are not yet unexplained).

Labor is signalling that it is more comfortable with the tax share creeping up — mostly thanks to increased contributions from high income earners — but it will make sure lower income earners don’t end up worse off.

Who says elections aren’t a contest of ideas?




Read more:
Potentially unaffordable, and it still won’t fix bracket creep. The Coalition’s $300 billion tax plan assessed


The Conversation


Danielle Wood, Program Director, Budget Policy and Institutional Reform, Grattan Institute; Kate Griffiths, Senior Associate, Grattan Institute, and Matt Cowgill, Senior Associate, Grattan Institute

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

Election stays on tax and health battlegrounds



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The Coalition has produced tables showing it would be offering bigger tax cuts in 2024.
Shutterstock

Michelle Grattan, University of Canberra

The election contest continues to focus on tax and health, with the government setting out the tax benefit people in particular occupations would get in the long term under its plan, and Labor announcing funding for pathology from its cancer package.

The government says teachers, nurses, police officers and tradesmen would pay significantly more income tax under Labor.

According to its figures a NSW nurse manager earning $199,029 in 2024-25 would pay $11,740 less tax than under Labor; a Queensland public school principal on $183,201 would pay $9049 less tax than under Labor, and a Victorian public school classroom teacher on $115,745 would be $3699 better off.

Labor has rejected the later stages of the government’s income tax plan, saying it is not fiscally responsible to produce details at this stage. It however has left the way open for a Shorten government to give tax cuts – beyond those promised to be delivered within weeks of the election – when budget circumstances allow.

Treasurer Josh Frydenberg said: “Anyone earning more than $40,000 will better off under our plan. It means school teachers, nurses, bus drivers and emergency service workers right across the country will have more money in their pocket.

“This is more money to spend as they see fit. Our plan provides greater reward for effort while ensuring top earners continue to pay their fair share.”

“Our tax system will maintain its progressive nature under our reforms, with the top 5% of the taxpayers paying around one third of all income tax.”


Source: Liberal Party of Australia

Tax and health have dominated the first days of the campaign, with the government using numbers from the Treasury to butress its argument about Labor as high taxers and figures from the Health department to claim Labor’s plan to slash costs for cancer sufferers was massively under-costed.

Both Treasury and the Health department distanced themselves from the exercises, saying they had responded to government requests rather than costed opposition policies.

In the case of the attack on the cancer package the government’s attack was based on a false assumption about rebates.

In its latest slicing and dicing of its $2.3 billion cancer package Labor says it would invest $200 million to keep pathology tests free for older people and people with cancer.

“Bulk billing for blood tests is at breaking point – cancer patients will either have to pay, or there will be a reducation in services,” Bill Shorten and health spokeswoman Catherine King say in a statement.

A Labor government would work with the sector and lift the bulk billing incentive. Older people will have about 20 million pathology tests a year; people with cancer have about three million.

The CEO of Australian Pathology, Leisel Well, said that “without adequate funding, pathology services will be forced to stop bulk billing.

“This will impact unfairly on poorer Australians, including pensioners. Many will simply not be able to afford tests, which means diseases will get diagnosed later at a greater cost to taxpayers, and most importantly with a greater impact on the health outcomes of Australians”.The Conversation

Michelle Grattan, Professorial Fellow, University of Canberra

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

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



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What’s not to like about a flatter tax system? Well, for starters, the one laid out in this budget won’t actually simplify our lives.
Shutterstock

Steven Hamilton, George Washington University

There weren’t any new tax ideas in the 2019 Budget, which perhaps is to be expected from a six year old government preparing for an election the betting markets suggest it will lose.

Instead what we got were extensions of a few actually-pretty-big tax ideas introduced in last year’s budget: the planned elimination of the 37% tax bracket, the Low and Middle Income Tax Offset, and the immediate expensing of investments for businesses.

Given the looming election it’s worth examining each of these three ideas, which I will do over the next few days.

First, eliminating one of the tax rates. At the moment the income tax schedule has five rates:



Australian Tax Office

By 2024 they are to be “flattened and simplified” to just four.

An entire rate would vanish, and on that part of their income between A$45,000 and $200,000, most people would face a flat rate of 30%, down from the 32.5% proposed in last year’s budget:



Commonwealth budget papers

It’s an idea with a long lineage.

In 2010 the Henry Tax Review told the Rudd Labor government that personal income tax had become “inordinately complex”.

It proposed a simpler, three-rate, system, but, importantly, said most of the complexity wasn’t due to the number of rates but was due instead to the “large suite of complex deduction rules, numerous tax offsets and a variety of exempt forms of income”.



Henry Tax Review

It’s worthwhile considering why simplicity matters.

Setting aside political considerations, simplicity only matters to the extent that it lowers the cost to the economy of the government raising revenue. For every dollar it raises, the tax system imposes compliance costs on taxpayers and others like employers and banks who are required to keep records and report information to the Tax Office, which also bears costs.

The only simplicity we should care about is one that makes the tax system easier to comply with and easier to administer.

The kind of simplicity that matters

The problem with removing a tax bracket is that by itself it does nothing to achieve that objective. It makes the tax system look tidier – the graph is easier to draw, but that’s it. It doesn’t simplify lives and doesn’t bring joy, except to clean freaks who can satisfy their inner Kondo.

The thing to understand is that the tax system is sometimes complicated for a good reason. That might be a desire to tightly target a tax measure so that only those of a certain income or those with children receive it, for example. Not targeting the tax measure would make the system simpler, but it might also make it less fair and more expensive.

If we accept that some income redistribution is desirable, then in an ideal world we would have a smoothly increasing marginal tax rate from middle to high incomes. There would be an infinite number of tax brackets, as in Germany, where income tax rates rise continuously with income.

It would be easy enough to navigate. An online tool would do the trick.



If we must have discrete tax brackets, then the goal ought to be to approximate this ideal system as closely as possible. It would mean having more rather than fewer rates. Having fewer rates forces some people to pay more than they should and others less.

Some have suggested that eliminating tax brackets would reduce the opportunity for taxpayers to manipulate their income so that it bunches around thresholds.

A graph prepared for the Abbott government’s tax white paper shows that bunching does indeed happen, but it is confined to only a narrow sliver of the income distribution and thus very few taxpayers. It’s probably not worth worrying about.



Re:think. 2015 Treasury tax discussion paper

The kind of simplicity that would help

An idea recently endorsed by the Inspector-General of Taxation
and originally proposed by the Henry Review is a standard deduction.

It would entitle every taxpayer to claim a standard amount of deductions without needing receipts. Those with deductions in excess of the standard deduction would still be free to claim those. It’s a system that already exists in the United States and other countries.

Deductions aren’t necessarily a bad thing. There are good reasons why some should be allowed (for example, deductions on the debt interest used to fund investment).

But in practice they take up a lot of our time to document and can be difficult for the Tax Office to interpret (is that car really for work purposes or for personal driving?), something the Tax Commissioner has complained about.

My own research suggests deductions are one of the main means of tax avoidance, responsible for 12 times as much avoidance as understatement of income.

The former Labor government was on board with Henry’s proposal. Unveiling the findings of Ken Henry’s review in 2010, treasurer Wayne Swan promised to “remove the hassle of shoeboxes full of receipts”.

From 2012 onwards everyone would get a standard deduction of $500 in lieu of claiming work-related expenses. It would climb to $1000 from 2013.




Read more:
What will the Coalition be remembered for on tax? Tinkering, blunders and lost opportunities


Budgetary constraints meant he never got around to introducing the legislation.

In 2017 Treasurer Scott Morrison asked a parliamentary inquiry to look into the possibility of doing it. It found it would be expensive. A standard deduction of $500 would cost an extra $2.3 billion, a standard deduction of $1000, $4.6 billion.

These costs, while considerable, are nothing like the cost of the flatter tax system the Coalition is proposing.

And they would enable most taxpayers to avoid submitting a tax return at all. Deductions are the primary reason for tax adjustments. Without them, taxpayers could set and forget. Most taxpayers, and the Tax Office, could concern themselves with other things, such as going after multinational corporations.

Now wouldn’t that spark joy?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.

Bowen says Labor would have lower tax take than under Howard years


Michelle Grattan, University of Canberra

Shadow treasurer Chris Bowen on Wednesday will seek to counter the Coalition’s attack on Labor as high-taxing by saying a Shorten government would have a lower tax take as a proportion of the economy than under the Howard years.

Delivering his post-budget address at the National Press Club, Bowen will point to an analysis released by KPMG last week estimating that by the end of the forward estimates Labor’s tax-to-GDP ratio would be just over 24%.

“If the Liberal party want to attack us for that, they’d be attacking one of their own.

“Tax-to-GDP was at or above 24% of GDP five times during the Howard years. That is, for roughly half their time in office. And it was 24.3% in two of those years.

“Far from being high-taxing, based on KPMG’s analysis we’d have a lower tax take as a proportion of the economy than under the Howard years,” Bowen says in his speech, released ahead of delivery.

“Under a Labor government, Australia would have a lower tax take than Japan, New Zealand, Canada, United Kingdom, Germany, Netherlands and most other OECD economies. In fact, we would remain in the bottom third of all comparable OECD economies”.

Bowen condemns the proposed second and third stage of the budget’s tax cuts as “fiscal recklessness on an unprecedented scale”.

They are regressive “and the claim they can be afforded is based on dodgy accounting,” he says.

“If the government is planning on paying for these tax cuts with spending cuts they should outline those spending cuts before an election – not afterwards like they normally do,” he says.

Labor has adopted the first stage of the tax cuts, and improved on it for low income earners, but rejected the other stages. The tax package had not yet been legislated.

The budget provides that from 2022-23 the top threshold of the 19% tax bracket will be increased from $41,000 to $45,000 and the low income tax offset from $645 to $700. From 2024-25 the 32.5% rate would be reduced to 30%.

Bowen says it will be 18 months before the assumptions underpinning the projected 2019-20 surplus can be fully assessed, and he questions the budget’s projections in the out years.

“The budget surplus in 2022-23 is projected to be a thin $9 billion, just 0.4% GDP.

“A surplus that wouldn’t be there were it not for the government apparently spending $12 billion less than it anticipated just six months ago at MYEFO [the budget update].

“What Government decisions have led to this significant reduction in government spending?”

Bowen says information from Senate Estimates indicated there had been no such decisions.

“The Department of Finance told the Senate that there was a ‘methodology change’.

“A methodology change that boosted the bottom line in that year by $7.8 billion. We have a surplus by methodology,” Bowen says.

“More miraculously, under the government’s assumptions, payments to GDP free fall from close to 25% GDP this year – the average level under the Coalition government – to around 23.6% of GDP by the end of the decade, well below historical averages.

“The size of government magically shrinks over time. If they are going to cut government services they should outline what they are”.

The Grattan Institute had called out this claimed reduction in spending in its analysis, Bowen says.

He says bigger surpluses are needed and a Labor government would deliver them.

“Based on the budget figures presented by the government last week, at the election we’ll present a fiscal plan with bigger budget surpluses and one that pays down more debt”.

Highlighting that Labor would take a very experienced team into office Bowen says: “If Labor forms a government, sixteen out of 21 of us in the cabinet would have served at the cabinet level before. I can’t begin to tell you what a difference this would make, making us a better government for it.

“Bill Shorten will be the first Labor prime minister elected from opposition since Andrew Fisher who has previous ministerial experience.”The Conversation

Michelle Grattan, Professorial Fellow, University of Canberra

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