Even though this year’s budget is pretty good politics and reasonable economics, on almost every front, it is a missed opportunity to be bold.
Last year’s budget was a bank-bashing bombshell, with 4-5% of profits for five of Australia’s biggest banks yanked away, not for financial stability reasons, but because, as Treasurer Scott Morrison hinted at the budget press conference, people don’t like the banks very much.
With that populist mission accomplished, this year’s budget is more mundane.
The much-vaunted return to surplus is now planned for 2019-20 at just 0.1% of GDP. In 2017-18 we are told to expect a deficit of 1% of GDP ($18.2 billion). That’s before the forecast 3% real GDP growth from 2018-19 onward kicks in. An heroic assumption.
Compare that to an actual of 2.1% in 2016-17. That topline forecast is not insane, but it is certainly bullish. One is tempted to ask the Treasurer whether he would bet a year’s salary that real GDP will be above 3% compared to below that. I suspect he wouldn’t.
A new personal income tax plan
Having previously introduced, but not wholly managed to get through the Senate, a 10-year plan to reduce the company tax rate from 30% to 25%, this year the government has a seven-year “Personal Income Tax Plan”.
Under the “PIT plan” (pun absolutely intended) the number of tax brackets will be reduced from five to four. By 2024-25 the tax-free threshold will remain at $18,200 and a 19% tax rate will apply up to income of $41,000, at which point the 32.5% rate will kick in. The top marginal rate of 45% will apply to incomes above $200,000.
One good thing the plan does address (at least in part) is “bracket creep,” where wage growth coupled with fixed tax thresholds, leads taxpayers to pay more. Under the new plan, 94% of Australians will pay no more than a 32.5% marginal tax rate. That compares to 63% of Australians who pay that rate or less, under existing policy settings.
In terms of tax relief, it’s relatively modest. A person earning $50,000 will be $530 better off in 2018-19. Because of changes to the Low and Middle Income Tax Offset, this falls to $215 for someone earning $120,000 (and less still beyond that).
Now $530 post-tax dollars, for someone on $50,000 a year, isn’t nothing. But it doesn’t really make up for wage growth so sluggish (2.2% on average last year) that it barely keeps up with inflation.
This is all part of the government’s newly announced, but thoroughly leaked, mantra that taxes should be no more than 23.9% of GDP. The rationale is, as the budget papers put it “so we do not unfairly burden Australians, nor allow taxes to chase ill-disciplined spending”.
In some sense that’s a fair point, but the 23.9% is completely unscientific. It appears to be the average of what tax as a share of GDP was during the Howard government, which has left most economic commentators wondering “so what?”
The black economy and superannuation
There’s a “crackdown” on the black economy with a $10,000 limit on cash transactions. Who knows how that will be enforced. Perhaps our good friends the banks will start complying with anti-money laundering provisions.
In any case, I prefer a $0 limit on cash transactions by transitioning over three years to a cashless Australia. That would likely raise $5-6 billion a year every year, maybe more.
The sneakiest thing of all is taxing tobacco 12 weeks earlier upon entry into Australia, rather than at present when it leaves the warehouse. That will boost tax receipts once, and once only, in 2019-20 by $3.27 billion. Without that timing trick the return to surplus would be pushed back a year to 2020-21.
Having attacked retirement savings last year, the government is now “reuniting Australians with lost super”. Hard to be against that, but hard to get too excited either. Exit fees on superannuation accounts will also be banned, which is a very good idea and should help consolidation of accounts.
One step better would be making it a net zero cost to transfer all banking arrangements (mortgage, accounts, credit cards, etc) from one bank to another, through a mandate on banks and a subsidy for customers. That would help with competition in the banking sector, which has come under recent scrutiny.
Another small but sensible initiative is increasing the Pension Work Bonus from $250 to $300 per fortnight, which permits pensioners to earn up to that amount without affecting their pension eligibility.
On a more disappointing note there is a reasonably large amount of fanfare but very little substance about “backing regional Australia”. There is $200 million for a third round of the Building Better Regions Fund to support infrastructure on top of the $272 million from the Regional Growth Fund.
That’s fine but falls well short of a systematic plan for regional infrastructure and does not address regional unemployment, particularly youth unemployment, in a meaningful way. Tackling that would require the kind of place-based policies like targeted wage subsidies and reduced payroll taxes that I have advocated before.
There are a host of so-called “integrity measures” to do with taxation. There’s the oft-talked about tightening of thin capitalisation rules, whereby companies load worldwide debt onto an Australian entity to increase interest charges in Australia, instead of in low taxing jurisdictions like Ireland. This is in addition to other attempts to get multinationals to pay more tax. These are more likely to get multinationals to pay lawyers more, but it’s now customary padding in every budget.
The forecasts are pretty rosy in this year’s budget, but they always are. Overall, it’s a hard budget to hate, and a hard budget to like. But it is a classic political pre-election budget.
As we move closer to Treasurer Scott Morrison’s third budget, what we do know is this – Australia has a revenue problem. A more global and digital economy; an ageing population with fewer taxpayers and sluggish wage growth make future predictions of revenue even more precarious. There’s never been a better time for tax reform.
But as governments have tried to reform (and stumbled) over the years the burden has shifted to individual taxpayers and the latest budget is likely to be no different.
We looked at revenue data over the last 20 years drawing from budget papers, government finance statistics and the Australian Tax Office. To compare revenue over time, we have adjusted for the effect of inflation by using real measures.
Tax revenues have risen 26% in Australia since the global financial crisis, from A$310.3 billion in 2009 to A$389.8 billion by 2016.
Income tax has contributed most to this growth and some is driven by rising wages and jobs growth. Between 2009-10 and 2016-17, individual income tax revenue grew by 37% – an average of 5% each year.
But bracket creep also comes into play as personal tax thresholds have not kept pace with inflation, causing average tax rates to rise among middle income earners in particular.
The growth in business tax revenue leading up to the global financial crisis was heroic – averaging 11% each year and well above any budget forecasts. In the ten years to 2007, business tax revenue grew by almost 130% – from A$41.4 billion to almost A$95 billion.
But what goes up must come down, and business tax fell by 6.3% between 2008 and 2016. However we can see strong growth between the last two periods, with business tax receipts growing by 10.7% from A$72.6 billion to A$80.3 billion.
Revenues from GST and sales taxes have risen, by 16% since 2009.
The relationship between Australia’s economic output and its tax revenue looks somewhat different. The tax-to-GDP ratio reached nearly 25% prior to the global financial crisis, but dropped to 20.5% in 2010-11. It recovered to around 22% by 2012 and has remained essentially flat since then.
A history of reform attempts
Successive governments have attempted to create an efficient tax system that’s fair and reliable with few distortions. Prior to the turn of the century the Howard government argued the tax system was out of date, complex and inequitable, heavily reliant on individual and company tax, and prevented Australia competing on a global level.
The Howard government’s new tax system in 2001 was an answer to this. This new tax system seemed to have all the reform solutions needed – income tax cuts for hard working Australians and at long last the introduction of a goods and services tax, along with some pretty big welfare reforms.
Everything appeared to be going quite well with the new tax system – revenue from company tax was way, way above any Treasury official’s forecast.
But fast-forward 10 years and cracks began to show, prompting a new review into the effectiveness of Australia’s tax system. The Henry Review, provided some 138 recommendations for tax reform, yet very few saw the light of day. And just five years later, another review was conducted with then Treasurer Joe Hockey at the helm, which since seems to have been not so much parked as abandoned.
Income taxes from individuals have always made up the greatest share of tax revenue in Australia. Prior to the introduction of the Howard government’s tax system, income tax from individuals made up 57.3% of the total tax pool – it now accounts for 51.0% of total tax revenue.
The Howard reforms included a reduction in personal income tax rates. During the next ten years Australian businesses shouldered a greater share of the tax burden, with their share rising from 17.9% in 2000-01 to 27.4% in 2007-08 at the peak of the resource boom. This has since fallen to 20.6%.
The contribution of taxes on goods and services has remained fairly steady since moving from sales tax to the GST in 2001. GST revenue is consistently around 16% of all tax revenue.
The share of tax revenue from customs duties, excises and levies has been falling since 2001, from 14.5% to 9.5%. Other tax revenue has been fairly consistent over time, contributing less than 2% of total tax revenue. However, in 2012-13 this increased to around 4%, with the introduction of the short-lived carbon pricing mechanism.
The problem with predicting future revenue
Taxation revenues were consistently underestimated prior to the global financial crisis, but have fallen below expectations since its end. The tax-to-GDP ratio has been anchored close to 22% since 2012-13. This is despite eight successive federal budgets since May 2010 projecting future tax revenues in excess of 24% of GDP.
And where does the greatest divergence lie between forecast revenues and out turns?
Company tax revenues are consistently – and by some margin – the most difficult to predict. Receipts fell short of forecast estimates of around 5% of GDP, by around one percentage point over four years, since the May 2010 budget.
Estimates of company tax receipts for 2017-18 were revised upwards by A$4.4 billion in the latest MYEFO update in December 2017. Should this eventuate, it will take total company tax revenues for 2017-18 to A$83.8 billion (around 4.6% of GDP).
The government may well feel that this creates space for a company tax cut and personal income tax cuts in the upcoming budget.
Revenue from individual income tax has been projected to rise to around 12.5% of GDP over the forward estimates, in each budget, since May 2013. Revenue has risen from 9.5% of GDP in 2009 to 11.4% by 2016 before dropping marginally by 0.2 percentage points in the latest Mid-Year Economic and Fiscal Outlook (MYEFO) forecasts.
But wages have not played the leading role that they have been cast in, in every budget going back to May 2011. Since this time wage growth has been forecast at an elusive 3% mark or thereabouts, yet has fallen well short of this each year and currently stand at 2.1%.
Tax thresholds remained fixed between the 2012 and 2016 budgets, and the only change since has been to lift the 32.5% tax threshold from $80,000 to $87,000, effective 1 July 2016. Tax revenue growth up to now has certainly been driven by the effects of bracket creep.
Unless tax thresholds in the future are increased at least in line with inflation, this means that average taxes will continue to rise.
Plans for a 0.5% increase in the Medicare Levy rate from July 2019 have been shelved, which would have raised around A$8.2 billion over the next four years to support the National Disability Insurance Scheme.
It’s hard to see how this will lead to anything other than a shift in the tax burden towards individual taxpayers – at least in the short term. This is unless company tax cuts are balanced with substantial, not modest, cuts to personal income taxes as well.
It seems Scott Morrison will be banking ever more on a strengthening economy to support Australia’s taxation revenues into the future.
Rebecca Cassells, Associate Professor, Bankwest Curtin Economics Centre, Curtin University and Alan Duncan, Director, Bankwest Curtin Economics Centre and Bankwest Research Chair in Economic Policy, Curtin University
The public disclosure of information that Australia’s largest companies give to the Australian Taxation Office (ATO) on their tax returns doesn’t sway investors’ decisions and doesn’t reduce corporate tax avoidance, our research shows.
We examined the first three releases of ATO tax transparency data in 2014, 2015 and 2016, along with financial statement data and share price movements for 244 listed companies. Under the Tax Laws Amendment Act 2013 the ATO is required to disclose total revenue, taxable income, and income tax payable for these companies.
When these companies first disclosed tax return data there was a significant negative reaction in stock prices for firms with lower effective tax rates. But the reaction wasn’t limited to companies that disclosed. This suggests investor concerns about either spill-over effects for other businesses, or a more aggressive stance on tax avoidance from the ATO.
However, for the second and third releases of ATO data, there was no reaction from the financial markets at all, not even for those firms included in the disclosures.
In combination, these results suggest that the ATO disclosures provide little new or useful information to investors about corporate tax strategies. It also shows the information the ATO currently discloses doesn’t lead to increased enforcement, and so, investors have little expectation of any increase in corporate tax payments.
What companies have to disclose to the ATO
The aim of the Tax Laws Amendment Act was to increase public scrutiny of company tax strategies through increased transparency, and ultimately discourage tax avoidance. Although only limited to the largest firms, these disclosures are exceptional.
Apart from some Scandinavian countries that have public disclosure of all tax return information, Australia’s legislation is unique. For example, the information is disclosed by the ATO rather than the companies themselves, and it’s mandatory rather than voluntary.
The disclosed information also allows us to estimate the magnitude of corporate tax avoidance among these companies.
However, the tax transparency law is still yet to meet its stated aim. This may be due to the type of information disclosed.
The information disclosed under the current legislation was chosen with no public consultation, discourse or input. So it’s unclear whether the decision to include only certain information has been politically driven. Neither the government nor the ATO cite any research to support their choice of data to be released.
Our study demonstrates that the success of any scheme to improve company tax transparency relies on new information about corporate tax strategies being revealed. It also requires an expectation of some consequences. These could include an increase in the costs of corporate tax avoidance, such as increased scrutiny from the ATO, or additional costs to justify tax-reducing corporate structures.
Unfortunately, it seems Australia’s law on this doesn’t meet these hurdles, and the politics of addressing corporate tax avoidance has stifled an attempt to develop an effective policy to counter it.
Roman Lanis, Associate Professor, Accounting, University of Technology Sydney; Brett Govendir, Lecturer, Accounting Discipline Group, University of Technology Sydney; Peter Wells, Professor, Accounting Discipline Group, University of Technology Sydney, and Ross McClure, PhD Candidate, casual academic, University of Technology Sydney
The Greens tax policy, released on Wednesday, would hit high income earners and target corporate tax avoidance.
The Greens plan would bring in “a Buffett rule” to ensure higher income earners paid their fair share of tax by limiting deductions made by those earning more than A$300,000.
“This will force high income earners to pay a minimum rate of tax and stop those on high incomes from deducting their taxable income to zero,” the policy says. The move would raise $9.5 billion over the forward estimates.
A Buffett rule – that would put a floor under the tax the very wealthy had to pay – has support within the left of Labor but is not ALP policy. It has been opposed by opposition leader Bill Shorten and shadow treasurer Chris Bowen but may be raised by the left at the July ALP national conference.
In the Greens policy, another $14.3 billion would come from targeting property investors, with the capital gains tax discount phased out over five years, and negative gearing scrapped for future purchases and phased out for multiple properties.
Trusts would be taxed as large corporations, at a 30% rate, raising $3.8 billion over the forward estimates.
The policy says: “Despite what the Liberals say, Australia is a low taxing nation. It is the 8th lowest-taxed among the 35 OECD nations. Australia’s combined tax-to-GDP ratio is 28.2% for all levels of government in 2015. The OECD average is 34%.
“If Australia collected the same amount of tax as the average OECD nation then we would need to collect an additional $94 billion per year”.
Greens leader Richard Di Natale said that Australia had a “tax avoidance system” rather than a “tax system”.
“Big corporations and the super-rich have rigged the rules for themselves, and the old parties are too frightened to do anything about it.
“Big corporate donations, vested interests and the revolving door between parliament and big business has made it so that the wealthier corporations and individuals get richer and richer, while inequality just gets worse”.
The Greens oppose the corporate tax cuts and advocate changes to the petroleum resource rent tax, ending fossil fuel subsidies, mainly paid to multinational mining companies, and the introduction of a mining super profits tax at a rate of 40%.
They put forward measures to target corporate tax avoidance, saying it is estimated corporations avoid about $8 billion of tax a year.
Resources usually give the budget a healthy boost in economic boom times but the government could be reaping more revenue if it changed the way it taxes gas projects, my new modelling shows.
A small change in the method for valuing gas would increase revenue from the petroleum resource rent tax by US$15.5 billion to 2030, compared to the current US$5 billion to 2030.
I modelled what would happen with an alternative but accepted method to tax the revenue from Australia’s four largest gas projects in Western Australia – Inpex’s Ichthys, Woodside Petroleum’s Pluto and Chevron’s Wheatstone and Gorgon. The method is called “net back” and it calculates back from a gas market price to get the gas transfer price, in a similar approach to that currently used for state gas royalties. It netted an average of A$1 billion per annum in Queensland and Western Australia from 2012 to 2016.
The production capacity of the four largest projects is 38.3 million tonnes of gas per annum (about 44% of Australia’s natural gas). But these projects currently raise no petroleum resource rent tax and scant income tax. This gas is earmarked for export and little is reserved for domestic consumption.
A small tax regulation change is required
When businesses shifts or transfers gas between different stages (upstream to downstream) of a project they are required by petroleum resource rent tax regulation to use a combination of methods (“cost plus” and “net back”) to value gas at the transfer point. My alternative of the net back method alone, uses the LNG market price from which costs are deducted back to the point, prior to gas being processed into liquid form.
My submissions to both Treasury, and the Senate inquiry into tax avoidance for the offshore gas industry, explain how the current gas transfer pricing method can be legally manipulated by gas operators. For instance, timing differences in recognising capital or operating costs.
The petroleum resource rent tax regulations prescribe an arbitrary gas valuation method for integrated gas projects, which devalues the transfer price of gas, meaning less revenue for the government.
The current method is not a transparent approach for businesses to use to value gas on its transfer from upstream to downstream. It incentivises tax minimisation through easily manipulated calculations.
Another variation to increase revenue along with the “net back” method would be to shift the gas taxing point from just before liquefaction, to after the gas-to-liquid process, at what’s called the “custody transfer meter”. The price per the metered volumes is accepted by the buyer and the seller of gas as the basis for a transaction.
Australia needs to follow in the footsteps of countries like the Netherlands, which has already reformed its inequitable, regulated gas pricing to market-linked pricing. The Netherlands government changes, which increased tax revenues, mainly targeted their current (not future) Groningen gas field, partly owned by Shell and Exxon.
Any change to resource taxing will bring the usual chorus of concern about sovereign risk so often heard in Australia when tax reform is raised. However sovereign risk concerns overt changes, such as nationalisation of resources, certainly not regulatory changes to promote transparency in taxation.
Changes to the petroleum resource rent tax have been part of pre-budget negotiations between the Turnbull government and certain independent senators. However these changes will only affect new projects that will not start for at least 10 to 15 years, so the expected revenue will have no impact on next week’s budget.
The current petroleum resource rent tax regulations prescribe an arbitrary gas valuation method for integrated gas projects. It devalues the transfer price of gas, meaning less revenue for government.
As a first step, the government should reform tax regulation to the net back method for existing projects. This change could easily be part of next week’s federal budget.
In this series – Budget policy checks – we look at the government’s justifications for policies likely to be in this year’s budget and measure them up against the evidence.
In this piece we look at the need for company tax cuts.
Business investment in Australia declined steadily for four years after peaking in 2013. In early 2016, the Turnbull government settled on a series of company tax cuts as their preferred policy to reinvigorate business investment and the economy.
Our modelling shows that a cut to the company tax rate for large businesses will indeed lift foreign investment in Australia, driving an economic expansion and an increase in pre-tax wages, but there is more to the story.
Like many policy changes, there are winners and losers. The give-and-take nature of the tax cut means that the “losers” from the tax cut will be Australian-owned businesses and the Australian government. We find that despite the expansion in GDP, the average income of the Australian population (a more suitable measure of the material welfare of the population) will fall.
Do we need investment to maintain jobs and economic growth?
The jobs growth figures last year – we all know now, more than 1,100 jobs a day – that’s had a really big impact on our economy and we can expect that to continue and now lead to – I would expect – better wage outcomes as long as businesses keep investing and businesses can keep remaining competitive.
– Treasurer Scott Morrison
More investment creates more buildings, equipment and intangible assets that enable workers to be more productive and, in theory, earn higher wages.
If investment is weak for a prolonged period, job opportunities are reduced and wage growth will weaken.
In a well-functioning economy, population growth and technological progress naturally attract investment. When investment only keeps pace with population or employment growth, wages stagnate. For wages to grow, investment needs to be above this level. This happens when there is technological progress, generating the higher returns which attract the level of investment needed.
Australian investment depends largely on foreign finance, so world economic conditions, including rates of corporate tax in other countries, also play a role.
In reality the link between investment and wages is not always clear cut. If unemployment or underemployment is high, investment may lead to growth in jobs without wage growth.
Businesses might also make profits in excess of a “normal” rate of return. These profits exist when new businesses struggle to break into a market dominated by a few large players, and can be an impediment to wage growth.
Even if you do accept that higher investment does lead to higher wages, giving tax cuts to companies to stimulate investment is not justified on this basis.
If company taxes are cut there will be significant costs to government revenue that amount to a “windfall gain” to the (mostly foreign-owned) investments that have already been made on the basis of the 30% tax rate. On balance, the positive impact on growth and wages is not enough to justify the loss of this revenue.
Is there a problem with business investment in Australia?
Business investment is critical to economic growth. When firms are empowered to invest in new productive capacity and technology, it supports innovation and helps create new opportunities and employment for Australians.
– Treasurer Scott Morrison
Business investment is now showing signs of picking up. In a speech late last year, Reserve Bank deputy governor Guy Debelle saw “signs of life” in investment growth, particularly in the services sector and in infrastructure projects completed by the private sector on behalf of the public sector.
A Grattan Institute report identifies four very good reasons for the four-year decline. These include a return to “normal” investment following the mining boom and an overall decline in the amount of money needed to create capital goods in most industries. The report also points to an ongoing shift towards households spending more on services such as retail, cafes, and professional services and slow economic growth overall.
Viewed in this light, there are plausible and benign reasons underlying the decline in investment. These suggest that it is not a large enough problem to justify “repair” in the form of a costly tax cut.
What’s the verdict?
Certainly business investment has weakened over the last five years, and along with this we have seen weak wage growth. It would be foolhardy to argue against the need for more business investment. Jobs and growth underpinned by a healthy level of investment are essential aspects of a modern society.
But cutting the company tax rate is not the way to go. It may deliver more business investment and economic activity, but by forgoing taxation revenue from existing investment, it comes at a cost to the average income of the Australian people.
To reap the benefits of strong business investment without a costly tax giveaway, Australia must continue to play to its strengths. Reducing the government revenue base through a cut to company tax will undermine the sort of stable, prosperous society that underpins the world-class environment that we strive to offer all investors.
It’s an indication of how politically difficult the terrain is for the Coalition that Scott Morrison has faced a hard time defending the decision to drop a planned tax hike.
Morrison explains abandoning the rise in the Medicare levy – which he insisted only a year ago was vital to fund the National Disability Insurance Scheme – by saying revenue is much better.
It’s relevant, of course, that the levy wasn’t going to get through the Senate in its full form.
Apart from criticism of the speed and suddenness of the backflip, stakeholders fear it means the NDIS’s funding base mightn’t be so secure in the longer term.
Still, most people aren’t going to complain about not having to pay the higher levy.
From the government’s point of view, it is especially important that it has removed a serious contradiction it had faced – on the one hand making income tax cuts a centrepiece of the May 8 budget while on the other proposing to increase the levy on July 1 next year, weeks after the expected time of the election.
The government is pinning its hopes on making this election all about tax – casting itself as champion of lower tax and Labor as signed up to what Morrison dubs the “high tax club”.
It’s shades of John Howard’s 2007 election, when he offered big income tax cuts as the Coalition tried to stave off defeat. Labor matched almost all the cuts. Howard lost the election.
Morrison says the budget will deliver “tax relief to put more money back in the pockets of middle to lower income Australians to deal with their own household and family budget pressures.”
“It is important that when we consider any plan for tax relief, middle to lower income families will come first as part of any broader plan”, he said, in a major pre-budget speech on Thursday, while notably also focusing on how much of the tax burden is borne by higher income earners. “A massive 17% of the A$186 billion collected in personal income tax for 2015-16 was paid by the top 1% of taxpayers,” he said.
Whatever the detail of the government’s income tax package – the Australian Financial Review has reported cuts would be phased in over a decade – Labor has, thanks to revenue choices it has made, the financial capacity to match it.
For the longer term, the ALP also has available money from the company tax cuts for big business. These are not through the Senate at this point but they are in the budget numbers; Bill Shorten says Labor would repeal them (saving multi-billions over time) if they are legislated.
One Labor source says: “We’re not going to let them beat us on income tax cuts. We’re not going to let income tax cuts be a contest”.
Following the government’s move, Labor has dropped its compromise proposal to increase the Medicare levy for those earning more than $87,000. Under its present policy a Labor government would, however, bring back the deficit levy for high income earners. But the “contest” there would be on ground where the ALP doesn’t have so many voters.
In painting Labor as big taxers, the government will home in on multiple fronts including the opposition’s proposed crackdown on negative gearing and the capital gains discount, its planned action on trusts, and its ending (except for pensioners) of cash refunds for franked dividends. Voters are used to the negative gearing policy from the 2016 election. By tweaking its clampdown on refunds, Labor has tried to limit the blowback.
A significant question is how much potency “tax” has in an election these days, especially if the two sides have broadly matching policies on income tax cuts (except at the higher end).
It is relevant to the cost of living issue, but only if one side offers cuts for lower and middle income earners and the other doesn’t.
This week’s Newspoll in The Australian asked voters to name from a list their top priority for the budget. Only 15% nominated cutting income tax rates, well behind reducing debt and deficit (26%) and increasing spending on health (27%).
We should probably apply a discount in interpreting these results – some people might say what they think they should say rather than their actual view.
Nevertheless, it does seem likely that tax cuts are not necessarily the vote-magnet they once might have been. In attracting voters, they can perhaps be described as necessary but not sufficient. People expect them. If they are modest and phased in, they don’t carry great punch. Also, many voters today are often more concerned about services.
While the budget’s focus will be the income tax cuts, the government is still trying to get a favourable Senate vote soon after on its business tax cuts.
How Finance Minister Mathias Cormann must be cursing that he wasn’t able to drag those last couple of crossbenchers across the line before the appalling stories started flowing in the banking royal commission! Cormann is a negotiator par excellence but his task is now tougher.
It may or may not have been encouraging for him that South Australian independent Tim Storer this week said he was looking at the company tax issue separately from what was going on at the royal commission. Storer has raised a wide range of doubts about the legislation.
The evidence at the commission must surely make Derryn Hinch, the other crossbencher who was central to the earlier negotiations, harder to win over. Even before the damning revelations, Hinch called for the banks to be excluded from receiving the cuts. After the government quickly rejected this, Hinch has talked about confining them to companies up to a $500 million annual turnover – another way to skin the bank cat. It’s difficult to see how Hinch can now move.
Cormann has turned his attention to the two Centre Alliance senators (formerly the Nick Xenophon Team). So far they have firmly opposed the cuts for big business. They are waiting to see the budget before coming back to the issue. Meanwhile the indefatigable Cormann deluges them with material. “I’ve never seen text messages as long as he sends!” says Centre Alliance senator Stirling Griff.
In this series – Budget policy checks – we look at the government’s justifications for policies likely to be in this year’s budget and measure them up against the evidence.
In this piece we look at the need for personal income tax cuts.
A large proportion of any cut in personal income tax – especially if the cuts were skewed towards lower and middle-income households with a higher propensity to spend – would likely provide a greater direct stimulus to the Australian economy than an equivalent cut in company tax.
Cutting personal income taxes seems likely to provide much more of a boost to the Australian economy than cutting company income tax. As the government’s own published modelling shows, the benefits of its proposed cuts to the company income tax rate are small relative to their cost.
Do we need income tax cuts to provide relief from financial hardship?
The treasurer and I have been working on how we can provide more tax relief for hard-working middle income Australian families.
– Prime Minister Malcolm Turnbull
Over the last five years, household spending has grown by just 2.6% per annum in real terms, on average – of which more than half has been the result of population growth – compared with an average of 3.6% per annum over the preceding 12 years. Even with that lower growth rate in their spending, households have reduced their saving rate, from around 7% of disposable income five years ago to around 2.5% in 2017. That’s the lowest saving rate since before the financial crisis.
The key reason for this “squeeze” on household spending and saving is of course the ongoing weakness in the growth rate of household disposable income. Over the past five years, real per capita household disposable income has grown at an average annual rate of just 0.4%, compared with an average of 2.6% per annum over the preceding 12 years.
One reason for this is that Australian households have been paying an increasing proportion of their income in taxes. In the years prior to the onset of the financial crisis, almost every budget included personal income tax cuts in some form or other.
By contrast, there have been no changes to Australia’s personal income tax scale since 2008 – apart from the increase in the tax-free threshold (paid for by an increase in the bottom rate) in 2012, the temporary surcharge on top-rate taxpayers which applied between 2014-15 and 2016-17, and the increase in the threshold for the second-top rate (from A$80,000 to A$87,000) which took effect in the 2016-17 financial year.
As a result, in 2017, Australian households in aggregate paid 19.5% of their taxable incomes in income and other direct taxes – the highest proportion since 2005, and continuing a steady rise since 2011.
Households are also spending almost two and a quarter percentage points more of their after-tax disposable incomes on education, health, insurance and other financial services, and utilities than they did five years ago.
Given all this, it’s little wonder that household spending in more “discretionary” areas has been so weak in recent years.
Well-targeted personal income tax cuts could thus help to ameliorate this multi-faceted “squeeze” on household incomes, and provide a direct boost to the economy.
Do we need income tax cuts to make up for the fact that we haven’t had a pay rise in a while?
It’s been a long time since any Australians had a decent pay rise…this is a real pressure on Australians…we can give them some relief when it comes to their personal income tax.
– Treasurer Scott Morrison
The other major reason for the very slow growth in real household disposable income over the past few years has been the unprecedented slowdown in wages growth. Wages have risen at an average annual rate of just 2.2% over the past five years (only 0.3 of a percentage point above the inflation rate), down from 3.7% per annum over the preceding 12 years.
Although, as RBA Governor Phillip Lowe noted in a speech that “the latest data suggest that the rate of wages growth has now troughed”, he went on to warn that the pickup which the RBA expects “is likely to be only gradual”.
Recent experience in other advanced economies clearly suggests that the unemployment rate needs to be lower for longer than in previous business cycles before wages growth starts to pick up. So even assuming that Governor Lowe is right, it may be one or two years before Australian households can expect any meaningful improvement in their financial position from faster growth in their wages or salaries.
Well targeted personal income tax cuts could help provide at least some offset to this likely continuing stagnation in wages growth over the next year or so.
What’s the verdict?
Targeted personal income tax cuts could reduce the squeeze on households and make up for persistent low wages.
Of course, it remains crucial that any cuts in personal income tax be sustainable – that is, that they are not funded by bigger deficits, and do not materially detract from the task of putting the nation’s public finances on a sounder footing. This is so we are better placed to withstand any unforeseen economic shocks.
And it’s important to remember that government spending has moved to what appears to be a permanently higher level as a proportion of GDP since the financial crisis. The government’s underlying cash payments averaged 25% of GDP from 2011-12 through 2017-18, up from 24% from 2001-02 through 2007-08. That also represents a constraint on the scope for tax cuts.
However, the apparently greater improvement in the budget so far this financial year, compared with what was forecast as recently as last December’s Mid-Year Economic and Fiscal Outlook, could give the government a little more latitude for financially sustainable personal income tax cuts in the upcoming budget.
Perhaps the most sustainable way of providing the “relief” which the treasurer says many Australian households need, would be to abandon the tax cut for companies turning over more than A$50 million a year. The government hasn’t been able to get these through the Senate. These cuts would do far less to boost the Australian economy than well-targeted personal income tax cuts of a similar order of magnitude.
A joint Fairfax/Four Corners investigation has uncovered a series of cases where taxpayers, particularly small businesses, have battled with the Australian Taxation Office (ATO) over tax assessments they claim are unfair.
The investigation suggests the tax office has broken the trust of taxpayers.
Professor of Taxation Law, Michael Dirkis, was senior tax counsel for the Taxation Institute of Australia from 1999 till 2009 and has been involved in consultations for various tax reforms.
He says the problem is that the Taxpayers’ charter which sets out the relationship between the tax office and taxpayers, isn’t enforceable for tax officers.
“If a taxpayer does the wrong thing, then clearly the full force of the law can be brought to bear, and penalties can be imposed or prosecutions undertaken. But if a tax officer makes a mistake or does something wrong, there doesn’t seem to be a similar mechanism,” Dirkis says.
This is where an advisory board to the tax office could be useful in rebuilding mutual trust between the ATO and taxpayers.
Here’s the full interview with Professor Michael Dirkis from the University of Sydney.
Q: These cases seen in the news reports – do they reflect the usual approach of the tax office?
A: It’s not surprising. The ATO, from time to time, has seemingly stepped over the mark historically in a number of different cases and the sort of tougher approach is probably the manifestation of that.
Q: Are cases involving small business the majority of the type of cases the ATO pursues?
A: No, I think the majority certainly still is at the larger end. Often with those larger businesses, the sort of the information required puts them on to a very regular contact with the tax office and their compliance burden is fairly large.
That said, because they’ve got large amounts of money, they’re also well organised. Of course, the compliance burden and cost, although large, is spread across the business.
Certainly, it appears when one reads the pronouncements from the tax office and information in the annual report, that a large amount of resources are going into the large end [of business] because that’s where the risk is.
The methods the tax office has adopted, certainly in its debt collection mechanisms, are very similar to that of the large banks. In fact, they, at various points of time, have had former debt collection management from the large banks in some of those roles.
Q: Do you think there’s been any sort of cultural shift or other changes in the organisation, with the changes in tax commissioners?
A: The tax office still has similar plans that it sets out in its annual audit areas of interest over the years.
But I think the organisation at the top certainly has had a cultural change. Among the senior staff within the tax office there’s been a constant of recruitment of private sector accountants and lawyers into the technical areas, to boost expertise.
But a lot of that is at the level of the large business, large family group type assessments, rather than focused at the small business end.
We’ve certainly had a cultural change when self-assessment was first introduced. It really made a major shift in power towards the ATO, as suddenly taxpayers were required to calculate their own tax situation.
So the shift of obligation of getting your assessment right switched from you supplying information to the tax office and then the ATO doing that on your behalf and confirming your position, to one where you are now expected to know. Hence why we see 70% of Australians using tax agents.
I think the nature of the audit process is that it can vary and probably at the smaller business end you are going to have an assessment issued and then there will be a lag with trying to talk to case officers.
Q: Is there anything you think the ATO can do to avoid the types of cases that we’re seeing?
A: It’s about education. It’s about ensuring that there are forms of mutual respect. There’s what’s called the Taxpayers’ charter that sets out what the tax office expects of taxpayers and what taxpayers should expect of them.
The problem is the charter is not enforceable. Most crucially, if a taxpayer does the wrong thing then clearly the full force of the law can be brought to bear, and penalties can be imposed or prosecutions undertaken, but if a tax officer makes a mistake or does something wrong there doesn’t seem to be a similar mechanism.
So we don’t have that reciprocal effect, that if the tax office or the tax officers breach the taxpayers charter there is no penalty.
Q: Should there be an oversight or advisory board for that?
A: I think there needs to be. The problem with the charter from day one was that the tax office writes it and then rewrites it. It was used as a mechanism of the ATO saying you know what you can expect.
But as I said, there just isn’t anything in the mechanism that actually makes the tax officers who breach it accountable.
Then the tax office about three years ago went through a large culling of staff. So a lot of very senior, long serving, staff left the tax office.
There was a view that this probably wasn’t a bad thing and that it would get rid of an entrenched “us versus them” mentality that can arise in enforcement agencies. But it doesn’t necessarily seem to have filtered down to those in sort of the more the coalface areas, the audit area.
There needs to be some empathy in that process and that doesn’t seem like it’s happened in some of these cases.