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.

Advertisements

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



File 20190416 147502 rgrvug.jpg?ixlib=rb 1.1
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



File 20190415 147483 11hcoio.jpg?ixlib=rb 1.1
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



File 20190414 76862 1l3oxdi.jpg?ixlib=rb 1.1
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.

Those future tax cut promises… they’re nowhere near as big as you’d think



File 20190405 123426 1rjdpdm.jpg?ixlib=rb 1.1
Much of what’s been promised would have had to happen anyway.
Shutterstock

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

The 2018 budget contained big tax measures – worth A$143 billion over the next decade – initially targeted at lower and middle income Australians, but after five or so years to be heavily weighted towards higher income Australians. The 2019 Budget doubled down, including an extra $158 billion of measures, again heavily weighted towards higher income earners.

It’s possible to draw graphs showing that if the tax cuts came to pass, higher earners would be enormously better off compared to everyone else, but the graphs miss a really important point.



National Centre for Social and Economic Modelling

The point is that high end tax rates would have been wound back over time anyway to stop people moving into higher tax brackets as their income grew.

The graph below shows the average personal income tax rate paid by households since 2000 and projections of what they will be through to 2029 under four assumptions – the (unlikely) scenario of no tax change; the 2018-19 Budget change; the combined 2018-19 and 2029-20 Budget changes; and the same combined scenario but with lower than average wage growth (2.5% per year).


Household average tax rates, 2000 to 2029

Takes account of tax changes in 2018 and 2019 budgets and one-off energy supplement.
ANU Centre for Social Research and Methods

This tells a very interesting story. The average household tax rate reached a peak of 15.5% in 2002 and then declined to 11.7% in 2010. Since then it has climbed to reach 13.7% in 2017.

Our modelling finds that without the tax changes announced in the 2018 and 2019 budgets wage growth and bracket creep would push the average rate to a record high of 16.4% in 2029.

It is unlikely that either side of politics would let this happen. The effects of bracket creep would almost certainly be at least partly eliminated through adjustments to tax thresholds or rates much earlier.




Read more:
NATSEM: federal budget will widen gap between rich and poor


Our analysis shows shows that the 2018 budget tax cuts would have reduced but not entirely eliminated the effects of bracket creep.

The tax cuts announced in the 2019 budget go further and mean that the average tax rate in 2024 would be much the same as in 2017, but that it would then start to grow again to be quite a bit higher at 14.5% by 2029 (assuming the wage increases projected in the Budget are correct).

They’d be bigger if wage growth was lower

While no one knows what wage growth will be over the next decade, the experience of the past decade suggests it could be substantially lower than the budget projection of 3.5% per year.

If it was 2.5% the average tax rate would be lower in 2024 than today and remain lower through to 2029.

Of course, projecting wages growth out that far is crystal ball territory and it is impossible to have much idea.

The biggest beneficiaries of the tax cuts are certainly households in the upper half of the income distribution. But this doesn’t mean their tax cuts weren’t necessary.

Welfare payments are largely “set-and-forget”. The rates increase over time with either prices or earnings. But tax rates need to be adjusted over time in order to stop more and more people being pushed into higher tax brackets.

Analysis of tax changes that ignores this will exaggerate their effects.




Read more:
What just happened to our tax? Here’s an explanation you’ll understand


The Conversation


Matthew Gray, Director, ANU Centre for Social Research and Methods, Australian National University and Ben Phillips, Associate Professor, Centre for Social Research and Methods, Director, Centre for Economic Policy Research (CEPR), Australian National University

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

What just happened to our tax? Here’s an explanation you’ll understand



File 20190404 123413 13p6w68.jpg?ixlib=rb 1.1
So far, Labor is $95 ahead of the Coalition, for many Australians.
Shutterstock

Peter Martin, Crawford School of Public Policy, Australian National University

With all the announcements on tax over the past few days it’s hard to keep track. So here goes.

A year ago the then treasurer Scott Morrison unveiled a “seven year personal tax plan.

Some of it involved tax cuts way out into the future, in 2022 and 2024, with which we needn’t concern ourselves – there’ll be two, maybe more, elections before then.

The bit that was to start in mid 2018 (and did) wasn’t a tax cut at all, strictly speaking. It was an “offset” with an ungainly name: LMITO – the Low and Middle Income Tax Offset.

A standard tax cut, applying to any rate, would save money to all taxpayers on that rate and rates above it, including those on very high incomes. It couldn’t be directed to just low and middle earners, which is what the Coalition wanted.

What’s on offer isn’t really a tax cut

So the Coalition designed an offset, to be paid as a lump sum after the end of each tax year, after returns had been submitted and only to those taxpayers whose returns showed they weren’t high earners.

The full offset was A$530 per year, paid only to taxpayers who earned between $48,000 and $90,000. Taxpayers who earned more than $90,000 would lose 1.5 cents of it for each dollar they earned above $90,000, meaning no-one who earned more than $125,333 would get any of it.

(Taxpayers earning more than $125,333 wouldn’t go home completely empty handed – they would benefit from an increase in the point at which the the second highest rate came in, worth a barely consequential $135 a year.)




Read more:
It’s the budget cash splash that reaches back in time


Taxpayers who earned less than $37,000 would get $200 off their tax, climbing to $530 for taxpayers earning $48,000.

It was ungainly – it was better described as a series of annual lump sum payments than a tax cut – and Labor embraced it entirely.

In 2018 Labor trumped it

Except that Labor supercharged it. Under Labor it was to operate in exactly the same way, except that each payment would be 75% bigger: the Coalition’s $200 became Labor’s $350, the Coalition’s $538 became Labor’s $928 and so on.

Labor outbid the Coalition.

And these things stayed, for almost a year, except that it was all a bit academic.

Labor wasn’t in government, and the leglislated offsets weren’t to put the lump sums in pockets until after the end of June 2019.

In 2019 the Coalition trumped Labor

It allowed the Coalition to sneak in before them in Tuesday’s budget and double the maximum lump sum: $538 became $1,080, a promise Bill Shorten matched in his budget reply speech on Thursday night.

But for some reason the Coalition didn’t double everything: $200 only became $255, rather than the $350 Labor had already promised.

On Thursday night Shorten confirmed the $350 promise.

He is able to offer the 3.6 million Australians earning less than $48,000 more than the Coalition – in most cases an extra $95 more: $350 instead of $255.

Now Labor has trumped the Coalition

Shorten says it’ll cost an extra $1 billion over four years, which is a mere fraction of the money Labor believes it will have that the Coalition won’t, because of its crackdowns on negative gearing, capital gains tax concessions and dividend imputation.

As Shorten put it on Thursday night:

Labor will provide a bigger tax cut than the Liberals for 3.6 million Australians all-told, an extra $1 billion for low income earners in this country. Here’s the simple truth – 6.4 million working people will pay the same amount of income tax under Labor as the Liberals. Another 3.6 million will pay less tax under Labor.

In fact they’ll pay just as much tax from payday to payday, but they’ll get back more at the end of the year, in most cases $95 more.

So here’s the scorecard:The Conversation

Annual tax offset by taxable income.
Source: Australian Labor Party

Peter Martin, Visiting Fellow, Crawford School of Public Policy, Australian National University

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

Grattan on Friday: Bill Shorten’s tactical play foils budget’s tax pitch


Michelle Grattan, University of Canberra

Scott Morrison needed the budget to change the game for the election. But its political impact has seemed tepid rather than transformative.

And Bill Shorten has shown that having the last parliamentary word in budget week can be used to grab the mic from your opponent.

By the time parliament broke on Thursday night, everything was in place for the election, except the announcement of the date, with the three options Morrison had earlier canvassed – May 11, 18 or 25 – hanging out there.




Read more:
The budget super change that helps the wealthy at the expense of the young


In his Thursday budget reply, Shorten delivered a carefully-targeted pitch to voters that invoked hope and promised fairness. He came up with a big Medicare initiative, and he outsmarted the government on its tax cuts, the budget’s centrepiece.

Shorten seeks to use what Labor dubs “the politics of hope” as a response to voters being switched off by all the cynicism. “We choose hope over fear. We choose the future over the past,” he said.

His $2.3 billion promise to slash out-of-pocket costs faced by cancer patients played to a traditional Labor strength – health policy – and should be popular.

The opposition aims to put Medicare at the forefront of its campaigning, as it did in 2016. But there is a notable difference.

Then it ran the negative “Mediscare” offensive. Now the emphasis is positive, with an ambitious pledge to extend Medicare, helping cancer sufferers, vulnerable and numerous, who often face financial burdens.

“One in two of us will be diagnosed with cancer at some stage in our life,” Shorten said, as he outlined “our vision for the most significant investment in Medicare in a generation”.

On tax, Shorten one-upped the Liberals, offering bigger immediate tax cuts to 3.6 million taxpayers who earn under $48,000.

Labor has more than neutralised the budget’s immediate income tax bait by matching the first tranche of tax cuts for most taxpayers, while bettering them at the bottom end.

This was always an obvious tactic available to the opposition, and it was canvassing that response even before seeing the numbers in the budget. Shadow treasurer Chris Bowen and Finance spokesman Jim Chalmers announced Labor’s position as Josh Frydenberg rose to deliver his budget speech.

Labor did not want a fight over the tax rebate the budget promised taxpayers would receive when they put in their returns soon.

And by throwing in just over $1 billion for the low paid, it boosted its “fairness” bag of goods. This complements Labor’s other policies for these people, including its commitment to a “living wage” and the restoration of penalty rates.

Shorten has rejected the further tax cut tranches the government proposes for 2022-23 and 2024-25. The cost of those is about $143 billion of the government’s $158 billion package.

The risk for Labor in dismissing them is smaller than might appear at first glance.

Tax cuts promised for well into the future are likely to be viewed sceptically by the public. Although people want governments to have long term “plans”, they’re also aware nothing lasts in politics. And in the final tranche, the benefits are very skewed to the wealthy.

The budget’s tax cuts haven’t been legislated so Labor doesn’t even have to say it will repeal something set in legal stone (although it is committed to repealing the later stages of the 2018 tax cuts).

Devoid of nasties and containing tax relief while promising a $7.1 billion surplus in 2019-20, the budget might be tracking reasonably in the community.

But given the government’s circumstances, it had to seize and hold people’s attention. Tuesday’s effort didn’t seem to have the required horse power for such a heavy task.

Many voters have stopped listening to the government. A lot of hostility is now locked in, reinforced by the general disillusionment with politics. There is a feeling that people are just looking to move on from “this lot”.

As one Liberal – who praised the budget – put it, “the die is probably cast, in terms of trust and disunity”.

After two terms of chaos and infighting, a benign budget is not going to work a miracle.




Read more:
Shorten uses budget reply speech to reframe the economic debate


Moreover, its content had been so widely foreshadowed that it had not even a small element of surprise.

One has to wonder about the political sense in the government dropping out so much ahead of the night.

This wasn’t even a case of getting bad news behind it. The government was pre-releasing the good stuff, including funding for regional projects.

Local factors are important in elections, and that’s where the budget’s infrastructure promises come in.

These initiatives, many directed to marginal Coalition seats, might help shore up some electorates. But whether that is enough to counter any strong anti-government swing in the pipeline is another matter. And besides, Labor, flush with money, has plenty of its own local promises.

All this is not to overlook that Shorten faces increasing challenges in the next few weeks as he confronts a desperate government that won’t follow the Malcolm Turnbull path of eschewing a heavily negative campaign.

The Coalition’s overarching scare homes in on Labor as the big taxers. Reacting to Shorten’s budget reply, Finance Minister Mathias Cormann’s mantra was Labor’s $200 billion in extra tax.

Then there are the specific scares (in Coalition terminology) around Labor’s “retirement tax” and, with this week’s release of the climate policy, its “carbon tax”, as well as the crackdown on negative gearing.

Often scares work, and indeed the polls might tighten, as they usually do at the business end of the cycle.

But sometimes tried and trusted methods fail. John Howard knew handouts worked – until in 2007 they didn’t. It all depends on the mood of the electorate.

At the moment that mood seems as dark as Scott Morrison’s “back in the black” budget week portrait. That, incidentally, turned out to be a rip off of a campaign some years ago by then New Zealand Prime Minister John Key. Just as the 2019 tax splash reprised the Coalition’s 2007 pre-election promised one, which Labor mostly matched.




Read more:
Grab your tickets to our live election events


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.

Fairness isn’t optional. How to design a tax system that works



File 20190227 150708 1iizk7e.jpg?ixlib=rb 1.1
No-one would ask low earners to pay the same as high earners.
Shutterstock

Fabrizio Carmignani, Griffith University

This is part of a major series called Advancing Australia, in which leading academics examine the key issues facing Australia in the lead-up to the 2019 federal election and beyond. Read the other pieces in the series here.


Any discussion of the tax system requires a common understanding that its purpose goes beyond revenue.

To see this, ask whether we would be willing to raise as much revenue as we do now by simply requiring each resident and business to pay A$16,400 a year, with no further complications.

We could do this. It would generate the A$450 billion the Commonwealth raises now.

And it would be appealing in some ways. It would minimise tax evasion. There would be no exemptions, no tax returns, no loopholes. And payment would be easy to monitor. It would also save the taxpayer the cost of submitting tax returns and the government the cost of checking them.

We all want some fairness

People who earn more than A$76,000 would be delighted, because they would pay less tax than they do now.

Households with people who earn much less would be less happy. Each child, no matter how young, would have to pay A$16,400. A household with two parents (one working) and one child would have to pay twice as much as it does now.

Unemployed Australians would pay the same as mining tycoons. Mum-and-dad businesses would pay the same as large corporations.

But we wouldn’t accept such a system, because it wouldn’t be fair. And that’s not just because fairness is one of our core values.

Inequality has an economic cost. Modelling by staff of the Organisation for Economic Cooperation and Development (OECD) shows that a 1% increase in a nation’s inequality lowers its gross domestic product by between 0.6% and 1.1%.

The researchers find that beyond a certain point growing inequality can undermine the foundations of market economies and lead to inequalities of opportunity. They report:

This smothers social mobility, and weakens incentives to invest in knowledge. The result is a misallocation of skills, and even waste through more unemployment, ultimately undermining efficiency and growth potential.

Progressivity helps

Almost all developed countries use the tax system to fight inequality, by increasing the rate of personal income tax as taxable income grows. In a typical “progressive” personal income tax system the first $5000 earned might be taxed at ten cents in the dollar, while subsequent earnings might be taxed at 20 cents in the dollar. The result is that higher earners pay a greater proportion of their earnings in tax.

Australia has such a system. Our personal income tax system is more progressive than most of the 36 OECD members.

But it has been getting less progressive over time.

A standard measure is the difference in proportion of earnings devoted to tax (the “tax wedge”) for high earners on 167% of a nation’s average income and low earners on 67% of the average. The greater the difference, the more progressive the system.



The graph shows Australia’s system became less progressive throughout the first mining boom in the 2000s. It then became more progressive during the global financial crisis and probably as a result of the government’s response to it. Progressivity has been drifting down since.

Unless we take action to make our personal income tax system more progressive, it is likely to become less progressive still.

Tax cuts legislated in 2018 will accentuate the trend by dramatically flattening Australia’s personal income tax scales by 2024-25, unless reversed as Labor has promised should it win the election.

Our company tax rate is high …

Company taxes are almost always proportional, set at a flat rate. Debate is about how high that rate should be.

Lower rates are said to encourage business investment, stimulating employment, wages and economic growth. But if company taxes are cut, government needs to find more revenue from somewhere else, or wind back spending.




Read more:
New figures put it beyond doubt. When it comes to company tax, we are a high-tax country, in part because it works well for us


Australia’s standard rate is 30%, reduced to 26.5% (and soon enough 25%) for companies with turnovers of less than A$50 million. It is the second-highest rate in the OECD, behind only France. A broader measure of Australia’s “effective” company tax rate, taking into account tax breaks, still shows it is high compared to other countries.

The high rate is little noticed at home. Most Australian shareholders are able to get a tax credit for the company tax paid on the profit that funds their dividend (a practice Labor has promised to wind back). This means the credit can cut the the income tax collected from a dividend recipient to zero, but not below it resulting in a payment from the Tax Office.

… which may not be a problem

There is no clear association between corporate tax cuts and economic growth.

Rough calculations using OECD and International Monetary Fund data suggest that, if anything, higher economic growth is associated with smaller tax cuts.

In part this is because foreign companies consider things other than the tax rate in deciding where to invest. In part it is because the revenue lost from corporate tax cuts has to be made up from somewhere else (most likely from extra income tax as incomes rise and push people into higher tax brackets).

Since 2001, when Australia’s rate of company tax was cut to 30%, Australia’s annual economic growth rate has averaged 2.9%. In the 17 years before then, when the company tax rate averaged about 39%, annual economic growth averaged 3.5%.

None of this implies causality. But it does show that lower company tax rates and better economic performance do not necessarily go together.

International surveys show that Australia, despite its relatively high company tax rate, is regarded as one of the 20 countries in which doing business is easiest. What most works against Australia is the high costs of electricity.

New taxes are waiting in the wings

In summary, there appears to be scope for reducing personal income tax rates at the lower end of income distribution while increasing them at the top end.

Our company tax rates are high, but this need not be a problem.

If company taxes were to be cut, other taxes would have to increase. One option is to increase the goods and services tax. But this is not ideal as the GST is a regressive tax; that is, it tends to make income distribution more unequal.

There are other options.

We could impose an extra, much higher tax rate on very high incomes, as Democratic representative Alexandria Ocasio-Cortez has proposed for the US.

It wouldn’t be a first. Australia’s top marginal rate was 75% in the early 1950s. Or we could reimpose an inheritance tax. A well-designed one would not only fund government spending but also work against intergenerational inequality.




Read more:
The workplace challenge facing Australia (spoiler alert – it’s not technology)


The Conversation


Fabrizio Carmignani, Professor, Griffith Business School, Griffith University

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

Words that matter. What’s a franking credit? What’s dividend imputation? And what’s ‘retiree tax’?



File 20190210 174873 wstlrx.png?ixlib=rb 1.1
There are words you’ll need to understand. But imputation is complex, like the tax system.
Wes Mountain/The Conversation, CC BY-ND

Peter Martin, Crawford School of Public Policy, Australian National University

You’re forgiven for being confused.

Newspapers need to economise on words. Television and radio reporters need to economise on seconds. So they use shorthand: words like “dividend imputation”, “franking credits”, and yes, “retiree tax”.

Which is fine if you already know what they mean, and pretty fine if you don’t, because you probably don’t need to. They speed things along.

Until now. Suddenly, because of their prominence in the upcoming election campaign, we are going to have to know what they mean. We are even going to have to know that one of them doesn’t mean what it seems to mean. The election might depend on it.

So here goes:

Taxable profits

If a company’s income exceeds its expenses, it has made a profit, which in ordinary circumstances is taxed at the legislated rate, which for big companies such as Telstra and the big banks is 30 cents in the dollar.

Dividends

After the tax is taken out, companies can pay some of what’s left to shareholders as a dividend, one for each share.

Last September Telstra paid shareholders a dividend of 15.5 cents per share. The previous March it was 11 cents.

Income tax

Australians pay tax on what they earn, unless the income is classified as not taxable or is below the A$18,200 tax-free threshold. The marginal rate (the rate on extra income) climbs with income, so that anyone earning more than A$180,000 (the top threshold) pays 45 cents on each extra dollar earned.

Dividends are taxable and so are taxed along with other income.

Dividend imputation

In 1987 in what he hailed as a world first, Labor treasurer Paul Keating introduced a rebate for each each tax-paying dividend recipient.

Taken off their tax would be the company tax the company had paid on the part of the profit that had been handed to them as a dividend.

It would greatly reduce the existing bias in the tax system which
taxed interest income once, but dividend income twice.

Here’s how it would work at today’s tax rates.

  • Jill owns 1,000 Telstra shares

  • Over the period of a year she gets dividends of A$265

  • To provide them, Telstra made a profit of A$379 on which it paid A$114 tax

  • Jill pays tax on the full $379 but gets a credit of A$114 that can be taken off any other tax she owes that year

  • As with other tax credits, it can be used to cut Jill’s tax bill as far as zero, but not to turn it negative. It can’t be handed to her in cash.

As Keating put it, the tax paid at the company level would be imputed, or allocated to shareholders by means of imputation credits.

But not to all of them. Non-resident (overseas) shareholders couldn’t get them, and nor could shareholders whose dividends hadn’t been franked.

Franking credits

As Keating explained, the tax credit only applied to the extent to which full Australian company tax had been paid; to the extent to which the dividends had been franked (stamped) to indicate that tax had been paid.

Not every company pays the full 30 cents in the dollar in every year. Often it is carrying forward previous losses. Only dividends from profits on which full tax had actually been paid were to be marked “fully franked”. Dividends on which tax had been partly paid were to be marked “partly franked”.

Fully franked dividends became sought after, because they brought with them the biggest franking credits. In a useful side effect, dividend imputation encouraged companies that wanted to look after their shareholders to pay full tax.

Refunds to non taxpayers

Although the particular Australian design arguably was a world first, dividend imputation or something similar is not unusual. Many countries have systems in place that to a greater or lesser degree ensure company profits are taxed only once – among them Canada, New Zealand, Chile, Mexico, Malaysia and Singapore, whose system is called “one-tier” tax.

Many that did adopt it later moved away from it, using the money saved to cut headline tax rates; among them Britain, Ireland Germany and France.

What is unusual is what Australia did next. In 2001 after more than a decade of dividend imputation, the Howard government supercharged it, paying out franking credits in cash to shareholders who didn’t have any or enough tax to offset.

From the point of the view of these non-taxpayers, dividend imputation became a negative income tax: instead of them paying the government money, the government paid them money.

As far as is known, it is an enhancement that has not been copied anywhere.

On one hand, it makes sense because it treats non-taxpayers the same as taxpayers by refunding them the same amount of company tax.

On the other hand, it does not make sense because it means that instead of being taxed once (at either the company or the personal level) as was the original intention, company profits can escape tax altogether.

Untaxed super

From 2007 the change mattered to many more retirees.

The Howard government’s “Simplified Superannuation” package made super benefits paid from a taxed source (that’s most super benefits outside of the public service) tax free when paid to people aged 60 and over.

A quirk in the wording of the Act went further. Not only did super withdrawals become tax free, they also became no longer included in “taxable income” and so didn’t need to be declared on tax forms.

This meant that many retirees on reasonable super incomes were no longer taxed at reasonable rates on their other income, including income from shares which could be untaxed if it fell below the tax free threshold.

And because of the 2001 decision to send dividend imputation cheques to shareholders who were untaxed, these retirees who suddenly found themselves untaxed also got imputation cheques mailed to them from the government.

Self-managed super funds, whose income is tax exempt in the retirement phase, also got imputation cheques.

In July 2017 the Turnbull government wound back tax free super by placing a limiting it to accounts with less than A$1.6 million. The restriction was to hit 1% of super-fund members.

Labor’s proposal

Treasury’s 2015 tax discussion paper prepared for the Abbott government referred to “revenue concerns” about dividend imputation cheques.

They cost the budget just A$550 million in the year the Howard government introduced them, but A$5 billion per year by 2018 and were on track to cost A$8 billion.

Labor’s proposal, announced in mid March 2018, was to return the divided imputation system to where it had been before Howard changed it in 2001, and to where it still is elsewhere. Tax credits could be used to eliminate a tax payment but not to turn it negative.

Labor allowed exceptions for tax exempt bodies such as charities and universities who would continue to receive imputation cheques alongside dividends.

Pensioner guarantee

Two weeks later, in late March, Labor amended its policy by adding a “pensioner guarantee”. Pension and allowance recipients, even part pensioners, would be exempt from the changes and would continue to receive cash payments.

Also exempt would be self-managed super funds with at least one member who was receiving a pension or part-pension at the date of Labor’s announcement, 28 March 2018.

The change cost relatively little (the budget saving over the next four years fell to A$10.7 billion from A$11.4 billion) because most of the imputation cheques go to Australians with too much wealth to get even a part pension.

Self Managed Super Funds

Retail and industry super funds pool their members contributions, and so almost always have tax to reduce, meaning most would be unaffected by the withdrawal of cash credits.

Self Managed funds usually represent just one person, or a couple; their funds aren’t pooled with anyone else’s. This means that in the retirement phase, where fund earnings are untaxed, most do not have enough tax to reduce. So they get imputation cheques, which they would no longer get when Labor’s policy was implemented.

The Parliamentary Budget Office expects some self-managed funds to change their investment mix and some owners of self-managed funds to transfer their investments to retail or industry funds.

Retirement tax

There is no such thing. The phrase is shorthand for Labor’s proposal to withdraw dividend imputation cheques from dividend recipients who are outside the tax system.The Conversation

Peter Martin, Visiting Fellow, Crawford School of Public Policy, Australian National University

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