Don't waste time on tax cuts

Day by day, political reality is ambushing the great tax debate of 2016. It will inexorably herd the government into a place where for policy reasons it should have been all along – sealing off holes in the income tax base to help fund reductions in the budget’s structural deficit without cutting social programs to pieces.

Last year, business groups demanded newly elected Prime Minister Turnbull from Sydney’s leafy eastern suburbs must show political courage and increase the GST take to use a slab of the proceeds to cut the company tax rate. For the Opposition and the Greens it would have been the political gift that kept on giving, for what was always a dubious economic benefit.

Next the government urged itself to increase the GST to pay for the handing back of bracket creep. But economic modelling made available in late-January told it that by the time GST compensation was paid, any economic benefits through improved work incentives would be miniscule.

Let’s follow the logic of using the GST to fund the return of bracket creep. Australia’s GST rate of 10 per cent compares with Europe’s average of 21 per cent. If the government gave back bracket creep every time it occurred – funded by a GST rate rise – Australia would quickly join the Europe’s 21 Per Cent Club. And our welfare state would swell to the size of Europe’s through the payment of GST compensation.

Having abandoned the GST hike, the government is now examining the scope for repairing the personal income tax base to pay for the return of bracket creep. On the agenda are superannuation tax concessions at the top end, negative gearing of rental properties and excessive work-related expenses. Each of these should be fixed on both equity and economic efficiency grounds. So, too, should the 50 per cent capital gains tax discount, but it appears to be off the agenda.

Unless the government goes hard on all four base-repairing measures, by Amanda Vanstone’s famous test the revenue they generate would barely be enough to buy an average worker a sandwich and a milkshake. The reason is that any meaningful rate reductions or threshold increases down the income scale are horrendously expensive. Cutting the top marginal rate or raising its threshold is much cheaper but would open up Turnbull to accusations of favouring the rich over the workers.

The only way to concentrate income tax cuts at the lower end is to increase the low income tax offset and phase it out quickly at higher incomes. But a rapid phase-out rate would raise effective marginal tax rates, damaging work incentives for part-time workers, especially women, defeating the purpose of handing back bracket creep.

All the fuss about handing back bracket creep has arisen when it is at its weakest in decades. Inflation is at historically low levels and money wages are growing at their slowest pace on record. Dire warnings about bracket creep in last year’s tax discussion paper assume money wages will grow to the year 2024-25 much faster than at present and than the budget’s forecast growth rates.

At some point, tax cuts will be needed to arrest the effects of bracket creep on work incentives, but why has this become the number one priority? What happened to the budget emergency? By insisting the government doesn’t have a revenue problem only a spending problem, the Treasurer is expecting spending cuts to do all the work in returning the budget to surplus. Yet Australians – young and old – understandably want access to new medical technologies. It would be a brave government that told Australians they should suffer and die early for the sake of fixing the budget.

Similarly, the community strongly supports extra spending on schools with large numbers of disadvantaged children. Numerous studies show high returns from sound investments in early intervention programs.

By all means, conduct efficiency reviews while maintaining the quality of health and education services, as agreed by the parties to last year’s National Reform Summit. And get stuck into the remaining middle-class welfare that the Howard government bequeathed the nation out of the transitory proceeds of the mining boom. But in an ageing population and with the ever-increasing availability of marvellous new medical technologies and life-saving medicines the budget will not be returned to surplus by spending cuts alone. Handing back bracket creep will only make the structural deficit worse.