Time for Tax Cuts

The unexpectedly large budget surplus has again raised the spectre of tax cuts, and not before time.

The tax reform of a few years ago did little to improve the burden of taxation.  Indeed, we came through the exercise not only with crushingly high levels of taxation on personal income but a higher overall burden of taxation.

The Federal Government ended the last fiscal year with a surplus of $7.9 billion -- almost double the level forecast in May at budget time.  The main reason for the large surplus is once again buoyant tax receipts.

While the government has yet to release revised forward estimates, the expectation is for large surpluses into the future.  This, along with a concerted effort to trim the fat that has accumulated around most areas of spending, is enough to provide a major reduction in taxation.

The case for tax cuts is strong.  Australia has a particularly onerous taxation system in comparison to other countries and as a share of earnings.

As detailed in a recent report by KPMG (a large accounting firm), Australia's total tax take represents 31.8 per cent of GDP (excluding social security taxes).  This makes us the sixth most taxed economy in the developed word and clearly ahead of all our major international competitors such as the US, Japan, UK, Singapore and Hong Kong.

Australia's tax position is particularly out of sync where it counts the most;  that is, on the corporate tax front.  Even after the recent reduction in the corporate tax rate (from 34 to 30 per cent), Australia is ranked the second highest taxing economy (after Luxemburg) on corporate incomes and is some 75 per cent higher than the OECD average.  The problem lies not so much with our tax rate, but with the way it's collected.

The other key area of concern is the taxation of personal income.  While Australia's overall tax take of personal income is only just above the OECD average, its impact on middle to high income earners is onerous in the extreme.  The top marginal tax rate is not only high, but it kicks in at a low level of income relative to over countries.  For example, the UK has a top marginal tax rate of 40 per cent which kicks in at an income of AU$83,900.  In contrast Australia's top marginal tax rate is 48.5 per cent and it cuts in a $62,500, or 1.2 of full time average annual incomes.

To put this in practical terms, KPMG showed that in order to be able to buy an average home in "middle" Sydney, a homebuyer needs earnings that place him or her on the highest marginal tax rate and who will, as a consequence, lose almost half of each additional dollar earned to tax.

The tax system thus provides a huge disincentive to work, save or study and encourages businesses and skilled workers to seek their fortune elsewhere.  It also encourages people to waste scare resource on minimising taxes.

The Howard Government tried to raise the threshold for the top marginal tax rate to $75,000 as part of the tax reform package, but this was thwarted by the Senate.  It's now time to try again but to do more.

ADVERTISEMENT