Punitive Taxes Hurt Us All

Tax reform remains an incomplete project in Australia.

While the 2004-05 Federal Budget makes some steps in the right direction, much more needs to be done.

It is well recognised that Australian middle-income earners -- the group that represents the majority of taxpayers -- face some of the highest marginal tax rates in the world.

The reason is that the top two income tax rates are high and kick in at lower levels of income than in other countries.  For example, Australia's top tax rate is 48.8 per cent, excluding the Medicare surcharge, and kicks in at $60,000.

This compares with a top marginal rate in Britain of 40 per cent on income of more than $83,000 and a top marginal rate in the US of 43.5 per cent, including state surcharges, on income of more than $595,000.

The result is that the tax take on the most productive people in society is far too high.

It is also having a substantial impact on the average person.  Anyone on average male weekly earnings faces a marginal tax rate of about 43.5 per cent.

But tax rates and thresholds only tell half the story.

Australia also has a welfare system with multiple payments and multiple withdrawal schedules based on income and other factors.

The interplay between Australia's high marginal tax and its welfare system produces large effective tax rates -- tax rates plus welfare payment withdrawal rates -- which are often more than 60 per cent on median income families.

This is not only unfair and breeds resentment, but is undermining the country's productive capacity.  It provides a strong incentive for people not to work harder, or invest in new and more profitable skills.

It also gives a strong incentive for people to waste resources in tax minimisation schemes and other unproductive activity.

The incentives are particularly perverse in the key areas of balancing work and home, and retirement.

Skilled women re-entering the workforce face not only high effective tax rates but the additional costs of paying for child care and other home-based assistance.

Retired people, especially partly self-funded retirees, also face high effective tax rates, as the pensions and other benefits are withdrawn with additional income.

The solution is clear.  The top tax rates should be cut substantially on a permanent basis and the corresponding income threshold should be increased.

The Howard Government attempted to follow this path as part of the GST tax reform package but the ALP and minor parties succumbed to the politics of envy and blocked it.

In the latest Budget, the Government has proposed a phased increase in the tax threshold for the two income tax rates by about $10,000 each.  Wisely, the ALP has said it will support these changes.

While the proposal will help, it is inadequate.  First, the benefits will be temporary, as they will be eroded by bracket creep.  Second, the key problem is that rates of tax are still high and are not being altered.

What is needed is political maturity, in the media as well as political parties, that can see through the politics of envy and recognise that taxing the hell out of the most productive people hurts us all.

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