Tax Cuts? What Tax Cuts?

The government has pulled a switfy.  They've got everyone thinking they are going to cut taxes.  They aren't.  Taxes are going up under the government's income tax plan which passed the Senate yesterday

The government's own budget figures show that revenue from personal income tax will rise six per cent in 2018-19, five per cent in 2019-20, and seven per cent in both 2020-21 and 2021-22.  The annual rise is well above the rate of inflation growth, or growth to nominal GDP.

Yes, some — many, perhaps — workers will be better off under the income tax changes.  The elimination of the 37 per cent threshold is a good policy that will see millions of workers have a top marginal rate of just 32.5 per cent.  It also means that 2024-25 around 94 per cent of taxpayers are projected to face a marginal tax rate of 32.5 per cent or less compared with 63 per cent if we leave the system unchanged.

And, yes, the changes to the tax schedule means Australian workers will be paying less tax than under the status quo and, almost certainly, far less tax than under a Labor government.

However, to call the changes tax "reform" is stretching it.

True tax reform would involve substantial alteration to the income tax schedule, such as through moving toward a single flat income tax, and heftier reductions to the corporate tax rate.  It would also involve alternations to the broken GST system, such as by allowing state governments to set their own GST rate and keeping what they raise, rather than the complicated and inefficient redistribution system we currently have.

More to the point, tax reform and substantial tax cuts can only occur where there are spending cuts.  This is because the true cause of higher taxes is higher spending.  Every dollar of spending must be funded through higher taxes either now, or in the future.  Taxes can be deferred into the future through the accumulation of debt to pay for unfunded spending.  This is why there is currently more than half a trillion dollars in gross debt that will be paid back by future generations.

The reality is that insofar as spending grows, so too will taxes.  This is the key issue that the political class will not reckon with.  And perhaps with good reason.  Voters have shown utter reluctance to face the financial abyss the nation faces without reductions to spending.  And the Labor opposition has no interest whatsoever in working in a bipartisan fashion to help make the case for reform.

One needs to only recall the reaction to the modest $5.00 co-payment to see a general practitioner proposed by the Coalition in its first budget under Abbott to see how near impossible spending reform is.

Moreover, the draconian top marginal tax rate of 45 per cent, which is really 47 per cent including the Medicare levy, will remain.  And the value at which that kicks in under the government's plan of $200,000 remains incredibly low by international standards.  As Judith Sloan noted in an article for The Australian last month the proportion of taxpayers who face this top marginal tax rate is expected to rise from the current figure of about four per cent to six per cent.

Such is the state of politics in Australia that a government which raises taxes at a slower rate than under the status quo is lauded as implementing reform that will cut taxes.  And therein lies the reason why the Coalition will probably win the next election.  The terrible performance by Labor makes the government look better every day.  It will be a long time before true reform to spending and taxes is forthcoming.