The scent of elections and tax cuts: Democrats offer alternatives

Big tax cuts are now inevitable.

Labor has ensured it by endlessly rabbiting on about the Coalition being the highest-taxing Australian government ever. (True but irrelevant, since Australia is among the lowest-taxing nations in the OECD.)

Labor's line is dangerous. It encourages a resistance to raising additional revenue to invest in education, health and the environment.

The Liberals have guaranteed tax cuts by constantly saying surpluses must be paid back.

So the question is: When?

My bet is in the May budget. One reason is that such an election sweetener is irresistible for the government. Two, the Coalition would want to spend any surplus money in advance, leaving Labor with nothing to promise. Three, pay packets would only benefit from tax cuts legislation in the second half of next year, when an election is most likely. Four, tax cuts will be seen as some relief against expected higher interest rates.

The government have trapped Mark Latham into virtually guaranteeing Labor support for raising the present top tax rate of 48.5 per cent from $62,500 to a much higher threshold.

ACOSS say anyone earning $100,000 has an average tax rate of 34 per cent on all income. Is that really that high?

The well-off have already had their tax cuts. The Coalition's 30 per cent rebate on private health insurance, costing the taxpayer nearly $3 billion a year, favours higher income earners. Capital gains tax was halved just a few years ago, with Labor support, despite the Democrats' opposition and despite the fact that it clearly mainly benefited those wealthy Australians with investment and share portfolios.

Democrats like me can cry all they like that Commonwealth revenue and expenditure are still insufficient to meet the pressing and legitimate expectations and needs of Australians for health, education and the environment, amongst other things. (Health will remain an issue, even if Medicare Plus passes the Senate.)

We say we do not so much need increased taxes as increased revenue. We attack some tax expenditures and tax wastage as the means of assisting the growth in revenue to meet expenditure needs.

But tax cuts it will be. The two majors will have the numbers.

So, if tax cuts seem inevitable, what is the right way to go? What could or should be the government priorities and how much money would they have to spend?

The latter we don't know, but priorities differ. If you wanted to keep the status quo, then bracket creep would be the target.

Bracket creep is the impact of inflation related salary increases on the static progressive marginal tax rates. Indexing tax rates to end the bracket creep problem would result in a cost to the revenue by 2005-06 of an estimated $3.5 billion per annum. $3.5 billion less tax to pay annually.

If you wanted to get people off welfare and into work you would target the tax and welfare intersects.

The working class and the middle class get the rawest income tax deal. Low and lower income Australians struggle with a tax threshold that kicks in at a ridiculously low level of $6,000, and they struggle with the highest effective tax rates of all because as they earn more, welfare benefits reduce.

The most important distributive mechanism for improving the lot of low-income Australians is to improve their disposable income.

From the employer's perspective, if the disposable income of low-wage earners increases as a result of tax cuts, it could take some of the stress and some of the tension off the low-wage industrial case that has to be mounted annually.

Imagine if the government had the ticker to raise the tax-free threshold from $6,000 to $20,000. ACOSS, in their 'Info 347' June 2003 paper, say that the average tax rate on all income for someone earning $20,000 a year is presently 12 per cent, or $2,400.

So, if the tax-free threshold were raised to $20,000, that low-income wage earner would have $2,400 more per annum, or $46.15 more per week disposable income in their pocket.

All Australians would get a tax cut because raising the tax-free threshold to $20,000 would flow right up through every income level and would cost a massive $18 billion a year.

That would have to be partly paid for by the richer Australians losing tax concessions.

This is because Access Economics' projected ongoing surpluses of around $7 billion would never be enough. Massively reducing corporate welfare, welfare for the wealthy and various tax lurks would be necessary.

The Democrats argue there is at least $7 billion that could be stripped out of the $30 billion worth of tax expenditures or concessions, but we prefer that spent on improving essential services.

And then there is tax arbitrage – the loss of revenue because smarties work the gap between income tax rates and capital gains and corporate tax rates.

Despite major reform, the tax act still encourages tax manipulation.

What is needed is comprehensive reform that broadens the base, lowers effective tax rates, produces more revenue, and delivers more equity and less inequality. A tall order!

We are unlikely to get comprehensive reform next May, so if Labor and the Liberals insist on tax cuts, lets concentrate on low and middle income Australians.