22 Jan 2018 is the year of personal income tax cuts
James Paterson — Australian Financial Review — 22 January 2018
There’s never a bad time to cut personal income taxes, but the case for tax cuts in 2018 couldn’t be stronger.
The Prime Minister put them firmly on the agenda in a speech to the Business Council of Australia in November.
Remarkably, the last substantial reduction to the income tax burden was delivered by Peter Costello in his final budget as treasurer, in May 2007 – more than a decade ago. The last of those scheduled tax cuts came into effect on the watch of Wayne Swan, who also lifted the personal income tax-free threshold from $6000 to $18,200 as part of compensation for the now defunct carbon tax.
Yet the current threshold for the top rate income tax still remains exactly where it was then – $180,000. In that time inflation has pushed many Australians into higher tax brackets, causing them to pay more tax without a real improvement in their income. For some people, this means a fall in real take-home pay. According to a Parliamentary Budget Office report in October, bracket creep has almost completely wiped out the Howard-era tax cuts, with the top 40 per cent of taxpayers paying almost 3 per cent more than when the Coalition lost office in 2007. That points to an unavoidable truth: if you are not cutting taxes, you’re effectively increasing them. Without action, this problem is only going to get worse.
According to the PBO report “The average tax rate for individuals in every income quintile is projected to increase over the period from 2017-18 to 2021-22.
“Absent rate cuts or threshold rises, middle income earners will be hit the hardest: the middle 20 per cent of income earners will see their average tax rate increase by 3.2 percentage points. This will increase their average tax rate from 14.9 per cent to 18.2 per cent. In other words, middle income Australia’s tax bill will grow by an average of $2500 by 2021-22.
Overall, Australians can expect their average tax rate to increase by 2.3 percentage points. This means that in 2021-22, Australians could be paying an average of $3600 extra in taxes. In the 2016 budget, the Turnbull government lifted the $80,000 income tax threshold to $87,000, saving half a million Australians from entering the 37 per cent income tax bracket. This provided average full-time wage earners with tax relief of $315 per year. But there is clearly more that needs to be done. In an era of slower wages growth, and with families struggling with the rising cost of living, delivering tax cuts is the most concrete action any government can take to improve household finances.
While virtually everyone outside the Labor Party now recognises that our 30 per cent company tax rate is uncompetitive by global standards, our personal income tax rates do not fare much better. Among the OECD – a group that includes most of the world’s high-taxing nations – Australia’s top income tax rate ranks in the highest third.
At 47 per cent, including the misleadingly named Medicare levy, it’s vastly higher than New Zealand’s top rate of 33 per cent, let alone regional leaders like Singapore (22 per cent) or Hong Kong (17 per cent). And it cuts in at just 2.2 times the average wage, compared with eight times in the United States and 14.8 times in France. In a world of footloose capital where labour is increasingly mobile and competition for talent is fierce – we have to make the rewards for success in Australia at least as attractive as our OECD competitors. This will require a much more internationally competitive personal income tax system.
The Trump administration’s remarkable tax reform that has slashed corporate and individual tax rates shows the huge economic gains from tax cuts. Already, major companies like Apple have announced they are repatriating billions of dollars of offshore earnings to be reinvested (and taxed) in the US. Walmart has announced its employees are getting pay rises, and investors are being returned dividends: all a direct result of tax cuts. Of course, there is also a profoundly moral case for tax cuts. No one should be taxed any more than is necessary to deliver the essential services that only governments can provide. Reward for effort should be at the heart of our tax system, not discouraged by it.
To deliver that, income taxes should be as low and as flat as possible. This is the year to take the first steps towards that goal.
This article was originally published in the Australian Financial Review.