Tony Abbott’s proposed income tax rise will hurt the states as well as consumers, and risks a demand crunch — all for a fiscal sugar hit.
“This isn’t the fifth term of the Howard government,” Prime Minister Tony Abbott said in question time several weeks ago. Indeed: the proposed “debt levy” will restore personal income tax rates to levels last seen in the Howard government’s third term, when Peter Costello, under pressure from newly arrived backbencher-in-a-hurry Malcolm Turnbull, increased income tax thresholds and reduced tax rates. Back when the Howard government took a quarter of GDP in taxation revenue.
But the more accurate comparison is with a different Howard era, the second term of the Fraser government, when the “fistful of dollars” promised voters by the Liberals before the 1977 election was wiped out by then-treasurer John Howard’s “income tax surcharge” of 1.5% to fix the deficit.
So Tony Abbott, who in 2012 promised “tax cuts without new taxes”, isn’t the first Liberal to break a promise and impose a tax levy under the guise of fiscal discipline.
But the Tony Tax won’t merely affect taxpayers. The tax, as outlined by Coalition favourite Terry McCrann today, is highly progressive, and targeted at middle and higher-income earners, as it should be. But in being so, it is aimed at discretionary consumer spending, which is more likely to be subject to the GST than basics like food and health, which form a much greater part of the spending of low-income earners.
As a consequence, the Tony Tax will simply direct revenue away from the GST, and thus state governments, to the federal government. It’s a revenue shift between levels of governments that will leave struggling states, already facing difficulties with flat GST growth, with an even bigger budget challenge.
Assuming the Tony Tax raises around twice as much as the National Disability Insurance Scheme levy, established by the Gillard government last year, which was estimated to earn $3.2 billion in its first year, it will lead to the siphoning away of over half a billion dollars a year from the states and territories and into federal coffers, a neat little trick that state treasurers will be less than happy with.
But even at that level, the tax will be no more than a sugar hit to the budget given the size of the deficit next year. Let’s compare the sort of revenue raised by a levy both to the deficit and to some other budget costs.
Dumping the private health insurance rebate, which has no worthwhile health policy outcome, would save around $5 billion a year; even with increases in spending associated with greater public hospital use, dumping it has been estimated to save a net $3 billion a year, permanently. Removing the GST food exemption would take substantial fiscal pressure off the states by delivering over $6 billion a year to state coffers, although some compensation would be required for low-income earners. The government is already walking away from over $6 billion in revenue from the carbon price next year, although that would have fallen to $3 billion to $4 billion per annum in 2016-17, when the price would have been linked to the European trading scheme.
Revenue from a Tony Tax would likely be much less than Treasurer Joe Hockey’s unsought and pointless handout to the Reserve Bank this financial year. And it would be dwarfed by the huge revenue losses associated with superannuation tax concessions, which together total nearly $30 billion (that’s the revenue Treasury estimates would be gained from removing them, rather than merely the revenue forgone).
The tax will thus be a choice of this government, not something forced on it. It will be a choice to rely on the lazy Howard-era method of lifting the Commonwealth’s overall tax take rather than targeting spending areas deemed to be off-limits to the Coalition, like high-income superannuants and the private health industry.
If that’s all it were, no particular damage would flow from it. And if it were coupled with genuine long-term spending reductions in areas like middle-class welfare — and by the way, how come no one is shrieking “class warfare” when this government proposes a highly progressive tax and curbs on middle-class welfare, like this crowd did when Labor did it? — then it might be a price worth paying.
But the Tony Tax runs the real risk of shocking consumers into closing their wallets. Having been told the budget is in critical condition (which of course it isn’t), that they’ve all got to make a sacrifice for the national good and that they’re going to have hundreds or thousands of dollars a year less to spend, consumers may well end up pulling their horns in and spending considerably less than the billions taken directly from them, curbing retail spending just when it had started to grow again after a long period of stagnation, with flow-on consequences for state GST revenue. This is still, despite the positive growth signs of the last quarter, an economy growing below trend. As any number of European countries have repeatedly demonstrated, short-term austerity rather than a medium-term path to fiscal sustainability simply entrenches low economic growth, deficits and deflation.
Still, at least it will guarantee that the Reserve Bank, already concerned about the impact in public demand of state and Commonwealth budget-tightening, won’t lift interest rates any time soon and may even have to reconsider further cuts, which Hockey is pressuring it to do because he doesn’t like having to budget with a dollar at US$0.93.
Treasurer Howard taking back his “fistful of dollars” prompted Paul Keating to dub him “Honest John Howard”. It was a label that plagued Howard throughout the 1980s. Whether Abbott has any more luck will depend on how successful Labor is at making him wear the Tony Tax. If Labor can’t exploit what is surely a golden opportunity, it should prepare for a long time in opposition.