My fantasy budget would be for the Treasurer to do nothing — do nothing in relation to tax cuts.
It simply is not the time for tax cuts — neither personal income tax reductions, nor company tax cuts. The economic case put forward for such cuts has so far been either poor or totally non-existent. And such tax cuts significantly curtail the government’s ability to invest in high-quality services and infrastructure.
The theory that tax cuts deliver a growth dividend is based on the idea that cutting taxes will increase the participation rate, and that more people will work more because they are incentivised to do so by lower taxes. However a new report out today from The Australia Institute shows most people don’t even know what their marginal tax rate is.
Regardless — as any economist will tell you — if this theory does have impact, it is far greater for those working part time. In particular, those looking after children and deciding that more work (and more childcare) stacks up might boost participation rates. But, of course, the vast majority of people in that situation are not earning over $80,000.
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And, of course, the whole economic case for the GST increase collapsed because the growth dividend from the associated income tax cuts was, in reality, negligible.
With that traditional economic case for income tax cuts hitting the floor, the backup argument is that they deliver an economic stimulus, which is needed because the economy is slowing. The reality is that the government would get much better growth and stimulus from spending the money itself — by, say, increasing the level of unemployment benefits, where a far lower proportion of the outlay would be saved or spent abroad.
What’s more, with wages growth at record lows and new deflation fears appearing, the idea that bracket creep needs urgent remedy is almost absurd.
However, what is less commented on is the ongoing effect of a whole series of income tax cuts built into the system over the past dozen years.
Under John Howard 13% of taxpayers paid the top marginal tax rate. By the time of the 2014 budget only 4% of taxpayers were in the top rate. Mid-way through Costello’s term as treasurer the top marginal tax rate cut in at $60,000. Now it has tripled to $180,000.
It was only a few years ago that the tax-free threshold was $6000. It has more than tripled to $18,200 now. We had tax cuts that actually over-compensated for a carbon price. But now we have no carbon price.
In essence, Australians have been compensated for bracket creep — in advance.
Then there is the company tax cut push. Again the Treasurer would achieve a lot by doing nothing. There simply is not a strong economic case for any tax cut. You would have thought there wasn’t a political case either.
With tax avoidance scandals and widespread corporate malfeasance, giving a tax cut to some of Australia’s largest, most profitable corporations would seem like the exact opposite of political sense.
Let’s take the banks, for example. Even a small tax cut down to the current rate for small business of 28.5% would deliver an estimated $8.1 billion over the next decade to just the big four banks alone. To suggest that this is a sensible way to spend that amount of revenue to banks already making multibillion-dollar profits is nonsensical.
If your actual agenda were to drive innovation and investment in job-generating industries, you would be ploughing that money into targeted schemes to support new industries, innovation and investment. A blank cheque to large companies, which will be passed on to many foreign-based share owners, makes little economic sense.
Let’s fantasise for a moment that good economics might trump politics on budget night.
That being the case, Scott Morrison should start with that old adage “first, do no harm”. When it comes to income and company taxes, the Treasurer should do nothing.