Earlier this week, the government floated the possibility of personal tax cuts for lower and middle income earners.
Such a move would be welcomed by many given the low or zero wage rises experienced by many employees in recent years. Although ironically that same wage stagnation has put ‘bracket creep’ – so much-talked about until fairly recently – on the back burner.
First question – could the government target the tax cut to those it wanted to benefit? Could it reduce the taxes of lower and middle income earners without also benefiting higher earners?
The answer is yes, the mechanism to do so already exists. It is called the Low Income Tax Offset. Currently it is a maximum of $445 which applies up to $37,000 and tapers to $66,667.
It is non-refundable and cannot be used to offset the Medicare Levy. One could increase the amount and possibly the taper to, say, $100,000 and achieve what the Prime Minister’s outline plan intended.
But rather than simply lowering the personal tax rates, I would prefer the government to take a different approach. For several years now, KPMG has argued that the potential changes to the tax and transfer system need to be evaluated through a prism of gender equity.
This is because one of the greatest single sources of productivity gain in our society is higher female participation in the workforce.
If the government has decided it has sufficient funds for tax cuts then it would be good to target the very high effective marginal tax rates (of around 80 percent) that particularly impact women in a family working part-time and wishing to increase their hours. This requires a structural “re-think” of the linkage between child and family benefits and the personal tax system.
Given the ongoing strain on public finances, and the continuing political impasse in Senate over the government’s desired corporate tax cuts, the next question is whether the PM would be tempted to abandon the fight over company tax cuts and use the proceeds to finance personal tax cuts?
It is certainly possible, but I think that would be unfortunate. Australia’s corporate rate is becoming increasingly uncompetitive and as a medium-sized capital importing nation we cannot afford to make ourselves unattractive in a world of mobile capital flows. Inward investment and jobs are threatened by an ongoing rate of 30 percent in a world where most other countries rates are lower, and increasingly so.
To govern is to choose. While unemployment figures remain stable, under-employment is a growing problem in Australia. Targeting tax cuts at employment-endangering company taxes and the redesigning of the transfer – tax system interaction is a good use of scarce resources.