Mythbusting the tax reform debate

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Mythbusting the tax reform debate

Deloitte report

14 September 2015: Deloitte has today published the first of two reports aimed at shedding light on the tax reform debate which to date has been characterised by a proliferation of myths and misconceptions. The first Shedding light on the debate: Mythbusting tax reform paper covers three areas: fiscal drag, GST and company tax.

Chris Richardson, Partner, Deloitte Access Economics and David Watkins, Deloitte Partner, Tax Insights and Policy outline the five myths discussed in the report:

Fiscal drag – is it doing the heavy lifting?

Myth 1: Budget repair in Australia is 80% reliant on ‘fiscal drag’ (or ‘bracket creep’) – the taxation by stealth process that pushes taxpayers into higher tax brackets as their wages rise over time.
Fact: Fiscal drag only contributes 10% of the revenue increase by 2018-19.
Why is the myth wrong? Because the engine that powers fiscal drag is wage growth, and wage growth in Australia is at record lows. Far and away the biggest driver of Treasury’s forecasts of a higher tax take (accounting for more than 70% of the increase) is simply the economy gets bigger over time as prices and the economy grow.

Myth 2: Middle Australia is the biggest loser from fiscal drag.
Fact: Although middle Australia feels this pain (for example, marginal tax rates rise from 32.5 to 37 cents in the dollar at $80,000), the share of income lost to tax is set to rise far faster for lower income earners (whose marginal tax rates rise from 19 to 32.5 cents in the dollar at $37,000, and who may also lose some government benefits as their income rises).
Why is the myth wrong? Because Australia has a progressive tax system and because our social safety net is means tested. That first factor (progressivity) explains why the tax curve starts to be steeper as income first rises, and the second factor (means testing) explains why higher incomes can result in fewer benefits as well as more taxes.

Can a GST increase be fair?

Myth 3: Any increase in the GST (a higher rate or bigger base) would punish the poor.
Fact: That myth ignores the bleeding obvious: we can raise pensions and benefits and tweak the personal tax system to keep the less well-off at least no worse off than now.
Why is the myth wrong? Fairness isn’t the outcome of a particular part of a particular tax reform package. That’s like measuring how well runners do in a race at the half way point: interesting to know, but not ultimately what counts. If you hear someone saying tax reform “just isn’t on” because of the fairness impact of one part of a proposed package – instead of all of a tax reform package – then feel free to switch off.

Should a cut in company tax wait?

Myth 4: Any cut in company taxes would just be welfare for plutocrats.
Fact: The key determinant of which taxes we should cut first is the damage they do to the economy, and Treasury and other economists rank company taxes among Australia’s most damaging taxes. Besides, and as Treasury also notes, the biggest beneficiary of lower company taxes would be Australian families, as lower company taxes mean more investment, jobs and higher wages. (Yes, you read that right: the actual winners would be the people, not the plutocrats.)
Why is the myth wrong? A lower company tax rate benefits Australians by providing more growth, investment, employment and higher living standards. Let’s not ignore a good reform option simply because it may be hard to explain to the voters that they’ll be the real beneficiaries.

Myth 5: Tax reform has to wait – the Budget is too battered, and tax reform takes time.
Fact: Tax reform and tax cuts are two different things.
Why is the myth wrong? After a decade in which we’ve voted for everything from family benefits to disability insurance and tax cuts, Australia now spends rather more than it raises in revenue. So you should be rightly suspicious of tax ‘reform’ plans that are merely proposals for tax cuts. Only treat them seriously if they come stapled to matching detailed proposals to cut spending or to raise other taxes. If they don’t, then do yourself a favour and file them cylindrically. But genuine tax reform can boost the prosperity of Australia and Australians by (1) raising the same amount of money, (2) doing so in a less economically damaging way, and (3) looking after the interest of the poor. And other nations have already taken action, including a number of our Asia Pacific neighbours and key trading partners.

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