How to fix everything: cut my tax

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by Ross Gittins
The Sydney Morning Herald’s Economics Editor

November 16, 2015

If I was on a mission to make big progress in increasing productivity and participation in the workforce, I wouldn’t start with tax reform.

That the people who profess to be so concerned about productivity and participation have started with tax reform does make you wonder about their motivations. Especially when you realise that the primary beneficiaries of the particular reforms the urgers are seeking would be their good selves.

Increasing land tax would mean the reform package made the tax system fairer rather than less fair.

The motives of the Business Council and other business lobby groups are transparent: their high income-earners want to pay less tax, so are happy to see other people pay more.

To them, this is the attraction of using an increase in the goods and services tax to pay for cuts in income taxes.

The better-off (such as me) benefit because their higher rate of saving limits how much more GST they pay. They benefit even further if the cut in income tax is shaped in a way that favours high income earners.

Powerful people pursuing their self-interest is hardly surprising. Nor is seeing them seek to disguise their self-interest with happy chat about improving incentives to “work, save and invest” and professing to be terribly concerned that Oz will miss out on foreign investment or that all our top executives will be lured away by American corporations.

But if, as a would-be reformer, I did get down the to-do list as far as taxation, what “reforms” would I make?

First, I’d remember that all the bracket-creep we’ve subjected ourselves to in recent years is the standard way governments achieve a recovery in tax collections after they find they’ve earlier gone overboard with tax cuts and tax breaks – as we did in the first stage of the resources boom.

I’d remember that Treasury has overstated the extent of bracket creep because its projections assumed a much higher rate of wage growth than has transpired. It’s true, however, that bracket creep is regressive, hitting people on the lower tax rates proportionately harder than people whose incomes have reached the top tax rate.

So if I felt it was time to ease up on bracket creep, I’d do it simply by lifting all bracket limits bar the top one by the same percentage, determined by the rate of price (not wage) inflation over the period. This would yield a quite noticeable weekly saving to workers.

That is, I’d belatedly do what in an ideal world I should have been doing once a year: indexing the tax scales to price inflation.

What I wouldn’t do is con the punters by using the regressiveness​ of bracket creep as cover for a tax cut biased in favour of high income-earners (particularly when the earlier tax cuts and tax breaks the punters have been paying for were themselves biased in favour of high income-earners).

Second, to cover the cost of this tax cut – and possibly also to increase our tax-raising capacity to cover the future growth in health and education spending Treasury is always agonising over in its intergenerational reports – I’d increase not GST but a uniformly applied land tax (which could apply to the same tax base as local government rates).

Why? Partly because GST is a regressive tax, whereas land tax is progressive, hitting higher-income households proportionately harder than lower-income households.

Do that and the need to “compensate” low income-earners disappears – though it would be necessary to institute reverse-mortgage arrangements for asset-rich/income-poor oldies.

It would also remove the government’s temptation to short-change the punters by double-counting the return of bracket-creep as compensation.

Increasing land tax would mean the reform package made the tax system fairer rather than less fair – surely an important goal of honest tax reform.

As well, universally applied land tax is more efficient than GST in that, as every economist is supposed to remember, it would do less to distort people’s decisions about whether to “work, save and invest”.

The argument that income from capital and, for high earners, income from labour, need to be taxed more lightly because globalisation has made financial capital and executive labour more mobile between countries, is widely used – especially by Treasury – to justify taxing consumption more heavily.

But how can these guys be fair dinkum in this argument when they’re overlooking the ultimate immobile tax base, land?

Finally, though excessively generous superannuation tax concessions and capital gains tax concessions are overdue for reform, I’d use the proceeds to reduce the structural budget deficit, not throw them into the tax reform pot to help justify tax cuts for high income-earners.

It’s arguable that budget repair is more important than tax reform.

https://prosper.org.au/how-to-fix-everything-cut-my-tax/