Saturday, March 21, 2015

Tax cuts for wealthy burried in intergenerational report

The intergenerational report projects massive and hidden tax cuts that would add as much as $150 billion a year to the budget deficit by 2055, a new analysis claims.

The Australia Institute has reverse engineered the tax projections in the report to find that by 2055 someone on the equivalent of $300,000 would be paying only 32.4 per cent of their income in tax, down from 37.7 per cent in 2021.

The tax cut, expressed in present dollars, would be worth $15,900. A low earner would receive a lower tax cut of about $4500.

The tax cuts come about because of a decision by the framers of the intergenerational report to hold the tax-to-GDP ratio constant at a time when real incomes are climbing.

Instead of being pushed into higher tax brackets with rising incomes as normally happens, wage earners would be kept on their initial tax rates even though their income had climbed.

The intergenerational report expects real incomes to climb 77 per cent over the next 40 years, pushing up the average wage from $58,700 to the present-day equivalent of $104,000.

In 2055 someone on the equivalent of $104,000 would be taxed as if they were earning $58,700. They would pay more dollars in tax, but they wouldn't be paying higher rates.

"It's not at all realistic to think that tax rate paid by high income Australians will fall, but that's what the report assumes," said Australia Institute executive director Richard Denniss.

"In fact it's entirely realistic to think that citizens whose incomes will rise rapidly will want world-class education, health and transport and will demand slightly higher rates of tax in order to get them.

"I think the purpose of the forecasts is to manage expectations, to make it look as if the government won't be able to afford things it'll be quite easily able to afford."

In The Age and Sydney Morning Herald

The IGR's hidden gift

Who wouldn't want high earners to pay more tax than low earners?

The treasurer. It's spelled out in his intergenerational report.

The relatively low earners are most of us, today. We make an average of $58,700.

If things go as the report suggests, in 40 years the average Australian will earn much more – an extra 77 per cent, taking the average wage to around $104,000. That's an inflation-adjusted figure. In real terms the average earner's wage will buy more than half as much again as it does today.  

It'd be wrong to tax those higher earners at a lower rate than we currently pay today, wouldn't it? It'd certainly be wrong to be cut back on spending on hospitals and schools in order to make sure those higher paid workers paid lower taxes.

Or so you might think.

But buried within the intergenerational report is a plan to do exactly that.

The Australia Institute has dug it out.

The trick is that the intergenerational report assumes that Australia's tax take will stay constant as a proportion of gross domestic product right out to 2055.

But because our real incomes will be higher (77 per cent higher by 2055) and because the report assumes that other taxes don't change, the outcome has to be that the proportion of tax taken out of rising incomes slides.

The iInstitute's calculations show that whereas in 2021 a high earner on $300,000 would lose 37.7 per cent of his or her income in tax, by 2055 an equivalent high earner would lose just 32.4 per cent.

The numbers are "real", inflation-adjusted. They mean that someone earning the equivalent of $300,000 in four decades time would pay a much lower rate of tax than someone earning that much today.

The gift to that high earner would be the equivalent of $15,900. The gift to a low earner on $50,000 would be much less, around $4500.

It happens because the report assumes the tax scales will be adjusted not only to compensate for higher prices but to compensate for higher real wages – an approach that, as it happens, is the opposite to the one the government is applying to pensioners.

It's inconsistent with the principle that Australians on higher real wages pay higher rates of tax. And it's expensive. The institute says by 2055 it'll cost the budget $150 billion more per year than if it had just indexed wages to compensate for prices.

It's extra compensation we shouldn't be paying. It's one thing to ensure that future generations will be no worse off than us, it's another thing to cut their rates of tax.

Why would the government want to pretend that it needs to? Partly because it doesn't want to be seen to be forecasting a higher tax take, regardless of how inevitable that will be as incomes rise.

And partly to make the budget outlook more scary than it is.

Richard Denniss from the Australia Institute believes treasurers and the treasury need props to help them argue that we can't afford to do everything that we want to do. The intergenerational report is one of them.

"It allows the government to almost trivialise the problems of running Australia by suggesting that we can't afford to solve them today because we should be thinking about 2055," he says.

In truth, the citizens of 2055 will be well placed to look after themselves, at least financially. Climate change may well be a big problem by then and shortages of workers may also be a problem, although we can ease that problem by bringing more workers in – something else the intergenerational report assumed we wouldn't do.

Raising more tax will be relatively easy when we are both richer and more concerned about our health.

And we get richer with each election. Back in 1998 when Australian National University asked what concerned us most at election time, 23 per cent said tax and only 10 per cent nominated health and Medicare. By 2001 the two were on level pegging and by 2013 health and Medicare had easily overtaken tax to trump it 19 per cent to 11 per cent.

The government l;ast week announced plans to extend Australia's tax system to Norfolk Island. Its citizens will pay income tax and company tax for the first time. In return they'll get Medicare, the Pharmaceutical Benefits Scheme, Newstart and pensions. It's a pretty good deal.

Taxes have benefits, and they become increasingly apparent with wealth and age. We'll be getting richer and older. Tax cuts will be the least of our concerns.

In The Age and Sydney Morning Herald