Monday, October 22, 2007

SPIN DOCTOR: Making sense of the tax wars

The Treasurer says there's a “fundamental error” in Labor's tax plan that would leave 45 per cent of us worse off.

Labor says his claims are “bogus”.

Without the spin, it goes like this.

A week ago Peter Costello promised a three-year program of tax cuts worth $34 billion over three years. For the two years beyond that he promised further cuts, uncosted and dependent on budgetary conditions at the time, but with an end-point – an effective tax free threshold of at least $20,000 and a top rate of just 40 per cent.

By then he said 45 per cent of taxpayers would be facing a top rate of 15 per cent or less, 85 per cent would be facing 30 per cent or less, and so on.

Labor endorsed the three-year plan except the cut in the very top rate and said it would use its best endeavours to eventually get to Costello's proposed endpoints, but one year later.

As well it said it try to would flatten the tax system by that end date, 2013-14, cutting the number of rates from Costello's four to three...

Its “fundamental mistake” according to the Treasurer was to assume that it could reach his goals of 45 per cent of taxpayers paying 15 per cent or less and so on using only three rates.

Would Labor's plan leave 45 per cent of us worse off? Not worse off than we are at the moment. Perhaps worse off than we would be under the Costello plan, but it is hard to be certain.

For one thing it is comparing two “best endeavours” plans. Neither is guaranteed.

For another, by 2014 many of us may be retired or living in a world so different from today's that comparisons made now don't make sense.

And for another any move to cut the number of tax rates (to “simplify” the system) is bound to throw up losers as well as winners. That's one of the reasons Costello has avoided it, and one of the reasons Rudd might have been wise to as well.