The company tax cut is dead. Maths killed it, last week.
It happened with the release of an innocuous-looking report from the Parliamentary Budget Office entitled Changes in average personal income tax rates: distributional impacts.
Those changes were baked into, but not spelled out in, the May budget.
They are needed for it to whirr back into surplus by 2020-21 as promised.
They come about because, aside from boosting the Medicare levy to help pay for the National Disability Insurance Scheme, the budget proposes to do nothing about the income tax scales whatsoever. Nothing. For four years. That's how it whirrs back into surplus.
Normally budgets cut income tax every few years. They have to, because otherwise wage increases would push more and more of our incomes into higher tax brackets. The misleading term for what happens is "bracket creep". But it happens whether or not we are pushed into a higher tax bracket. Any increase in wages, even within a bracket, pushes more of our income into our highest brackets, pushing up the total amount of tax we pay and pushing up our total tax rate.
Here's how it would work if you were on $50,000. If your pay climbed 3 per cent to $51,500 you wouldn't change brackets but your tax bill would climb from $7797 to $8284. More tax would be taken out at 32.5 cents in the dollar and proportionately less at 19 cents. Your average rate would climb from to 15.6 to 16.1 per cent.
To prevent this sort of thing happening, budgets repeatedly adjust income tax scales. Since the turn of this century, budgets have cut tax rates in 2003, 2004, 2005, 2006, 2007, 2008, 2009, 2010, 2012 and 2016. A gap of four years or more without cuts, as is baked into the 2017 budget, is unusual.
All the Parliamentary Budget Office did was calculate what the budget projections would mean for various types of taxpayers.
For middle earners (those in the middle 20 per cent) they will mean an extraordinary jump in overall tax payments from 14.9 to 18.2 per cent. Only 0.5 points of the increase would be due to the higher Medicare Levy.
For earners one rung up (the next 20 per cent) they will mean a jump in tax paid from 21.9 to 24.1 per cent. For those at the very top they will mean a jump from 32 to 33.9 per cent.
One rung below the middle (a rung centred around $28,000) the tax take will jump from 5.5 to 8 per cent. Only at the very bottom (a rung centred around $8000) would there be little change. That's because most of the bottom rung would remain below the tax-free threshold.
The figures are projections out to 2021-22. It's true that we might get extra tax cuts not accounted for in the budget projections. But if we do, there won't be a budget surplus, not without an unexpected mining boom-style windfall or something else to fund them.
And there will have to be. A ramp up in the tax taken from middle Australia from 14.9 per cent to 18.2 per cent is unthinkable.
The only obvious place to grab the kind of money that will be needed is a program that hasn't yet become law.
Only half of the government's $50 billion program of company tax cuts has become law. The Senate passed $24 billion of it. Company tax is set to fall from 30 per cent to 25 per cent for small and medium size businesses, but not for big ones.
Forced to choose between finishing the job in order to help big business and cutting tax rates for individuals in order to stave off implausible bracket creep, there's no choice.
Businesses don't suffer bracket creep. Individuals do. Businesses don't vote. Individuals do.
And despite all the talk about how uncompetitive Australia's company tax rate is, or would become if Donald Trump succeeded in convincing Congress to cut the US tax rate to 20 per cent (the Business Council put out another brochure this week), and despite all the talk about how dynamic Australia would become if the company tax rate was cut to 25 per cent, the truth is the cut wouldn't pay for itself. The Treasury says so. The cost, to be paid for somehow, would be $8 billion per year.
It might well be that wages don't increase by anything like as much as is forecast and that bracket creep is less severe. But that would just create another set of problems. The government would fall well short of its targeted surplus and be under further pressure to find money from somewhere, most likely the yet-to-be legislated tax cuts.
The most important insight from economics is that actions have costs, often opportunity costs. Richard Thaler won a Nobel Prize last week in part for pointing out how little that is understood. There may well be great benefits from cutting the company tax rate. But there would also be great costs. One of them would be the lost opportunity to support middle earners, who'll need it.
In The Age and Sydney Morning Herald