Thursday, May 17, 2018

Here's my big dangerous tax idea: let us keep our money

Suddenly we’ve wised up. As far back as any of us can remember, all the way back to the beginning of income tax, we’ve been easy to bribe.

Here’s how it has worked in every election and in almost every budget: “You’ve been working hard and paying too much tax. We feel your pain. We’ve magically found some money from somewhere. We’re pulling a tax cut out of a hat. You can thank us later.”

That the rabbit was our own money, taken from us in ever-increasing amounts through an automatic process known as bracket creep, and then only partly returned, was the trick we weren’t invited to dwell on.

Here’s how it will work this time. In the year ahead wages will probably climb 2.1 per cent. It’ll push a greater proportion of our pay into the highest rate of tax we pay. All by itself that will push up the total amount of tax we pay by around $6 billion, even though our actual buying power, our inflation-adjusted wages, might not much change. The budget tax cuts will give us back some of it: around $4.4 billion.

Hey presto. We’re supposed to be awed.

Even after 10 years, after the third and most expensive phase of the Morrison tax cuts announced on budget night, middle earners will still find themselves paying 3 per cent more of their income in tax than they do right now: 18 per cent instead of 15 per cent, according to the Grattan Institute. Only the very highest earners - the top 10 per cent - will get their bracket creep back.

(We need to rely on organisations such as the Grattan Institute and the Parliamentary Budget Office for the calculations because the government won’t provide them for us. It wants us to be in awe of the trick without seeing how it's done.)

It helps that bracket creep isn’t widely understood, certainly not by shock jocks such as Sydney’s Ray Hadley (“it simply means that people who were formerly taxed at the lower income rate through no fault of their own go on to the next income rate”), Nor, on the face of it, by the Treasurer himself, who on Monday said that the third and final stage of his plan that levelled the tax rate between $41,001 and $200,000 meant that “for most Australians, who will earn over their lifetime somewhere between $40,000 and up to $200,000, they will never face bracket creep again”.

Bracket creep happens even if you don’t change brackets. Whenever your income climbs, a greater proportion of it ends up in your highest tax bracket, leaving a lower proportion of it in your lower brackets and beneath the tax-free threshold.

Imagine you had been earning $75,000 and inflation pushed up your wage to $77,000. Your buying power wouldn’t much improve and you wouldn’t change tax brackets, but your tax bill would climb from $15,922 to $16,572. The chunk of your salary lost in tax would climb from 21.2 per cent to 21.5 per cent. A lower proportion of it would be protected by the tax-free threshold.

It’d be easy to fix. You would index the tax-free threshold and each of the other thresholds to the general rate of wage increases, or to the general rate of inflation, both of which at the moment are near 2.1 per cent. So the $18,200 tax-free threshold would climb to $18,582 and then to $18,972 and so on.

It would be devastating for the budget and devastating for politicians. Without automatic tax increases they would no longer be able to announce regular 'tax cuts' that only partly returned our money in return for applause.

But the applause has stopped. This week’s Fairfax-Ipsos poll found that 57 per cent of voters didn’t want the cuts they were offered. They would have rather had the money used paying off government debt. Only 37 per cent wanted the tax cuts, and many of them would have regarded them as unsurprising. It’s probably Peter Costello’s fault. By repeatedly cutting tax rates under prime minister John Howard, he destroyed the magic.

Indexation would make the magic real. And it would make budget choices real.

At the moment we grant the government leeway for indulgences such as spending $50 million commemorating the voyage of Captain Cook, or $247 million keeping chaplains in schools. If those indulgences meant an explicit increase in tax rates we would indulge our politicians less.

As it stands, most of the promised $80 billion cut in the company tax rate is to be funded by bracket creep. If indexation removed that option it would have to be funded by an explicit increase in income tax or another tax, and we would be less accommodating.

On the other hand, we would become keener to accept tax increases where they were the only way of getting things we wanted, such as they were with the National Disability Insurance Scheme. Without bracket creep, if we wanted more spending on something like health we would have to agree to pay for it. Or disagree, in which case we wouldn’t get it. We would become prepared to pay more tax where we had to, and keener on getting value for what we paid.

We would start treating our money as if it was ours.

In The Age and Sydney Morning Herald