Monday, April 29, 2019

Election tip: 23.9% is a meaningless figure, ignore the tax-to-GDP ratio

Expect to hear a lot about tax during the coming leaders’ debates.

Which is why it’s important to get two things straight.

The first is that you can’t argue against a tax by pointing out that it will take money from people.

By all means, use that as an argument against taxes in general. It’s true – taxes take money from people. But to oppose better taxing capital gains or tightening up on dividend imputation refunds because they will take money from people is to leave unexplored the more important question of whether those particular tax measures are better or worse than the alternatives.

You can’t escape that question by just saying that all taxes are bad – that we ought to collect less. For any amount of tax collected, the next most important question is the way in which it is collected.

Low tax and high spending can be the same thing

And the second thing we ought to get straight is that talk about one side of politics being “low tax” and the other being “high tax” tells us next to nothing.

To see this, consider Bill Shorten’s childcare policy announced on Sunday. Labor has promised to spend A$1 billion a year in subsidies to cut the cost of childcare for every family with a combined income of up to $175,000 and to make it free for working families earning up to $69,000.

But what if, instead of subsidies, it had promised to deliver the $1 billion via tax rebates, to be paid to parents on proof of their use of childcare?

The effect would be same, although the method of payment would be more complicated.

Childcare would be just as supported, and just as supported from the public purse, but one policy would be called “big spending”, while the other would be called “low tax”.

Take the quiz

Here’s a quiz: is the Private Health Insurance Rebate a tax break (and counted in the budget as a contribution toward lower taxes and smaller government) or is it a spending measure (and counted in the budget as boosting the size of government)?

What about the Family Tax Benefit? Or the film industry tax rebate or the seniors And Pensioners Tax Offset or the Low Income Tax Offset or the existing Child Care Rebate?

It’s okay. You’re not expected to know. The answer varies from case to case. The point is that it is silly to claim that tax cuts are good, and government spending is bad, when in many cases each could be easily classified as the other.

The signature measure in the April budget is a case in point. It’s a tax offset of up to $1,080 per person to be paid out with tax returns after July 1. It’ll push billions into the economy, just as the Rudd government’s cash bonuses during the global financial crisis did. But Rudd’s payments were categorised as spending; these payments will be categorised as tax cuts, which means they will keep down the tax-to-GDP ratio.

Which means it is silly to talk about the tax-to-GDP ratio, as the government insists on doing.

That speed limit, where did it come from?

Labor was keen enough to do it while it was in office, boasting in its final budget in 2013 that its tax-to-GDP ratio was lower than in the Howard years, and lower than it had been before the global financial crisis, as if that was an achievement to be proud of. It wasn’t. The ratio was lower than during the mining booms because fewer tax dollars were rolling in, and it was lower than before the financial crisis because the economy was weaker.

The Coalition has hardened the tax-to-GDP ratio into a target. As treasurer, Scott Morrison spoke last year of “a speed limit on taxes in our budgets, that requires that taxes do not grow beyond 23.9% of our economy”.

Why 23.9%? Well, in the Coalition’s first budgets it wasn’t a target at all, merely an operating assumption used by the treasury for long-term forecasting. As it explained in the 2017 budget papers:

A tax-to-GDP “cap” assumption is adopted for technical purposes and does not represent a government policy or target. It is based on the average tax-to-GDP ratio over the period from the introduction of the GST and to just prior to the global financial crisis.

Treasurer Josh Frydenberg and Finance Minister Mathias Cormann have begun talking about 23.9% as if it’s a commitment, a pledge, even though it would be hard to keep if the economy picked up (and probably unwise to keep), and even though it is fairly meaningless given the ease with which changes in spending can be classified as changes in tax and the other way around.

Treasury makes pretty clear what it thinks about the measure in the back of Budget Paper 1. That’s where it sets out the history of the important budget measures and its forecasts for the future. You won’t find the tax-to-GDP ratio in the first two tables. Instead, it details “revenue to GDP”, which is a much more relevant measure because it includes income from all sources – fees as well as taxes, and income from Future Fund earnings which are revenue too.

Think like treasury

Early in his time as time as shadow treasurer, Labor’s Chris Bowen bought into tax-to-GDP debate, challenging the Coalition to keep the ratio below such and such per cent. He isn’t doing so now.

It’d be wise to ignore talk of the tax-to-GDP ratio in the coming leaders’ debates

Focus instead on what they’re planning to do and how they are planning to pay for it. You’ll get a handle on how to vote.

Read more: It’s the budget cash splash that reaches back in time The Conversation

Peter Martin, Visiting Fellow, Crawford School of Public Policy, Australian National University

This article is republished from The Conversation under a Creative Commons license.

Read the original article.


Friday, April 05, 2019

What just happened to our tax? Here's an explanation you'll understand

With all the announcements on tax over the past few days it’s hard to keep track. So here goes.

A year ago the then treasurer Scott Morrison unveiled a “seven year personal tax plan.

Some of it involved tax cuts way out into the future, in 2022 and 2024, with which we needn’t concern ourselves – there’ll be two, maybe more, elections before then.

The bit that was to start in mid 2018 (and did) wasn’t a tax cut at all, strictly speaking. It was an “offset” with an ungainly name: LMITO – the Low and Middle Income Tax Offset.

A standard tax cut, applying to any rate, would save money to all taxpayers on that rate and rates above it, including those on very high incomes. It couldn’t be directed to just low and middle earners, which is what the Coalition wanted.

What’s on offer isn’t really a tax cut

So the Coalition designed an offset, to be paid as a lump sum after the end of each tax year, after returns had been submitted and only to those taxpayers whose returns showed they weren’t high earners.

The full offset was A$530 per year, paid only to taxpayers who earned between $48,000 and $90,000. Taxpayers who earned more than $90,000 would lose 1.5 cents of it for each dollar they earned above $90,000, meaning no-one who earned more than $125,333 would get any of it.

(Taxpayers earning more than $125,333 wouldn’t go home completely empty handed - they would benefit from an increase in the point at which the the second highest rate came in, worth a barely consequential $135 a year.)

Read more: It’s the budget cash splash that reaches back in time

Taxpayers who earned less than $37,000 would get $200 off their tax, climbing to $530 for taxpayers earning $48,000.

It was ungainly – it was better described as a series of annual lump sum payments than a tax cut – and Labor embraced it entirely.

In 2018 Labor trumped it

Except that Labor supercharged it. Under Labor it was to operate in exactly the same way, except that each payment would be 75% bigger: the Coalition’s $200 became Labor’s $350, the Coalition’s $538 became Labor’s $928 and so on.

Labor outbid the Coalition.

And these things stayed, for almost a year, except that it was all a bit academic.

Labor wasn’t in government, and the leglislated offsets weren’t to put the lump sums in pockets until after the end of June 2019.

In 2019 the Coalition trumped Labor

It allowed the Coalition to sneak in before them in Tuesday’s budget and double the maximum lump sum: $538 became $1,080, a promise Bill Shorten matched in his budget reply speech on Thursday night.

But for some reason the Coalition didn’t double everything: $200 only became $255, rather than the $350 Labor had already promised.

On Thursday night Shorten confirmed the $350 promise.

He is able to offer the 3.6 million Australians earning less than $48,000 more than the Coalition – in most cases an extra $95 more: $350 instead of $255.

Now Labor has trumped the Coalition

Shorten says it’ll cost an extra $1 billion over four years, which is a mere fraction of the money Labor believes it will have that the Coalition won’t, because of its crackdowns on negative gearing, capital gains tax concessions and dividend imputation.

As Shorten put it on Thursday night:

Labor will provide a bigger tax cut than the Liberals for 3.6 million Australians all-told, an extra $1 billion for low income earners in this country. Here’s the simple truth - 6.4 million working people will pay the same amount of income tax under Labor as the Liberals. Another 3.6 million will pay less tax under Labor.

In fact they’ll pay just as much tax from payday to payday, but they’ll get back more at the end of the year, in most cases $95 more.

So here’s the scorecard: The Conversation

Peter Martin, Visiting Fellow, Crawford School of Public Policy, Australian National University

This article is republished from The Conversation under a Creative Commons license.

Read the original article.


Tuesday, April 02, 2019

It’s the budget cash splash that reaches back in time

Talk about retrospective. In his determination to quickly inject money into the economy (for economic as well as political reasons), Treasurer Josh Frydenberg has reached back in time to give us an extra tax cut on income already earned during the financial year that’s about to finish.

Almost a year ago, in May 2018, Frydenberg’s predecessor, Scott Morrison, promised a “sort-of” tax cut for the financial year beginning in July 2018. People earning between A$48,000 and A$90,000 would get a tax offset – a bonus – of $530 as part of their tax return.

People earning more, or less, would get lesser amounts but would still get something, right up to a cutoff of $125,333.

The arrangement meant they wouldn’t get the money until the following financial year, the one beginning this July, after they submitted their tax forms.

Labor trumped him within days, announcing a bigger offset in its budget reply speech.

Not only bigger, but backdated

Now Frydenberg has trumped Labor and Morrison, announcing a rebate of almost twice the original size — $1,080 — to be paid out after the end of the financial year.

But, in an innovative piece of policy, he is applying the increased offset to the financial year that’s almost over, as well as the ones to come. It means that after submitting their tax forms for the financial year that’s about to end, most Australians will get $1,080 back for the work they did during 2018-19, instead of the $530 that was promised at the time (assuming the measure is enacted).

It will work the same way as the Rudd government’s “cash splash” during the global financial crisis. It’ll be paid into bank accounts within weeks, providing near-instant, much-needed spending power.

The fact that it will be bigger than the first Rudd government cash splash (which was $800 for qualifying taxpayers) is probably no bad thing.

It’s what we need, unfortunately

Consumer spending is much weaker than was expected in the December budget update just five months ago, and a lot weaker than was expected in Morrison’s last budget as treasurer a year ago.

Morrison expected consumer spending to climb 2.75% for 2018-19. Frydenberg cut that forecast to 2.5% in December and to 2.25% today.

Morrison expected consumer spending to climb 3% in 2019-20, and Frydenberg held the line in December. Now he has marked down the 2019-20 forecast to 2.75%. He has also marked down (yet again) the forecasts for wage growth and economic growth.

Home prices, not explicitly forecast in the budget, are also lower than was expected in the last budget and budget update. Along with lower-than-expected wage growth, this is depressing consumer spending.

The markdowns in spending, wage growth and economic growth have started to hurt revenue forecasts, but the damage isn’t yet apparent because at the same time dramatically higher iron ore prices have been pouring more money into the budget than was expected.

When iron ore prices fall, we’ll be exposed

When, for whatever reason, the higher iron ore prices recede (and that’s what the Treasury says it is expecting), the budget will look much worse. Unless consumer spending and wages pick up, which is also what the Treasury says it is expecting, in the face of evidence to the contrary.

That’s what makes Frydenberg’s cash splash so important. It will push an extra $3.5 billion into the economy within weeks. On top of it will be an extended instant asset write-off for small and medium-sized businesses, the operative word being “instant”.

From now on, businesses with a turnover of up to $50 million (up from $10 million) will be able to buy equipment worth up to $30,000 (previously $25,000) and deduct the full cost from the tax they will owe from July.

Read more: Iron ore dollars repurposed to keep the economy afloat in Budget 2019

The measure won’t cost the government money until next financial year, but it will inject money into the economy from Wednesday in the 14 weeks before that financial year starts, as as many as 22,000 previously ineligible businesses spend up to $30,000 on equipment (even cars) and then spend it again and again without limit.

A peculiarity of the instant asset write-off is that businesses can spend as much as they like and get it all back, as long as it is broken up into parcels of less than $30,000. In an example quoted in the budget papers, a previously ineligible food manufacturing business buys ten new commercial ovens, each for $12,000. The entire $120,000 can be written off within weeks, helping the business “invest, grow, and employ more workers”.

Frydenberg would probably prefer it if the measures weren’t called “stimulus” measures, but that’s what they are. And they are needed, for economic reasons as well as for political ones.

The economists surveyed in January for this year’s Conversation economic survey assigned a 25% probability to a recession within the next two years. The downward revisions in the budget have done nothing to change that assessment.

The government elected in May will inherit a fragile economy in need of help.

Frydenberg has demonstrated that he is just as prepared as was Kevin Rudd during the global financial crisis to provide it.The Conversation

Peter Martin, Visiting Fellow, Crawford School of Public Policy, Australian National University

This article is republished from The Conversation under a Creative Commons license. Read the original article.