Coalition's tax cuts could be an expensive mistake
by Ebony Bennett
[Originally Published in The Canberra Times, 29 June 2019]
You have to hand it to the Coalition. It says it hates Labor's style of "class war" politics, but the reality is the conservative side of politics is just better at it. The Coalition has so radically reshaped our tax debate that earlier this week Labor was debating whether or not earning an income $200,000 a year should be classified as the "top end".
Think about it this way: being 6'4 is tall. If you were standing next to someone 6'4 you would be standing next to a tall person. But if I put Dwayne "The Rock" Johnson (who is 6'4) next to Shaquille O'Neill (who is 7'1), The Rock would look short. In fact, The Rock might even feel short standing there next to Shaq. But that doesn't magically make The Rock any shorter. The Rock is an objectively tall person. Being 6'4 is tall. And an income of $200,000 a year is most certainly at the top end of incomes.
The Australian Bureau of Statistics defines low income as the bottom 30 per cent of taxpayers. The next 50 per cent are the middle (where most of Australians are), and the top 20 per cent is defined by the ABS as high income. So just as being 6'4 makes you taller than most people, if someone is earning $200,000 a year they earn more than 96 per cent of Australian workers. They are at the top end.
It's important to be able to meaningfully distinguish between the middle and the top because Australia's tax system is designed to make sure those at the top, those who are doing well compared to everyone else and who can most afford it, pay the largest proportion of tax.
I'm not criticising people who earn $200,000 a year - indeed I aspire to be such a person - I just think they should pay their fair share of tax, just like everyone else.
The highest income earners paying the highest proportion of tax is not a design flaw, it is the system working as designed, and the jewel in the crown of our progressive income tax system. It's an egalitarian system that has served us well. The problem is the Coalition is successfully and radically redefining where the top end is.
The median income in Australia is $58,000. The median is the middle income, meaning half of Australians earn even less. Median gives a more accurate picture of where the middle is and it is very far from $200,000 a year.
Back when John Howard was prime minister and the GST was introduced, the top marginal tax rate kicked in at $60,000 and 13 per cent of taxpayers were in this top tax bracket. Now we are heading for a system where an apprentice earning just over $45,000 a year will be paying the same marginal tax rate as a CEO earning $200,000 a year. In fact, the latest tax statistics shows only about 3 per cent of income earners will be in top marginal tax bracket. And it is high income earners who will benefit most from the income tax cuts, particularly the Stage 3(a) tax cuts, which will deliver $26 billion to people earning over $200,000 a year and benefit men almost twice as much as women.
Stage 1 of the government's proposed income tax cuts are better targeted at low- and middle-income earners. What they won't tell you though, is that despite low- and middle-income earners getting a tax cut of about $1000 a year, if this whole tax plan is approved they are about to start paying a higher proportion of tax, while higher income earners will pay a smaller proportion - surprise!
Why is this a problem? Because taxes are a large part of the revenue that pays for the services and infrastructure that make Australia a nice place to live. And the Morrison government is about to cut income tax revenue by $300 billion, on top of the billions in company tax cuts it has already passed. That's a lot of foregone revenue.
Do you know what happens when a government's revenue base collapses? Let's look at the town of Colorado Springs in the United States. During the Great Recession (the one Australia didn't have, thanks to the Labor government's stimulus package) the city's revenue collapsed, voters rejected new taxes to make up the shortfall and so it started reducing services.
Bus services were slashed, rubbish bins were removed from city parks because there was no one to collect the rubbish, police officers were retrenched and a third of street lights were turned off (residents who could afford it could pay $125 to adopt a streetlight, for everyone else: darkness). A local businessman was elected as mayor on a platform of running government like a business: he proposed ditching property tax for business and removing red tape as well as speeding up permits for developers - sound familiar? Colorado Springs ended up conducting a natural experiment in low-taxing, small government.
The experiment turned out to be a costly one. For example, turning off the streetlights saved the city more than a million dollars, but when copper thieves started working long hours to scavenge and sell the copper wiring, fixing it cost the city about $5 million. Less than 10 years later, the people of Colorado Springs were voting for increased revenue for services and new taxes.
Unless the Senate - our democratic House of Review - intervenes, the government is set to pass a fiscal timebomb in the form of a combined total of $300 billion in income tax cuts that radically flattens Australia's progressive income tax system.
So, don't believe any politician who tries to tell you we cannot afford to increase Newstart above the poverty line, or any other services for the community.
In fact, Australians are now so conditioned to the underfunding of our public schools, that school sausage sizzle and bake sales on election day are seen as a celebration of democracy rather than a warning sign that our public education sector is under-funded. Similarly, the ABC reported the story of a disability pensioner who, having secured subsidised housing after 14 months of being homeless, only had $20 to spare each week once her rent and bills were paid. Good Samaritans, upon hearing her story, pitched in to donate whitegoods and cash to help her make ends meet. It was a horror story pitched as heart-warming.
Whenever anyone attempts to have a conversation about phasing out Australia's coal industry to prevent more frequent and intense heatwaves, droughts, floods and bushfires, the discussion inevitably turns to how Australia can replace the lost revenue from coal, which has overtaken iron ore as Australia's largest export. And that's a sensible discussion to have, but it's one we rarely have when it comes to hits to Australia's revenue base from income tax cuts or company tax cuts.
Worse still, wage growth is at an all-time low, Australia's economy is sluggish, stagnating and in desperate need of stimulus. To maximise economic growth, fiscal stimulus must be well-targeted - the proposed Stage 3(a) tax cuts are wasteful, five years away, and certainly not well-targeted.
Fifteen years after Peter Costello started implementing permanent tax cuts during a temporary mining boom, the Morrison government is about the make the same expensive mistake. Cutting taxes rather than increasing spending is exactly what this sluggish economy does not need.
The only thing that can save us from this Stage 3(a) fiscal timebomb is the Senate.
- Ebony Bennett is Deputy Director of independent think-tank The Australia Institute.
- Twitter: @ebony_bennett