Oh dear, the facts have got in the way of a good story.
I thought bracket creep was alive and well and pushing us into ever higher tax brackets.
In fact, there was virtually no bracket creep in the 1990s. Adjustments to the tax rates eliminated it.
The other myth is that the Howard plan favours the rich. That may or may not be true with respect to the GST, but it is not the case with income tax.
In fact, Labor’s income-tax changes favoured the rich, if slightly.
Let me begin at Year Zero. That is 1989-90. That is the year the Australian Bureau of Statistics bases the Consumer Price Index at. That year the CPI was 100. By the end of 1997-98 in index hit 121.
So I thought I would dig out Year Zero’s Tax Pack and do a quick comparison with the present rates and with the rates in the Howard plan.
The table looks complex but it tells the story. We have Alf earning $20,000 in 1989-90. Bill earning $35,000, Charles $50,000 and David $100,000.
Take Alf first. In 1989-90 he pays $3317 tax on his $20,000 which is 16.6 per cent of his income. If his pay goes up exactly with inflation over the next eight years, by 1997-98 he is earning $24,200. He pays $4250 tax. This is 17.6 per cent of his income. Virtually the same.
Similarly Bill on $35,000 pays 26 per cent of his income in tax in 1989-90 and 25.5 per in 1997-98. Virtually the same.
Charles, too, of $50,000 pays virtually the same. As does David on $100,000.
Each of these four people’s tax bills are less than one percentage point different despite the 21 percent inflation over the seven years. Incidentally, the poorest is worse off by 1 percentage point and the richest better off by 1 percentage point.
What does this tell us? There was no bracket creep over the eight years of the 1990s because the rates were adjusted. Paul Keating called these rate adjustments tax cuts. In fact, they were not cuts, but adjustments to ensure we marked time. But at least we were not going backwards as we would like to believe.
Most of the unadjusted bracket creep in Australia’s history came in the high inflation years of the 1970s.
Now look at the third line for each of our taxpayers which shows the effect of the Howard tax plan. Note that the rich ($100,000 and $200,000) get slightly less of a percentage cut than those $50,000 and under.
In absolute terms people on $75,000 do best under the Howard plan with a $4472 a year cut. People on higher incomes that that still get only $4472, so the new system will not benefit the rich as is made out. And the reforms should be looked at in percentage terms, not absolute ones. The rich pay more in absolute terms and in percentage terms at present so any change should give them commensurately more in both, otherwise eventually inflation will put people on average incomes on the highest rate and in the very long term you will have a flat rate of tax.
That said, it is unlikely that the tax package will break the pattern of bracket creep. Inflation will no doubt erode the gains and tax cuts. The only difference is that the cuts will come first and the creep later.
No government will index the rates. That would mean forsaking the chance to deliver “”tax cuts” after a period of bracket creep.
Also, economic growth pushes wages up and people into higher tax brackets. It is another opportunity for Governments to generously give us our money back.
Sub-head with “health” in it please.
Some clarification to last week’s article on health insurance. I over-estimated the spending on the existing incentive scheme, under-estimated the cost of the new scheme and under-estimated the total contribution of the private sector. The first two strengthen my argument and the last weakens it. The argument was that the Government was throwing good money after bad in the tax package by giving a tax rebate for private insurance.
Private insurance premiums yield $4.4 billion, which is about 10 per cent of Australia’s total health spending of $43 billion. The remaining 90 per cent is not all public (as I said last week). In fact other private health spending (usually money straight out of consumer’s pockets) brings to total private spending to 31 per cent.
The previous incentive scheme failed in its stated aim of getting more people in private insurance. They continued to leave.
But the aim should not be just to get more people in private cover for its own sake.
The aims of government health policy should be universality, excellence of care and efficiency. The new rebate, which is just ideologically driven, will not help the last two. Much of it will go to existing insurers. More will go to high-income people who tend to insure more. Some if it will underwrite the ancillary elements of insurance (like glasses, physio, dental and so on), which though worthy, are not as worthy as fundamental hospital treatment.
The money will help private funds which spend about 12 per cent of their income in administration against Medicare’s more efficient 4 per cent. It will do nothing to make the funds more cost effective or attractive though the funds’ own performance.
Instead, the Government should have given the funds more economic freedom, particularly removing community rating, and allowing them to offer greater choice.
It should also have made Medicare more realistic. The levy of 1.5 per cent raises about $3 billion. Out-of-hospital medical spending on its own costs more than double that, and Medicare is supposed to also fund public hospital stays and the pharmaceutical benefits scheme. It would have to be a 7.5 per cent levy to cover them as well. (Though other taxes could be cut accordingly.
With a 7.5 per cent levy we would have realistic measures. And people with private cover could be exempted from the hospital element of Medicare (about 2 percentage points of a 7.5 per cent levy). Then you would have effective competition.
At present we are dreaming if we think the Medicare levy pays for our health care. Medicare is hopelessly under-priced. Small wonder people abandon private cover and flock to it.
The Government has got this the wrong way around. Instead of adding a whopping tax subsidy to private insurance, it should have taken away the whopping tax underwriting of Medicare and allowed them to compete.