This week saw the great tax spat. It began with the Labor Party in difficulty over the merest hint of a slight suggestion that it could it possibly leave itself open to looking at increasing some taxes at some it indeterminate period in the future. This was followed by an utter denial by Labour leader Kim Beazley that Labor would increase any tax ever. And that was followed by Prime Minister John Howard matching the promise with one of his own that the coalition would never increase taxes – – to be later qualified, it would seem, as not increasing any core taxes. This was accompanied with that the bombastic claims by Howard that his tax cuts that came with the GST were greater as a percentage of GDP than those given by President Bush in the United States.
It was only so much humbug by two political parties that over the past several decades have engaged in a charade of allowing inflation to silently increase taxes for them and then to grandstand with false generosity by making much of winding back the silent tax rises by calling them tax cuts.
The present government has engaged in even worse humbug by imposing higher indirect taxes in the form of a GST and pretending to more than compensate by giving “cuts” in income taxes. However, the figures presented in the Budget papers and other figures give the lie to this pseudo-generosity.
Every half decade or so Governments give so-called tax cuts to PAYE taxpayers. However, they are not tax cuts at all but merely the restoration of the previous tax position that had been eroded by inflation as tax players up pushed into ever higher tax brackets with the notional increase in wages. And then inflation works its insidious way it all over again. This time however it is more pernicious because as inflation pushes people back into their pre-tax cut tax brackets, they GST, for which the tax cuts were supposedly compensating, remains in place.
If the compensation for this GST had been permanent and real, one would have expected a permanent reduction in the relative position of income tax as a percentage of total government revenue and as a percentage of gross domestic product. But what do we find? No such thing. Rather income tax appears to be creeping back to its pre-GST level – – and this is on the Government’s own Budget papers and forecasts. The accompanying table shows what has happened over the past four years.
In 1998-99 and 1999-00, personal income tax represented about 50 per cent of government revenue. In 2000-01, with the introduction of the GST, it fell to just 44 per cent of government revenue. But the projection of 2001-02 shows that income tax will rise to 47 per cent of government revenue and will probably continue to rise back to its old position before too long.
The comparison with GDP is more damning. In 1998- 99 personal income tax represented 13 per cent of GDP. It rose to 13.3 per cent in 1999-00 and then fell with the introduction of the GST to 12.9 per cent. But on the Budget projections it will be back up to 13.5 per cent in 2001-02 – – that is a higher grab than in pre-GST 1998-99. Yet the GST is still with us.
Bear in mind that PAYE makes up more than 80 per cent of the gross income-tax grab.
In short, mug PAYE taxpayers are back where they were in 1998-99 with respect to income tax but they also have to cop the 10 percentage GST on everything they buy with their post-tax wage.
So Howard’s claim to be a low-tax Prime Minister is twaddle. And his claim that he will not increase taxes may be semantically correct. He will not increase taxes overtly because inflation and rises in average weekly earnings will do the job for him. The same goes for Beazley.
There are only two sorts of income tax reductions that count. The first is a reduction in the top marginal rate of taxation and the second is the introduction of new indexed lower scales of personal income tax. Both are immune from the effects of inflation, but politicians rarely give them.
If John Howard were serious about comparing himself with the President Bush he would reduce the top marginal rate from the present 48.5 per cent. President Bush has asserted that the state has no business taking a any more than one third of each extra dollar a person earns. If Howard did not have that the courage to do that, he at least should have the locked in the tax cuts that came with the GST by making them indexed. It would mean that if inflation made this year’s $30,000 worth $32,000 next year then the $30,000 threshold for a given tax rate would move automatically up to $32,000. We would not have to wait for a disingenuously generous politician to grant us that which inflation had taken away.
In fact, the position is even worse than this for the mug PAYE taxpayer. There is solid evidence that over the past 10 years or so more and more high-income-earning taxpayers are indulging in tax avoidance and tax evasion. It has meant that proportionately a greater burden has fallen on PAYE taxpayers, particularly those falling above the politically sensitive zone of the battlers. Combined with a raft of extra imposts on those earning over $60,000, it has meant a that people earning between, say, $60,000 and $100,000 have been especially burdened. These people by large do not have enough income to support big-scale avoidance schemes because they need nearly all of their income to support their families.
Negative gearing, salary sacrifice and setting up companies have reduced the burden on very high income earners, increasing the relative burden on the middle. Work by Ann Harding at the University of Canberra has revealed that the number of private companies increased by 60 per cent between 1985 and 1995, whereas the number of PAYE taxpayers increased by a mere 20 per cent. The number of taxpayers claiming interest deductions doubled in the six years to 1994-95. The amount lost to the Budget last year in salary sacrifice through superannuation and other schemes cost about $8 billion.
Coupled with the continuation of the welfare state, it has meant a huge shift in the tax burden to the $60,000 – $100,000 PAYE group. Added to this, is the cutting out of government payments of virtually all kinds and the imposition of new levies at around the $60,000 to $80,000 mark. Superannuation and Medicare surcharges are examples.
It is a big mistake to imagine that Australia has an equitable, progressive tax system. The income tax rates on their face are progressive and equitable scale. But the truth behind the scale is probably very different. This is because the income tax scale does not apply to income, but only to (italic) declared, net (end italic) income. The fact that the mug PAYE contribution is such a high proportion of total income tax indicates that the self-employed and partners are not paying much.
I suspect that before long there might be a rebellion among the $60,000 – $100,000 middle-class PAYE group, particularly those baby-boomers who will be facing the choice whether to continue working or whether to sit back and spend their superannuation. The choice to retire will be made that much more attractive when they contemplate how much of the rewards for their labour and wealth generation would go in tax.
If that happens, and more wealth-generators retire, governments may find it necessary to increase tax rates even further thus generating even more retirements. It might be this vicious circle on the revenue side rather than the costs of the ageing population on the spending side that presents the biggest fiscal difficulties for governments in the future, particularly if governments continue with the serial mendacity over tax that we saw this week.