There was no income tax cut in this week’s Budget. In fact, there was an increase in income tax.
It is just a question of the way you look at it: through smoke and mirrors or with a dose of reality.
The so-called tax cuts introduced by Treasurer Peter Costello come into force on January 1, 2004. They nowhere near compensate for inflation. Yes; we had some commentary about bracket creep, but a lot less about the exact extent of it.
The Howard Government came to office with a charter of Budget honesty. It should expand this to include an honest account of bracket creep for each year.
Doing the exercise over the period since the existing rates were introduced on July 1, 2000, to when the new ones come into force on January 1, 2004, reveals that for the past three budgets, Treasurer Peter Costello has INCREASED income tax by a total of about 9 per cent for the vast bulk of people – those on incomes between about $50,000 and $70,000. He has increased tax on the real strugglers on around $25,000 by a whopping 15 per cent. These increases are AFTER taking into account his so-called tax cuts.
The tables tell the story. The figures took a moderate amount of number crunching on an Excel spreadsheet and getting statistics from the Australian Bureau of Statistics publicly available material. Skip the next three paragraphs if you don’t like numbers.
The consumer price index has gone from 126.6 on June 30, 2001, to an estimated 143 on January 1, 2004 – using government inflation estimated for the next seven months. If June 30, 2001 is scaled back to a base of 100, the CPI over the period to January 2004 is 113. The same exercise using average weekly earnings yields an index of 119.
And average weekly earnings is perhaps a fairer measure of bracket creep. After all, we are talking about a tax on earnings and the Government is fond of telling us that the standard of living is rising because wages are rising faster than inflation.
You can easily apply the index to the income levels at which each higher income-tax rate applies. You can then see at what income level the higher rates should have been applied if inflation or increased average earnings had been taken into account.
Once you apply indexation to the tax rates, you can see what a con job the Government has done. Labor has done it in the past, too, of course.
There are only two real tax cuts: one that is indexed or one that cuts the top marginal rate. All else is handing back what was taken away earlier or giving something which will soon be eroded by inflation.
Government’s will index or allow things to rise with prices when it is to its advantage, but will not index if revenue will be affected. To be fair, social security is an exception as is the removal of petrol indexation (as a political stunt). But Governments of both complexion consistently shy away from indexation of personal income-tax rates. (Companies cop a flat 30 per cent on everything so do not need indexation.) Labor has been carrying on about the meanness of Costello’s tax “cut”, but Opposition Leader Simon Crean verbally runs away when asked about indexation.
An unindexed tax system is too good for governments. They can – as Costello did this week – actually put tax up and get away with saying they are cutting it. And they can spend the windfall on vote-buying and favour-culling – on things like ethanol subsidies, upper-middle-class and business welfare from the Coalition or mad social-engineering programs from Labor.
In addition to the income-tax rises, the GST grab is rising dramatically. The economy has grown at 3 to 4 per cent over the past four years, but GST revenues have averaged more than 9 per cent increase per year. Sure, it goes to the states (which are even more apt to misspend it than the Feds), but it means that the Feds can reduce other funding to the states.
In short, Labor is right in saying that this is the highest taxing Government in Australia’s history. But Labor will not doing anything about the underlying tax structure – too much money being redistributed inefficiently by Government. Government hands back in sundry welfare benefits to the very people it has over-taxed in the first place.
Taxpayers need more information. If government won’t provide it, someone, somewhere every Budget should do a sounder and more comprehensive job than my necessarily rough back-of-an-envelope figures in this column and tables. But the theme should be the same. The tax scales should be notionally indexed and any shortfall in indexation by the Government at Budget time should be calculated and the figures distributed as the real tax INCREASES in the Budget.
That would be far more realistic than every newspaper and television station trotting out the tables and graphics provided by the Government showing a tax “cut” when in fact there has been a tax increase.