IT IS a pity that it is considered OK to say, “I’m no good at maths.” An ABC TV news presenter said it this week, for example. The pity is that the more people get turned off by any news or commentary that requires a bit of arithmetic, let alone maths, the easier it is for governments and sharp people to rip them off. Never has this been truer than in the recent tax debate.
People in the $37,000 and $80,000 tax bracket, and a bit beyond into the next highest tax bracket, have been thoroughly ripped off in the past 10 years, especially the past five years.
In the past five years, there has been no adjustment for inflation or average earnings on the $37,000 at which the 32.5% marginal rate cuts in, nor on the $80,000 at which the 37% rate cuts in.
I will take you slowly through the arithmetic (nothing above Year 8) rounding to make it easier to grasp and leaving out a few changes that did not affect the overall picture.
Since 2010 the marginal tax rate for people on $37,000 to $80,000 has been 30%, rising to 32.5% when the tax-free-threshold was raised in 2011-12, but effectively unchanged.
The 37% marginal rate for those on $80,000 to $180,000 has similarly remained unchanged.
Without adjusting for inflation, or more properly for average weekly earnings, people creep into the higher bracket hardly realising it.
If the $37,000 and $80,000 had been adjusted for the 28.2% rise in average weekly ordinary earnings recorded by the ABS the $37,000 would now be $47,430 and the $80,000 would now be $102,500.
In round terms, someone on $47,000 has been hit with $1350 extra tax on the $10,000 income that was notionally moved from the lower 19% marginal rate the to 32.5% rate.
And someone on $102,500 has been hit with $1010 extra tax on the $22,500 income notionally moved from the 32.5% rate to the 37% rate.
For people on incomes between $37,000 and $65,000 you have to go back 10 years to find any adjustment in the marginal rate for inflation or average wage increases. Those people in real terms are paying much more tax than 10 years ago and they are paying a higher portion of their income in tax.
Whatever way you look at it, that is a great big new income tax. It is an insidious creeping system that over time becomes less fair and delivers more inequality.
As at May last year, all of the income earners in the 32.5% marginal tax bracket are earning below average weekly earnings.
That means a very large slice of the workforce earning below average weekly earnings are paying 32.5 cents in every extra dollar they earn. It is a scandalous disincentive.
There is a fair argument for saying that people earning below the average should pay very little income tax, not 32.5 cents on every extra dollar they earn.
In a week of “debate” about the tax mix, this has hardly been mentioned.
In the five years before that, adjustments for bracket creep were very small. It means that for 10 years, people on very modest incomes have been made to shoulder an ever-greater part of the tax burden. Most of these people have the tax taken out of their salaries by employers and have little or no means of engaging in tax avoidance by moving income to capital gains or taking advantage of large tax breaks for extra superannuation contributions.
In those 10 years, those higher up the scale have been shouldering a lessening burden with concessions on superannuation, negative gearing and capital gains, and special treatment for selected industries.
Income-tax fairness for people on less than average income should be the core aim of tax reform.
When Prime Minister Tony Abbott started the latest tax reform movement he said his aim was for “lower, simpler, fairer taxes for higher economic growth and better and more sustained services”.
That was a contradictory jumble of aims. The simpler five-bracket income-tax system produces unfairness for people on modest incomes. Lower taxes for people on high incomes is also unfair and will not produce better and more sustained services. And economic growth and tax levels are scarcely related.
It may well be that increasing the GST to 15% would raise money for sustained services and extract more tax from the well-off who would find it hard to avoid if they want to enjoy their high incomes.
But the increase would hit lower-income earners, too, and they would need to be compensated if the change is to be fair. That is going to be difficult for people on incomes less than $19,000 who pay no income tax.
It might be better to tackle the tax breaks for high-income earners first and only if that does not work move to increase the GST.
A higher GST is not a panacea. After all, Europe is full of nations with high GSTs and hopelessly unbalanced budgets.
Aside from superannuation and the family home, deductions for interest are a key to tax avoidance by high-income people and by large corporations, especially multi-national corporations.
Maybe interest deductions should be restricted to interest paid to unrelated entities resident in Australian. No more off-setting Australian income by paying large interest bills to related overseas entities. A trick used by Apple, Microsoft, Google and others.
Maybe interest deductions should be limited to the amount of income or rent earned and no more. Any claim for additional interest paid would have to be carried to future years. It would not end negative gearing because people could still deduct non-interest deductions, but it would stop the rampant conversion of highly taxed income to concessionally taxed capital.
It might be better to broaden the GST to education and health, rather than increase it. Untaxed education and health costs are mainly used by the well-off – especially private school fees. Those public schools, like everyone else, usually pay GST for compters, stationery and the like.
Increasing the GST might help, but other things should be tried first.
CRISPIN HULL
This article first appeared in The Canberra Times and other Fairfax media on 6 February 2016.