Tax system still rotten, despite election

There are about half a dozen reasons why Labor and the crossbench in the Senate should block the Government’s tax package next month. 

First, upper and upper-middle income earners already got a generous tax cut last year. Second, the all-or-nothing approach amounts to blackmail. Third, it is bad economics and risk management. Fourth, in these says of fake news, election lies, and massive spending, who knows if a government has a mandate to do anything? And fifth, the cuts will undermine more than a century of a progressive Federal income-tax system which imposes higher rates of tax on higher incomes.

Under the Coalition’s proposal, the middle 75 per cent of income earners (those between $45,000 to $200,000) will have the same marginal rate of 30 percent.

So the Government will be pinging exactly the same amount of tax on the $10,000 extra income as someone moves from $45,000 to $55,000 as someone who moves from $190,000 to $200,000.

Before the election most people probably had little idea of this detail and little idea of how it will profoundly change Australian society, making it more unequal.

It will be made worse by the fact that the person on $45,000 is likely to be a wage slave with few deductions whereas someone on $190,000 will most likely have some loopholes.

Unfortunately, a lot of the damaging flattening of the income-tax scales is now already law. From July 2024 people from $41,000 to $200,000 will pay the same marginal tax rate of 32.5 per cent.

This flattening should be wound back, not made worse with the proposals which will go before the Parliament next month to cut that 32.5 to just 30 per cent.

That proposal includes some breadcrumbs for lower and lower-middle incomes in the form of “tax offsets”. This would be a sensible way of making the tax system fairer, but not the way it is being done now.

Tax offsets are done instead of increasing the tax-free threshold (now around $18,000). If you increase the threshold it means everyone on incomes above the threshold get a tax cut no matter how high their income. If, however, you leave the threshold where it is and instead hand tax back to people whose ultimate income is fairly low, the result is fairer overall.

The trouble is that the 2018-19 Budget measures which are now law do not quite work like that. The “tax offsets” are too modest and they do not cut out until $90,000 – an income at which no-one should receive an offset.

In short, the breadcrumbs for lower incomes do not amount to much.

When the Government takes its package to Parliament it says it will be an all-or-nothing proposal. So the masses will miss out on their breadcrumbs (which amount to little more than adjusting for inflation) unless the well-off are given their caviar and beef sandwiches (which go well beyond merely adjusting for inflation).

Labor should not accept this blackmail. It could either blame the Government for the masses not getting their breadcrumbs or argue that the breadcrumbs are not worth the cost.

And the cost will be high, so high, that we should question the economic responsibility of the whole Government tax proposal.

The third stage of the Government’s tax cuts would begin after the 2022 election. So what is the hurry?

We know what the hurry is. The Coalition wants to lock in the tax cuts and debase the revenue so it can cry that to produce the sacred cow of a budget surplus it is too cash-strapped to provide decent funding for public health and education, especially if, as is likely, the economy turns sour.

This is the agenda: cut, abolish and reduce public health and education and make the wealthy even more wealthy so they can access private health and private education and have a two-tier society.

With that cost, the breadcrumbs on offer for the lower and middle-lower incomes are definitely not worth it. We should forget a minor tax break for lower incomes if it means that the higher income earners do get a revenue-depleting tax break such that the government’s long-term capacity to educate and provide health to everyone is eroded.

Besides, if Labor and crossbench reject the all-or-nothing approach, there will be plenty of pressure on the Government to give tax relief at the lower end as a stand-alone measure. 

That said, the Coalition would be foolish to think they have had a major endorsement of all their policies. The margin was very close and entirely explicable by a few things: a $60 million spend by Clive Palmer who may not have won any seats but who diverted about 2 per cent (a winning margin) of voters via preferences to the Coalition and social-media fake news assertions that Labor would bring in death duties.

Despite the result, some fundamentals about the opinion of the Australian electorate remain: voters still want action on climate change; they want Medicare retained and spending on public health and education improved; and they want the tax system made fairer (though they are too bamboozled to say precisely how even though they know the rorts are happening under their noses). Sure, they don’t want death duties, but they were never on the agenda, anyway.

The interesting thing here is that the previous election informs, but should not dictate, how the next one goes.

And one thing this election did was to insert a little education and information among the broad voting public about tax. Before this election very few had any idea about “franking credits”, let alone that that people could claim a tax deduction for them even though they paid no tax.

All of this tax stuff is going to explode like the banking royal commission. People had a bit of feel for banks behaving badly, but no idea, how corrupt they were.

Between now and the next election the mass of voters, informed by this election, are going to realise how corrupted the Australian tax system has become and how it is getting worse.

The choice for the Coalition is to address these things or face an electorate in three years’ time coming to the realisation that in 2019 they were conned.

Perhaps the Coalition should (with Series Three of “Victoria” on the screen) learn from the great Victorian statesmen Peel and Palmerston: better not to dig in, better to allow steady change to avoid the risk of later inflaming the wrath of the mass.

The election result does not take away the fact that we still have a rotten tax system and proposals to make it worse should be rejected.


This article first appeared in The Canberra Times on 15 June 2019.

One thought on “Tax system still rotten, despite election”

  1. The sneaky introduction of a single, low rate of income tax – a goal of the neocons.
    On the franking credit issue: by all means advocate the repeal of the imputation system, I felt when it was introduced that the “double taxation” argument was dubious. However, the simplistic argument that people who don’t pay tax shouldn’t get refunds is invalid: there are those e.g. casual workers with multiple employers and incomes below the tax threshold, drought-affected farmers with a business loss but off-farm wages, who are entitled to a cash refund.

Leave a Reply

Your email address will not be published.