The haste with which the Albanese government backflipped on the stage three tax cuts suggests economic reform is too important to be left to politicians. The original cuts, legislated with the backing of the Parliamentary Labor Party, had genuine merit in that they addressed bracket creep.
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Even though high income earners were told they had to wait until 2024 they had the comfort of knowing relief, in the form of more equitable tax scales, would eventually arrive. That changed in a heartbeat when Labor, after years of promising stage three would be rolled out as legislated, rewrote the detail to rob the rich to reward low and middle income earners as a form of cost of living assistance.
There are many reasons why this is bad policy. First and foremost is that Labor is using the tax system to address a short-term cost of living crisis. The changes to stage three will be set in stone long after inflation returns to the RBA's target band of between two and three per cent. The changes are also bad policy in that by retaining the 37 per cent tax bracket for those making between $135,000 and $190,000 the government has binned the original justification for the reforms; reversing bracket creep.
While Labor's defenders have repeatedly argued the "tweaks" deliver greater "equity" they gloss over some significant points. One is that the stage one and two tax cuts for low and middle income earners were delivered before the end of 2020. Their recipients have had the benefit for years.
Another is that people earning $40,000 a year will only be $654 a year better off as a result of Labor's changes. Those on $50,000 a year will only be $804 a year better off and those on $60,000 will only be $800 a year (or $15 a week) better off. Those are hardly life changing amounts given the average rent in most major cities is now above $700 a week.
Labor's decision to put political expediency above economic reform means other ways now have to found to address tax reform. It also vindicates former Treasury Secretary Ken Henry's view the tax system now "fails every test" of growth and fairness because governments don't have the "courage, creativity and political persistence" to follow through. The Business Council of Australia was channelling its inner Dr Henry this week when it called for a national summit on tax that would include business, unions, economists and government.
That call was backed by Wentworth Teal Allegra Spender who shared the podium with Australia Institute director Richard Dennis at the National Press Club on Wednesday. Neither Ms Spender or Dr Dennis believe income tax is too high. They say the real problem is a failure to collect more tax from other sources. "Australia ... lacks taxes on pollution, lacks taxes on wealth and has enormous tax loopholes for family trusts and superannuation," Ms Spender, working on a green paper on tax reform, said.
The one thing nobody has been willing to endorse, or even call for publicly, at this stage is an increase in the GST accompanied by an across the board reduction in income tax. If there is to be an honest discussion about tax reform then all the options, including that one, must be on the table.
A consumption tax, so long as it has safeguards, is arguably the most equitable of all.