Cutting Taxes, And Spending

Sydney Morning Herald

Tuesday January 18, 2005

The rumble for income tax cuts from the federal Liberal Party back bench is growing louder, with a ginger group publicly campaigning for change. However, it has failed to detail either how the tax cuts should be made or the spending cuts needed to fund them. This lack of detail from the tax cuts' proponents - a loose group of as many as 25 federal MPs - makes it difficult to take the proposal seriously, especially as much of their case rests on preventing the way bracket-creep boosts the Government's tax revenue.

It certainly true that a top marginal rate of 50 per cent for individuals appears high - especially compared with a corporate tax rate of 30 per cent. However, high-income earners are not as badly off as the bald figure might suggest. Firstly, their overall tax rate on all income is usually far lower than the top marginal rate. They can, for example, use the tax system to subsidise investment in residential property. Similarly, high-income earners can use superannuation contributions to reduce tax liability, while dividends from shares are largely income tax-exempt. Hence the proportion of tax paid on income from all sources may be well below that on just the salary portion of their income.

Beyond this, there are other ways for the wealthy to arrange their affairs. Family trusts, for example, are a fairly straightforward tax shelter for those with an operating business, although perhaps the Liberal Party would not like the spotlight put on trusts as part of any new round of tax reform.

At first glance, the Howard Government's tax take as a proportion of national income appears higher than that of previous governments. But this overlooks the very fundamental transformation brought about in 2000 by the goods and services tax. This tax, collected by the Federal Government, replaces a host of state-based charges.

A taxation debate is to be welcomed, but only if it is wide-ranging and aimed at fairly balancing taxes across both the working population and productive enterprises, not just picking out the bits that a fringe group of politicians think would be good for them and their supporters. Likewise, a shift from the reckless spending that characterised the last federal election campaign to greater fiscal responsibility is to be encouraged. But more than simplistic sloganeering is needed if the case for income tax reform is to gain support.

© 2005 Sydney Morning Herald

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