When the Business Council released its tax-reform proposal last Tuesday, its accompanying statement warned that “the current tax system is holding back growth unnecessarily”.
But what is to be done to unleash more growth? The BCA thinks the answer lies in personal tax cuts, an immediate reduction in corporate tax and the phasing out of stamp duties – all paid for by reductions in superannuation tax concessions, reductions in tax deductions for wage earners and better policing of multinational taxation.
The casual observer might wonder, however, how cutting taxes is going to fix the whopping budget deficit each year in Canberra.
Well there is an answer, though not one everybody believes.
Cutting taxes to increase growth, and therefore to collect more tax revenue, has been a popular idea with some schools of economics for decades.
It was popularised in the late 1970s by Chicago economist Arthur Laffer, who famously is supposed to have explained his theory of the ‘Laffer curve’ to a group of US government officials by drawing it on the back of a restaurant napkin.
The theory, in simple terms, is that taxing economic activity at a rate of either zero, or 100 per cent, would result in no revenue at all – the latter because nobody would bother getting out of bed to be taxed at 100 per cent each day.
So Laffer proposed that somewhere on a curve of possible tax rates, there must be an optimum rate that will maximise government revenues and growth.
The Laffer curve has popped up a few times in Australian tax reviews in recent years, although it is not specifically mentioned in the BCA’s new policy proposal.
What the Business Council does mention, however, is that it wants a flatter personal tax scale.
It lists three key problems with the current structure of the tax system:
• When a person considers getting a new job or taking on additional work, they
face high marginal tax rates that distort the work/reward trade off.
• When people get a pay rise to keep up with cost of living increases they end up
worse off because of higher taxes through bracket creep.
• When a business is considering a new investment in Australia, it compares our
uncompetitive rates, which increase the rate of return hurdle, with other countries
where it is easier to invest and do business.
Some of these concerns have been voiced for years – particularly the high marginal tax rates for high-income earners.
The most commonly used statistic is that ’10 per cent of income earners pay 50 per cent of income tax’ – something that is clearly visible on the chart below, which shows who’s earning what, and what part of the personal tax burden they shoulder.
That chart, at face value, would seem to answer the question The New Daily raised yesterday: Is Australia’s tax system too progressive?
As always, however, taking things at face value is what politicians would like us to do. Digging a bit deeper reveals a different picture.
High tax, low tax
The first thing to note is that Australia’s overall tax take is competitive by international standards – it has edged up from about 30 per cent to nearer 33 per cent in the past few years (combining local government, state and federal taxes), but that compares well with the UK, which as reported last year is trying to get total tax revenue down to between 35 and 40 per cent. We tax a lot more than Singapore (15 per cent) but a lot less than Norway (44 per cent).
The reason the top-line figure is important is that it gives an indication of what tax is being paid, net of all tax minimisation measures allowed by the tax code – or tax avoidance in the grey economy.
Many tradies, for instance, pay a marginal tax rate of 37 cents in the dollar and collect GST. That means that if they do a job for you cash-in-hand, they’ve given both you and themselves an illegal tax break.
The second thing to note when considering the above chart is that the incomes represented are only about half the picture. Income tax is 50 per cent of the overall tax take, corporate tax 22 per cent, GST 15 per cent and other indirect taxes 13 per cent.
Lower income earners are sometimes accused of “paying no tax”, when in fact they pay a much higher proportion of their income than the wealthy on GST, alcohol and tobacco excise, and other indirect taxes such as rates, car registrations and stamp duty. All of that has a net effect of ‘flattening’ the personal tax scale considerably.
Finally, your high-income neighbour – let’s say a lawyer or surgeon on $180,000 a year – has plenty of ways of getting their taxable income down into the lower marginal tax brackets, such as family trusts, negative gearing and superannuation tax concessions. You may well be living next door to a surgeon whose taxable income is below the average full-time weekly earnings figure – currently $78,000.
It’s likely that at budget time, some of Prime Minister Malcolm Turnbull’s views of the Laffer curve (quoted yesterday) will find their way into the corporate or personal tax rates or thresholds.
If they do, it’s important that voters remember that Australia’s tax system is a lot less progressive than some of the champagne-set try to argue.