Each year the government increases income tax rates, and most people don’t notice. They do this through “bracket creep” where workers are moved into higher tax brackets due to inflation. For example, if your income jumps from $37k to $38k to compensate you for higher prices, then you will be pushed up a tax bracket so that you are now paying a 35.5% marginal rate (instead of 20.5%) leaving you with less disposable real income.
This implicit tax increase could be easily removed by indexing the tax brackets to inflation.
To work out a rough estimate of the size of bracket creep, we can make the simplifying assumption that income tax should grow at the same rate as nominal GDP growth. Looking at the coming three years, nominal GDP is expected to increase by 16.9%, while income tax is expected to grow by 25% over the same three years. The difference can be attributed to bracket creep, and amounts to a total secret tax increase of $13 billion over three years.
If the government does not offer at least $13 billion worth of income tax “cuts” over the next three years, then they will actually be increasing income taxes.
Historically, the government has been happy to allow bracket creep to continue as it gives them extra tax revenue each year which they can then give away to special interest groups or loud lobby groups in the hope of buying an election victory. Because the tax increase is not well publicized and not well understood, the government is able to increase the tax burden with a relatively low political cost. But while it might make for good politics, the continuous increase in income taxes has been squeezing family budgets, reducing work incentives, and slowing down our economy.
In the long run we need to have income tax indexation. In the meantime, we need to demand at least a $13 billion income tax cut.
Note: If the government introduced an inflation indexation on income tax rates, that would ensure that nobody was pushed into a higher marginal tax bracket due to inflation. However, there would still be a gradual increase in average tax rates as real economic growth pushed more people into higher tax brackets. To ensure that there is no increase in average income tax rates it would be necessary to index tax brackets to nominal wage growth. But that is a topic for another day.
The debate about the carbon tax is so passionate and divisive that a compromise is almost certainly out of the question. But that doesn’t mean we can’t consider the thought experiment. I am on the public record as being against Gillard’s carbon tax, but after Ross Garnaut came out recently talking about linking the carbon tax with other tax cuts I started thinking about what else could be done to make the carbon tax “less bad”. The following are the demands I would put to the government if they wanted me to consider supporting their new tax…
1. The first requirement, and non-negotiable for me, is that the tax cuts must be at least as large as the new carbon tax. I believe that the federal government is already too big, and I am very strongly opposed to any policy that would further increase the size of government. If the proponents of a carbon tax really believe that the policy is vitally important then they should be willing to offer large tax cuts, even if that means they need to cut government spending.
2. My second requirement, which is also a game breaker, is that the carbon tax must not later convert into an emissions trading system (ETS). While both will have a cost to the economy, in my opinion an ETS is worse, and is likely to be an ever-growing bureaucratic and regulatory nightmare. If there must be a price on carbon dioxide, then it should remain at a low, simple, and predictable tax.
Payroll tax (like many other taxes) leads to fewer jobs, lower take-home pay, higher consumer prices and lower returns for investors. As I have previously argued, we should be striving to cut (and some day abolish) payroll tax.
In Queensland the government defends itself by saying that we have the lowest payroll tax rate of any state, at only 4.75%. But that isn’t quite right.
Queensland is the only state that charges a variable payroll tax, with medium-sized firms actually paying 5.94% marginal payroll tax, while only the larger firms (with labour costs above $5 million per year) pay the reported 4.75%.
This means that for medium-sized firms, Queensland’s payroll tax rate is actually higher than every other state except Tasmania.
Governments of all persuasion often claim that they support a strong private business sector, while at the same time burdening business with a range of taxes, regulations and obstacles. One such tax that has been a consistent thorn in the side of the private sector is the state payroll tax.
Payroll tax is paid by businesses based on the amount that they pay their staff. It is literally a tax on jobs.
In many ways, the payroll tax is similar to the income tax. Both drive up the cost of employing people. Both are paid by employers, based on wage payments. Both result in lower take-home pay for workers, higher prices for consumers, and lower profits for investors. The main difference is that while the Commonwealth income tax applies to everybody, the state payroll tax only applies to people working in a medium or large business.