Joe Hockey’s first budget does not contain much tax reform, in spite of headlines on the “temporary budget repair levy”.
It does contain some very big cuts to spending in the short and longer term – consistent with Hockey’s claim that “the age of entitlement is over”. But will this lead us to prosperity and opportunity?
Why a temporary levy?
That temporary budget repair levy of 2% for those earning over $180,000 is a hit on Australia’s highest income earners who can certainly afford it. It is predicted to raise $600 million this year; $1.2 billion in each of following years.
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What’s wrong with that? It could be a good thing to make that levy permanent – Australia would be in company with a growing number of wealthy countries, including the US, which have been lifting marginal rates on the highest income earners.
And it makes sense to levy it on the highest incomes. The levy brings our top marginal rate to nearly 50%, but the empirical evidence suggests that this is unlikely to negatively affect work or business effort by high income individuals, who are mostly men, and who are not so responsive to higher rates, unlike lower income workers.
But the temporary levy will increase the pressure on tax planning margins, making it more attractive than ever to keep money in companies (at the smaller end, now taxed at 28.5%) or to income split through discretionary trusts. Capital gains will still be taxed at half that top rate. And tax deductions for travel, negative gearing using rental losses to shelter taxable income are more valuable than ever to high income earners. All those negative consequences could be dealt with by tax reform, but that is not on the table yet.
No business tax reform
Hockey also has not addressed business tax reform in this budget. Without a carbon tax or mining tax, Hockey still plans to cut company tax by 1.5%, a policy copied by Abbott from Labor’s failed attempt. The budget has kept the controversial paid parental leave policy to be funded by large companies who will continue to pay the 30% rate.
Meanwhile, the Base Erosion and Profit Shifting project of the OECD and G20 continues.
Funding paid parental leave: Let’s tax Peter to pay Mary
The continuing negotiations around the PPL scheme is a reminder of how controversial these big planks of government policy are.
Its high cost comes from funding the mother’s salary – even at minimum wage – for 18 weeks. It has some great features – a payment that goes to working women, based on their individual income, has to be good both for gender equity and for the broader economy. If it was being introduced with substantial new funding for childcare and help for single parents at the bottom end, I’d be all for it.
By bringing forward Labor’s policy of abolishing the dependent spouse tax offset and mature age worker tax offset, Hockey saves almost enough to pay for parental leave for a year. If he made the temporary levy permanent, this could be enough to cover the cost – in fact, we could see this higher top marginal tax rate as a transfer to some extent from rich men to working women with children. Or alternatively he could cut some of the superannuation tax concessions which are not mentioned in the budget.
The trouble is, the levy is not permanent and the politics mean its unlikely to be retained. And so this turns out, when we examine the cuts to family tax benefit B, to be a transfer from poor women to richer women.
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