My AFR piece tomorrow will deal with the expenditure side of the Budget, but I also plan a piece on the tax side. My immediate reaction is the same as everyone else’s – these cuts are amazingly skewed towards upper-income earners, with no-one on less than $55 000 per year getting more than a $300 tax reduction. This is about 9 months worth of bracket creep for someone on $40 000/year, but it’s apparently supposed to last for the rest of this government’s term in office, given the allocation of future tax cuts to the top end.
I’ll try to have a more detailed analysis soon.
There’s more from Ken Parish, Andrew Norton and Flute
John Quiggin 
The rich get richer…
If there is one thing the Howard government has done consistently and effectively over its several terms in office, it is attempt to bribe the electorate into supporting it by offering tax cut incentives, often at the expense of the…
On the welfare changes: As usual with welfare-to-work ‘encouragements’ the key will be in the implementation. However, I thought it was pretty disgusting that the government’s description of these did not once mention (as far as I could see) the reduction in benefit levels associated with the changes. These will have a much bigger impact than the job search requirements.
Just to clarify Bruce, I assume the point is that NewStart (unemployment benefit) is lower than the benefits (Supporting Parents and Disability) that people are being pushed off.
About time JQ, I’ll be getting the AFR to see what you have to say. By the way, your link to one of my budget sprays (there are a few) goes to Catallaxy by mistake.
The difference in top rates for DSP and Newstart is around $76, I think.
In a recent pilot study by DEWR, around 60 percent of those who voluntarily left the DSP and entered labour force remained unemployed. The study can be found here.
Incentivation, Howard-style: sticks for the poor, carrots for the rich.
My question: what is the long-term effect of increasing wealth disparity on patterns of demand ? Does it skew consumption towards imports to the detriment of our balance of trade?
I think the effect of tax cuts, long term and for most people, are illusory. For salary earners, real income is their inflation discounted after-tax payment. They also have a reasonable expectation of increases in the amount they are paid in accordance with inflation and promotion, or incentives to keep them in the job. Tax cuts will have a shortish term inflationary impact, though they should more than compensate a rise in prices and therefore real income will increase. But, that decreases the pressure on employers to raise wages, so therefore, over the long term, real income will come back into line with what an employee might reasonably have expected their income to have become without the tax cuts. Maybe the time scale for this is of the order of three to five years.
So, in the short term, sure, more money in the pocket, inthe long term, that conclusion is rather more problematic (I went on about this in a Monday Message Board a month or two ago, but nobody replied to it, so I guess there’s no interest). Huge tax cuts (order 50%) would have a rather less predictable effect than the one I’ve crudely outlined here, so I don’t claim this analyis is valid in that case.
Of course, the big winner of tax cuts to employees is their employers, who have to allocate less of their corporate income to paying the taxes of their employees, which in effect is how our income tax system operates, and over time as real employee incomes come back into line, can expect their profits to increase. Funny how they lobbied so hard….
-Peter
Isn’t it a nasty little world we live in.
The rich are rewarded , to work harder and the poor ,with stick a of celery, are asked to go off to the Hillsong Church for redemption.
Praise the Lord!
The tax distribution was always on the card from this lot. What surprised me was this barmy “future fund” policy. They have finally killed off the last stalwart liberal party (state funeral on Monday) neuron with that one.
Tonight, told after 9 months of casual work, of over 30 hours a week, asked to wait for a telephone call. Not the only person in this small seasonal business in a large country town told , the same thing.
Seasonal sacking and not recognised .
Pr Quiggin
In Creeping Capitalism March 2005 you said:
“In today’s Fin (subscription required), Sinclair Davidson tries to resuscitate the claim that Australian taxpayers are suffering from severe bracket creep, a claim I refuted in my piece last week”
Now you are saying:
“with no-one on less than $55 000 per year getting more than a $300 tax reduction. This is about 9 months worth of bracket creep for someone on $40 000/year”
If $300 for 9 months of bracket creep isnt “severe” what is?
I guess this is the women and children tossed overboard budget.
I’m not following your point, Econowit. The tax cut required to compensate for bracket creep is not large (maybe $500 per year at $40 000 per year). It’s just that the government has chosen to give a cut that’s too small to do the job.
I think it’s worth reposting what I posted on the Monday Message Board before this thread appeared. I’m thinking of working on a letter to the Australian (or similar) about this tomorrow, so I would welcome any suggestions. I am contactable here.
Here is the earlier post:-
I’d like to take the opportunity of this budget to bring out the differences between a wage subsidy like the one Costello is proposing, and the Pigovian adjustment in Professor Kim Swales’ GST offset scheme (which is not a true subsidy, unless and until the implementation method gets monetised via vouchers or something).
Costello’s system is narrowly targetted at the long term unemployed, and terminates after a brief period of re-employment. It is naturally structured to cycle the long term unemployed through brief periods of employment, churning them back into being reclassified as short term unemployed. The only exception is the extent to which employers end up investing in training the employee and prefer to keep him or her on rather than investing in training another – but that is offset by the incentives and the existence of a pool of comparatively unskilled jobs to churn people through. Another kind of stickiness is that sincere long term employers will be reluctant to take
on employees under the Costello scheme until it has been around long enough for them to have faith in it; that stickiness works against long term re-employment.
The main effect on the budget reform package is to undercut the grandfathering commitment that no existing social security beneficiaries will have their benefits cut. No, not as such – but they will be compelled to have their status churned via short term subsidised work so that they come back under lower benefits.
Now, let’s look at the Swales scheme. The main points in which it differs are that there is no outflow of funds, and while it is only revenue neutral in the short term it is budget neutral even over time, so it can be (and is) untargetted and long term with no costs incurred until the benefits start to kick in. Theoretically that could be immediately, but in practice I expect a couple of years delay while potential employers get used to it and start having faith in it (just as described for the Costello scheme). But there will be no costs during that interval, and some signs of progress, so I expect it to be practical to keep it going that long. I
also expect the first effects to show through as more apprentice hiring and fewer retrenchments/less downsizing (if indeed there is any scope remaining for that by now).
It’s easiest if I quote two letters I had published a few years ago. They don’t mention Kim Swales, since at that time I had not yet come across his parallel work.
The following is the text of a letter I had printed in the Australian Financial Review of 11.8.97, which I also have here:-
‘Tax rebate to create jobs
In his article of 6.8.97 Alan Mitchell summarises some theoretical options that were used to brief Ministers before the Cabinet meeting on unemployment. One in particular showed some possibility of results, namely lowering the minimum wage while compensating the less well off through social security and/or the tax system.
‘These options rely on reaching a new equilibrium. The practical difficulties are blindingly obvious – there’s many a slip between cup and lip, so what if other factors interfered and we got the worst combination of the intended and current situations? We might have all the unpleasant effects of minimum wages collapsing, without ever quite reaching the jam promised us for tomorrow. We might not be able to get there from here.
‘Yet there is another approach. Consider the effect of rebating employers’ own tax bills, say by $10,000 per full time employee per annum (and pro rata for part-timers). The precise figure should correspond to social security costs, including the on-costs of administration. The general tax rates would need to be higher to offset the rebates on the existing workforce, of course – but short of 100% unemployment the frighteningly high rates are merely dummy intermediate numbers for purposes of calculation, and no employer would ever pay that much. But this does imply broad-based production taxes, such as a GST or a tax on the use of commercial plant and premises.
‘In the short term such rebates would encourage employment at the same time as protecting a minimum wage corresponding to social security, with no additional cost over and above the existing hidden cost of social security. As tax rates would match present requirements the system would be revenue-neutral in the short term, and while the tax base would narrow to the extent that social security was privatised, it would only do so in exact step with reductions in the social security burden. Over time this approach would be budget-neutral and would not affect governmental planning, resources or budgets [I should have put “commitments”] in any other respect. Yet apprenticeship
schemes would become realistic, retrenchments would be less likely, and to the extent that the unemployed were taken into the workplace they would be exposed to all the opportunities they need. And, over time, structural change would still create new opportunities – only now without people having to risk being sidelined into dead-end, low wage careers.
‘With this approach you can get there from here.’
The following is the text of a letter I had printed in the Australian Financial Review of 7.11.97, which I also have here:-
‘Tax rebate on employees a better option [than negative income tax]
‘Professor Dawkins’ article on unemployment and tax reform states that “the best way to attack these problems is with a negative income tax”. Another approach uses broad based taxes on producers. If employers received rebates for all their employees, e.g. classifying them as a GST business input, there would be an incentive to hire at corresponding wage levels.
‘The only difference is where the tax falls. Yet this has three major consequences:-
‘- Negative income tax physically transfers funds. This means churning with additional compliance costs. Employee rebates have no counterflows of cash, so they are only dummy intermediate figures for purposes of calculation with no great administrative burden.
‘- Negative income tax improves employment indirectly. First, people have to accept that lifestyles are unaffected, harder with low inflation as nominal wages are “sticky”and slow to adjust. Further increases in the natural level of unemployment would offset this slow improvement. But employee rebates do not affect nominal wages and so do not need a change in expectations. The quicker response not only means employment recovers more rapidly but also means recovery can keep pace with any simultaneous damaging processes.
‘- Social security is a general cost, not falling on particular employers. This currently creates a bias towards retrenching. But employee rebates do affect particular employers, cancelling the bias. Negative income tax does not benefit employers directly, so what would happen depends on just how much of unemployed people’s willingness to work actually flows through to create jobs, and how fast. Opinion is divided on the subject.
‘Perhaps a drug cocktail attack on unemployment could combine these and other approaches.’
In a precise and specific sense, the Swales scheme is not a subsidy at all, and it is only “financed” by GST in the sense that it uses that as a carrying tax. Changes in revenue with increased employment are in fact set off against reduced social security outgoings, and it is that that is truly financing it. The problem areas seem to relate to existing previously successful rent seekers (downsizers), sovereign risk from faulty implementation, and interfaces with the wider global economy. I want to get all these studied, but so far I haven’t managed to get anybody on board with it.
In a classic case of “great minds think alike”, Steve Edwards and I recently agreed in a thread on his website about the interaction between marginal tax rates and the Newstart income test. I wrote to Steve that:
“Steve, your original calculation of an 87% EMTR was correct, if you focus on the interaction between the Newstart income test and PAYG fortnightly tax deductions by the employer. The employer does deduct tax from the employee’s wages separately from Newstart, so your original assumption (which your friend criticised) was correct.”
“Of course it is true that Newstart payments and income from paid work are combined when one’s annual taxable income is calculated, and the annual tax payable is calculated on the combined figure. However, it is what people find in their bank accounts each fortnight which is most important in terms of making ends meet most of the time, and in terms of the incentive structure created by the tax/welfare interface.
“Finally, it is possible to face an EMTR of about 94% if one’s fortnightly income is above the level at which PAYG deductions ratchet up to 24 cents in the dollar, but below the level at which no Newstart Allowance is payable.”
I’ve yet to study the impact of the budget measures on either this poverty trap, or the one facing women in couple families seeking (voluntarily) to return to the workforce after an absence due to childbearing, but I think I can safely assert that they are derisory compared with (a) the benefits flowing to the top end of town and (b) what should have been possible given the size of the surplus and a proper emphasis on removing poverty traps for the poor and for middle-income families.
Is there a name for the economic law (clearly a favorite of the Costello Treasury) that states the poor only work harder (or at all) being beaten with sticks but the rich need juicy carrots to make them lift a finger?
Hey guys – as a consultant, working in my own business, trying to grow it, keep it solvent, and at the end of the day trying to make a living, the changes to the tax scales (though limited and true not tax reform) I greatly welcome them. And I would also argue my staff would as well, even though we pay above indsutry average salaries, plus profit incentives.
I think that the deabtes mooted here are interesting, and dare I say it ‘academic’, ultimately mean diddly in suburbia, and frankly add nothing to the real issues.
Would like to discuss things in more detail, but I’ve got a business to run, but I will keep reading intently and following how this debate (here) pans out.
Keep up the good work guys
Roberta, I suspect that anyone under $70k (especially at the $50k mark) will be very aggreived to see the size of the cuts going to people earning more. I don’t think that Howard can continue to shaft the $50k earners and get away with it. His only hope is that people on these incomes look only at their own tax decrease and not look further down the table. Actually, given the state of the dreadful “tax cuts for all” line of the media, this is quite likely. Anyhows, I’m off to buy an AFR just to read Lord Quigley’s piece. See that Fairfax – Miranda Devine, no sale – Gerard Henderson – no sale – John Quiggin – a healthy increase to your bottom line.
Another issue relates to the proposals to require single parents (mainly single mothers) to return to the labour market once their youngest child turns six. This measure is simply bloody-minded unless specific steps are taken to overcome: (a) the serious labour market disadvantage that these people will be at after an absence of five years or move from the workforce, especially in occupational categories where being up to speed with office software and ICT in general is imperative; and (b) their likely need for childcare and/or flexible hours of work. The relevant Minister, Kevin Andrews has admitted that the success of the policy is contingent on employers being prepared to come to the party, but has claimed that the government is unable (or unwilling) to make employers do so.
It is also worth noting that ABS figures show that single mothers of children under 5 have by far the lowest rates of labour market participation amongst mothers of children in this age group. The highest rate of labour market participation is amongst mothers of infants whose male partners are employed full-time, followed by those whose partners are employed part-time and then those whose partners are unemployed, with single mums last. This strongly suggests that mothers’ workforce participation is strongly determined by opportunities and skills, rather than working mothers being the “economic conscripts” of family-values conservative mythology. There are, of course, other aspects of this issue which complicate the picture.
Paul is quite correct. Lack of suitable skills is the key driver, others people can work around.
There is also another issue in this debate about mothers returning to work. Currently policy implies that mothers are expected to work once their children reach the age of 6, compared with the 50s when mothers simply don’t work. Great move Treasurer. You get to make more money in three ways:
a) Mothers get their pension cut, regardless of whether they work or not
b) Mothers pay for childcare, which is not tax deductible, but childcare workers pay taxes
c) Mothers who find work pay even more taxes
The worst thing is the Centrelink cuts payments based on gross wages. Forget that it can cost a poor person $10 in bus fares to commute from the outskirts to workplaces. Forget that childcare expenses have to be paid for. As for tax deductibility, transport from home to work is not deductible, and neither is childcare — deemed private expense. Anybody else thinks that the legal and tax system still lives in the 50s?
The budget tax and welfare changes reflect the moral views of the Howard government: that the rich are morally worthy while the poor are poor due to moral failure. To be poor is to be a bad person; anyone can make it good through hard work.
The policy choices reflected in the budget flow from these moral views. Because the poor are morally bad they should be punished. Because the rich have achieved wealth through hard work and being upright moral citizens they deserve reward.
Consider the moral views in statements about ‘dole bludgers’, ‘work dodgers’, ‘politics of envy’ etc. How often does the government stand up and talk in a meaningful way about poverty and/or class and its impact? Can anyone imagine Howard arguing for improved education and health care on the basis that it is not the fault of a child that the child is poor? Howard and his colleagues would be far more likely to sprout nonesense about the failings of the child’s dole bludger parents. Cut the dole and the parent will work, and will therefore be able to pay for the child’s needs.
Aside to roberto: I wonder whether there is an issue here about how one asks about tax cuts. If asked, ‘Are tax rates too high and do you want a tax cut?’ the answer is probably going to be yes. If instead the question was, ‘Would you be willing to forego a $6 a week tax cut so that $X billion can be directed into health care (or education or water infrastructure)?’ the attitude to tax cuts would probably be different.
GotF is probably right about the moral values of the Howard government. However I’d suggest another factor.
Over the last 30 years, governments across the board have effectively abandoned the goal of a full employment economy (as in unemployment never exceeding 2% and consisting mostly of people in reasonably rapid transition between jobs). If there is a tacit consensus among policymakers that an unemployment rate of 5% is the best that can or should be achieved, it is impolitic for them to let on to the punters that the persistence of unemployment at such a level, which would inevitably mean higher levels in some regions and long-term exclusion for some people, is the result of a conscious policy choice. An alternative story has to be told, and the one which blames unemployment and poverty on the moral deficiencies of the unemployed and poor is the one with populist appeal and a wedge-politics edge.
Pr Quiggin,
What I am saying is that government never compensates adequately for bracket creep (at any end of the scale). The compounding over a long period of time of cuts that are “to small to do the job” plus the years when no adjustment are made equate to Sinclair Davidsons severe bracket creep. You refute that taxpayers suffer from it.
Your example $40k/$500 or 1.2% pa as a figure for uncompensated bracket creep (half the inflation rate) in years when no adjustment is made- would be severe to someone on $40,000.
My problem with the tax cuts is that the money from the commodity prices boom should be put into the piggybank not spent.
I see no problem with reducing the top rates or even abolishing it. It doesn’t cost much relative to other brackets and at some stage it must be done.
however if the problem is labour market participation would you target the highest EMRTs in the system ie those for people who are on welfare benefits and you want to get into the labour market
[quote]the one which blames unemployment and poverty on the moral deficiencies of the unemployed and poor is the one with populist appeal and a wedge-politics edge.[/quote]
I think you’re right: the government can’t be seen to be doing nothing about unemployment even though 5% may be the lowest possible rate that can be achieved. Therefore the government needs a blame-worthy target and finds a politically useful one in the poor and unemployed.
I do think though that it is not just politics. Current social morality seems to be fairly egoistic and draws on American protestant ideas about the moral-worth of wealth maximization. This is the type of morality preached at Hillsong and which draws record crowds. It is deceptively easy and enticing to believe that maximizing your own wealth is morally right and correct.
Of course, what is moral is a question which is open to debate and conflicting views. Also, it is just as easy for the poor to see themselves as victims as it is for the rich to see their wealth as morally worthy. The real situation is likely to be more complicated (and therefore harder to deal with) – some poverty is the fault of individuals, some is not… maximizing your own wealth is not morally wrong per se… The issue with the budget is that it goes for a simplistic solution.
Paul Norton – it’s all very nice to put out a theory that the federal Government is deliberately conspiring to maintain the current levels of unemployment. What you now need to do is produce some hard evidence. . . What? You can’t? Why not? Is the fact that unemployment is at historicaly low levels too much conflicting evidence. It is probably time for you to change hands.
As for those bewailing the unfairnes of the size of the tax cuts for higher income earners I will make a couple of points – Both the Unions and the ALP have been calling for tax-cuts, particluarly for the higher brackets. Please put forward what the Unions, the ALp or yourselves think is a fair tax-cut. The truth of the matter is that higher income earners are taxed so highly that any reduction is always going to be skewed to the higher payers if any significant reductions are going to be made, otherwise it is just a waste of time.
All I am hearing is complaints – no solutions (unless you beleive the higher income earners are evil and must continue to be taxed at the current rate.)
Razor, how much could you lower the top rate if you got rid of the capital gains tax concession and phased out negative gearing?
“Is the fact that unemployment is at historicaly low levels too much conflicting evidence.”
Razor, you might be interested in the following quote from a publication by the commos and Green extremists at the Australian Chamber of Commerce and Industry:
“We seem as a community to have become generally impervious to the
problems created by unemployment and have become willing to accept rates of unemployment that would have been seen as intolerable in previous years. To recall that the average unemployment rate between 1945 and 1970 was 1.9% is seen as a curiosity with little if any relevance
to the contemporary world. Yet the evidence is clear that the low
unemployment rates of the post-War period coincided with the period of
the fastest real income growth in Australian history.”
The url is http://www.acci.asn.au/text_files/review/r97.pdf
Oh my god! A slashing to reply to one point. Woe is me.
Unable to reply to the rest?
Come on – you can do better than that.
“Both the Unions and the ALP have been calling for tax-cuts, particluarly for the higher brackets.”
Actually, one unionist, Bill Shorten. made such a call. Important man that he no doubt is, Shorten doesn’t speak for all the unions.
What the ALP says appears to change by the hour, so that doesn’t count.
Dave – Premier Gallop yesterday said it was a good budget and supported the tax-cuts.
I would be interested for somebody to go and ask Unionists on any level of income whether they think the tax-cuts should be blocked because they are not fair. I don’t think you’ll find too many supporting Kimbo.
You are absolutley correct that the ALP can’t keep a policy from lunch-time to Late Line. As the Prime Minister pointed out yesterday in relation to the iniquitous Superannuation Surcharge – the ALP voted against the introduction of it, voted against the reduction of it and no wthreaten to vote against the abolition of it. And they wonder why they can’t get elected!
Razor, I don’t need to reply to the rest for reasons I’m about to outline.
if you had read all my posts, you would have seen that my general view is that the priority areas for tax changes were: (a) changing the interplay between the Newstart income test and the tax system to eliminate marginal tax rates of 87% and even 94% for unemployed people obtaining part-time work; and (b) enabling more families seeking to shift from one income to 1.5 or 2 incomes to keep some of the money earned by the partner returnng to the workforce. These are general principles which I’d be interested to know whether you agree with; I leave it to others with more time to do the sums.
As someone currently being taxed at the 47% rate (plus an extra 9.5% for the Medicare levy and HECS) I don’t consider myself evil, just less in need of a break than others in society who either: (a) don’t have my qualifications or means; (b) have obligations which I don’t have; or (c) both of the above.
The unions and the ALP can speak for themselves.
Razor, you seem to be on the ball. Can you jusitfy why someone earning 55K will get a $750 odd tax cut in 2007, whereas someone earning $110K gets a $3600 odd tax cut? Double the salary, five times the cut.
Also, what do you make of the future fund?
Flute, the future fund is just a method of pumping public money (via a couple of intermediaries) into the stock market. the “Super Choice” campaign has parallel features, as does The Bush plan for changing the US social security system. The public money so invested will be “silent”, ie. there will be no corresponding Board representation to match the gigantic investment, nor will there be any of the “behind the scenes” pressure by fund managers on Boards and managements that we read about occasionally.
“Yet the evidence is clear that the low unemployment rates of the post-War period coincided with the period of the fastest real income growth in Australian history.â€?
Perhaps you can’t have that Paul without the accompanying social mores, tax rates and social security system that accompanied it? What are you suggesting here?
Measuring income and deciding how to tax it have become too problematic for me and the comments here and the 10,000 odd pages about it the ATO are ample evidence of that. However, if we’re going to continue with the science of muddling through then even the Beazer has said higher income earners need tax relief. Basically we can’t get out of kilter with other OECD countries, particularly with developments like this http://www.smh.com.au/news/National/Uncle-Sam-wants-you–for-betterpaid-jobs/2005/05/11/1115585034140.html
Generally speaking this Budget is a fairly mild response to the emerging realities of demography. It’s sending clear signals to a community that we need an ‘all hands on deck’ future and adjust your mindset and behaviour accordingly folks. Personally I think the electorate already has, but the ALP seems stuck fast, wistfully looking back to the social luxury of our youth glut past. Propping up the front bar while the real world scurries by outside.
Paul Norton, that making the employers come to the party thing is the main reason why the Swales scheme is structured that way. It has a point of impact on employers, and just like the fortnightly effect on people’s bank accounts, it’s that which has the most driving effect – not the ultimate flow through on the general economy from the incidence. Swales’ modelling shows that each 1% off the unemployment figures is matched by “only” about 1/2 % on the GDP. But that’s still an improvement, not a cost.
Paul – I have always believed that family units should be treated as a single tax entity in the same way that Centrelink treats them. This is income splitting and would reduce tax-burdens on families. As for the the interplay of loss of welfare benefits as earned income increases – I have always had serious issues with calling this inter-play an Effective Marginal Tax Rate, because recipients are not being taxed, they are just not drawing benefits. Internationally, no-one that I am aware of has come up with an effective solution to the high EMTR situation as welfare recipients move from welfare to work. If there is one I will be pleasantly suprised. So, with no better solutions around, the government is correct in making tough decisions to move people from welfare to work. (I am a big fan of the reforms Clinton made to the US welfare system – about the only worthwhile thing he did). The EMTR argument never takes into account the positive non-cash benefits of being in the workforce (and you social policy wonks just love getting inot that type of thing). (Please note I don’t use the term wonk as a perjorative – I regard myself as a bit of a policy wonk in other areas). I also believe that child-care and education expenses should be fully tax-deductible as they are means to both earning income and increasing social capital.
More sound advice for the Federal ALP here http://www.news.com.au/story/0,10117,15261326-29277,00.html
Beazley’s reaction to all this has been pathetic. He has no sense of strategy, no sense of tactics, and, above all else, no sense of his own impotence and irrelevance.
The Labor Party has been caught, yet again, completely flat footed. They either had no idea this was coming, or if they did, they were unwilling or unable to prepare themselves for it. Yet there were hints all over the place in the weeks prior to the budget that something was going to happen on tax.
When he was leader last time, Beazley’s greatest failing was his laziness and unwillingness to do hard policy development. All we got then was prolixity without substance. But now, it’s actually worse. All he can give us is thoughtless, knee jerk reaction. That doesn’t mean he had to mindlessly agree with what the government did. He could have said, as Robert Merkel said in his comment, that if you are going to cut taxes you should also fix loopholes like the capital gains concession and negative gearing. That would have been good politics and good policy. But that would have required a combination of thought and guts, two qualities Beazley lacks.
Flute – A letter writer to the Australian put it succinctly today – “UNDER the Government’s proposed new tax changes, from July 1, 2006, a taxpayer with a taxable income of $125,000 will pay $39,960 in income tax and a taxpayer with a taxable income of $50,000 will pay $10,860 in income tax. This means that the higher income earner in this example has an average tax rate of 32 per cent and the lower income earner has an average tax rate of 21.7 per cent. This analysis excludes the Medicare levy of 1.5 per cent.” I believe that our tax scales should be much flatter and the current system is very unfair. Obviously what you consider fair and what I consider fair can be very different. I do think it is very instructive to have the gross amounts out there. I am not alone in being staggered each quarter when I do my BAS and send off the EFT for the GST and Withholding Tax for my business.
I think the Future Fund is a marvellous idea. I had the misfortune of hearing some ABC talkback callers yesterday moaning about it- they obviously don’t understand the unfunded liabilities facing the government for superannuation. The Gov has a choice of funding this now or funding it through future revenues. To fund it now unburdens future cashflows for other uses – this is a good thing whatever your political hue. The argument that it will all go into the sharemarket is also a spurious one. Certainly a portion of it will go into the Australian share market, but if a reasonable asset allocation is chosen it will be spread across a wide range of sectors – cash, fixed interest, property, shares, derivatives and all those classes are both domestic and international.
Gordon’s response is typical of the uneducated opinions being pushed about the fund.
I also believe that Governments holding o fTelstra shares should be vested in the fund from the beginning and the Future Fund then divests itself of that holding excess to what they deem to be a desirable size for the portfolio.
The crap about fund managers looking to make a killing is a load of bunk. The market is extremely competitive and the Future Fund will be able to push hard bargains for their mandate. The Fund Managers have a right to be remunerated for their efforts.
I will make a disclaimer and state that I am one of the many unfortunates who has a six-figure amount tied up in Government Super, that they will not allow me to invest how I wish to, because the liabiltiy is unfunded. My super would be a lot healthier now than it is if I had of got hold of it four years ago when I wanted to.
I wonder about how sensible tax cuts are in the longer term. Consider that the economy has been doing well over the last decade but that there is no guarantee that it will do as well in the future. Consider also changing demographics. There is every chance that future surpluses will be smaller and less frequent, and future costs will be higher. Ie. the tax cuts are short sighted. Take into account that it is political suicide to raise tax rates. If the budget doesn’t look as healthy down the track, there will be less room for movement. In short, the tax cuts are bloody-minded political opportunism. They are not good policy.
In response to Bruce’s point at the top of this thread, I also think that putting people onto lower payments on the basis that this is going to help find a job is particularly nasty. The new applicants for both sole parent benefits and disability payments will now go on to Newstart will be triply disadvantaged. The base rate is lower by $40 per week, the taper rates are higher so they lose more money from working, and the indexation is based on CPI instead of average male earnings.
As an example, a sole parent working 20 hours per week will be $60-80 per week worse off than the current arrangements. A person with a disability working 20 hours per week will be almost $100 worse off.
I could understand the argument for introducing some activity testing for these groups, but this could have been done without making them worse off. These changes are little more than cost-cutting and for this to happen at the same time as tax cuts for those on 6 figure salaries is appalling.
I reported on the budget for the Canberra Times so you’ll have to read that to get my take on it in full, but in summary the budget papers show the government is taking more in revenue growth (a consequence of economic growth) than it is giving back in tax cuts. The growth assumptions in the budget underpin the whole deal – if we get 3% GDP growth next year, the government can afford all of tax cuts, new spending and a large surplus. The Treasury model has consistently underestimated revenue, and there has been an unexpected windfall to government in almost every economic update for the last 14 years – so at last they are adjusting their model (announced in some of the finer of the fine print). The treasurer was asked in the lockup about the lack of tax cuts for middle income earners and his answer was that they had an increase in family tax benefit last year. If you don’t have kids, tough! (disclosure – I have 2 young children, the so-called family policies actually benefit me; but I would be prepared to forego these for a more equitable system). There is a lot of new spending in this budget, allocated across a range of areas (concentrated on national security – which has not been mentioned much in coverage to date – and in implementing the welfare to work package, but across numerous other areas as well).
Razor, the future fund is actually just a device for maintaining a supply of government paper (the bond market has convinced the government that it needs to continue issuing official treasury bonds to set a reference rate – so surpluses and proceeds from the Telstra sale can’t any longer be used to retire debt). There is no problem as such with unfunded superannuation, the Commonwealth government has met its superannuation liabilities on an emerging cost basis since it established the CSS and PSS schemes (now closed) and could continue to do so easily until the last superannuant dies a century or so from now. However, putting the money aside until the unfunded liability is matched is a way to keep the money quarantined from other bids to use it (eg for national party pork barrelling). What does worry me is what restrictions (if any) will be placed on the use of the funds thereafter: or will it be the mother of all slush funds? Ideally, any revenues from the fund would be simply included in the budget, as with other revenues, and expenditure decisions taken in the same way as they are now. I hope that is what the legislation to establish the Future Fund will specify.
has anybody noticed that Costello and howard seem to think because the budget is in surplus it will be contractionary.
It is interesting that no-one seems to understand the Structural and cyclical budgets now.
I haven’t examined this in detail indeed don’t have the time to do it however it seems to me over the last few years the structural part of the budget must have deteriorated and this has been covered up by the cyclical part of the budget.
Chris richardson was alluding to this.
any ideas?
Stephen – I am wel aware of the arguments for maintaining a bond market, but to argue that this is purely a device for that purpose is disingenious. It is there to fund the unfunded liabilities. (What should happen is as soon as superannuants’ superannuation is funded they should be given the option of rolling over the capital to a fund of their choice.) Arguing that there isn’t a problem is twaddle, too. If there isn’t a problem how come all new superannuation funds are fully funded and, for example the Victorian Government has been funding, previously unfunded liabilities adn giving superannuants choice to exit? – Because the future funding requirements are a problem. To fund them now reduces the burden in the future.
As for your concerns about it being a slush fund – to assume that the trustees (I use the term loosely) would make anything but sound investment decisions impunes the future office bearers before they are in thejob, let alone guilty. How one could make money from pork barrelling, National Party or otherwise, is beyond me.
As for “Ideally, any revenues from the fund would be simply included in the budget, as with other revenues, and expenditure decisions taken in the same way as they are now.” No! The revenues are part of the return on the investments – there to be re-invested for the future use of the superannuants – not to spent by the government.
Guardian of what ever you are holding – in good economic times governments should generate surpluses and reduce debt so that in poor economic times they can run deficits and improve the economic situation. I know monetary policy has been in the forefront of economic commentary recently, but a bit of good old keynesian pump priming may be needed in the future. Maybe I’m a little simplistic, but I don’t think overly so.
Paul Norton – re unemployment
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Unemployment lowest since 1976
May 12, 2005
That is almost 30 years!!!
Dave, I wasn’t intending that as political advice for Labor. Neither party has been prepared to tackle negative gearing; I presume there are good political reasons for not doing so. Anybody care to explain what they are?
Robert Merkel, sorry I misse dyour question above and will now respond
“how much could you lower the top rate if you got rid of the capital gains tax concession and phased out negative gearing?”
The question makes it sound like they are not independent issues. But they are, although the tradeoffs may be seen as reasonable by some.
As to the question of quantum – I don’t know.
Which CGT concesssion do you mean? – there are a number. I assume you mean the 50% reduction in assessable gain for holding >12 months. I agree that concession should be removed. it creates a disparity between receiving income or capital gain and the reason for CGT is to remove that disparity.
As for negative gearing I have no problem with claiming a loss when one is incurred. If it was to be tightened up then perhaps losses should only be offset against income in the same sector – eg. real estate income losses only offset against real-estate income or captial gains.
If you think that negative gearing is bad because it forces up property prices- you aren’t going to get anywhere with me. The Real Estate market is the same as others – supply and demand determines price, andit ain’t the Federal Government that is restricting supply – for that you needto look at Satte and Local governments.
Razor, relax. Unemployment is measured in a completely different way now than is was in 1976 (both Labor and Coalition governments have consistently invented new ways of redefining unemployment and otherwise kicking people off the list, so to speak). A friend of mine and a veteran of various incarnations of the federal department responsible for unemployment welfare reckons that using the method used in the 1970s would calculate a rate around 12-15% nowadays. You can’t possible expect journalists fed a government line to get out of their lazy comfort zones, do you? Jeez mate.
(And don’t get me started on changes to the way inflation is measured, which is even more of a farce.)
-peter