Monday, October 15, 2007

Staged, substantial tax cuts are sound policy

The phased program of tax cuts offered by the Treasurer Peter Costello today is sound policy. Taxes are raised in order to pay for public goods and to fund social security programs. If tax receipts systematically exceed expenditures – as is now happening - taxes should be cut. It is our money. That the economy is operating at very high levels of economic activity, with only 4.2% unemployment and inflation next year forecast to run close to the upper range of RBA tolerances, suggests that immediate significant tax cuts might put undue pressure on interest rates.

But longer-term it would be crazy to run structural surpluses just to constrain private sector demand – moreover these cuts will leave the budget in surplus above 1% of GDP with growth in the economy of 4.25% over 2007/08 compared to 3.75% in the May budget. Unemployment is forecast to continue to fall with 100,000 extra jobs over the next year.

Most importantly the rise in the tax threshold for low income workers to $16,000 by 2010 will encourage them to join the workforce – about another 65,000 according to Treasury modelling.

Since 2000 the Government’s tax cuts are estimated to have generated over 300,000 jobs.
With these reforms 85% of taxpayers will be on a top marginal rate of 30% or less. Some 98% would be on a top rate of 35% or less, with 45% paying only the minimum rate of 15%.

The cumulative effects of tax reform are attractive.The proposed new tax cuts amount to $34 billion over 5 years.

Moreover, the move is smart politics because it forces the Labor Party to prioritise any big spending proposals that it will come up with against the opportunity cost of foregoing tax reform.

The Age summarised key aspects of detail in the policy:
  • Within 5 years the top rate would be 40 cents in the dollar.
  • The tax cuts will deliver a cut of around $20 per week to a person currently on average weekly earnings - around $50,000 - from July 1, 2008, rising to around $35 per week from July 1, 2010.
  • For a family where the principal earner is on average weekly earnings and the second income earner is in part-time work - earning 40% of average earnings - the income tax cut would be around $30 per week, rising to $50 per week in 2010.
  • Under the new plan, low income earners from the 2008-09 tax year would see their tax free threshold rise from $11,000 to $14,000.
  • The 30% threshold would increase from $30,001 to $34,001 and the 40% threshold would increase to $80,001.
  • The 45% threshold would increase to $180,001 as previously announced in the budget.
    From July 1, 2009, low income earners would be tax free up to $15,000, the 30% threshold would increase to $35,001, the second top marginal rate would be cut from 40% to 38% and the top marginal rate would be cut from 45% to 43%.
  • From July 1, 2010 , low income earners would be tax free to $16,000, the 30% threshold would increase to $37,001, the second top marginal rate would be cut from 38 to 37% and the top marginal rate would be cut from 43% to 42%.
Encouraging more people into the workforce, by reducing their effective tax-free threshold and particularly by lifting the threshold up until which you pay 15 cents in the dollar, is boosting the number of people joining Australia's workforce.

In reference to Kevin Rudd and his as yet unannounced tax policies Prime Minister John Howard said the across-the-board tax relief was a better way to relieve cost-of-living pressures on families than targeted housing affordability policies or cutting petrol tax. You would have to agree.

With Kevin Rudd as PM and a trade union dominated front bench we can expect instead of tax cuts and a growing economy higher unemployment and higher inflation as unionists 'fight' for the rights of their members. It is an unattractive and foolish alternative to the great prospects the Australian economy has. Its the reason I’ll be voting for an experienced, better team.


Bring Back CL's blog said...

jibber jabber.

If the budget remains at 1% of GDP then how in heavens name does the structural part of the budget not deteriorate.

how does wage rises from EBAs or common law contracts increase costs?

Spiros said...

"across-the-board tax relief was a better way to relieve cost-of-living pressures on families than targeted housing affordability policies or cutting petrol tax. You would have to agree."

Presumably then Howard will announce that he is withdrawing his $7000 first home owners grant which in the past he has said is a great help in make home ownership more affordable.

You would have to agree that all this does is push up house prices, because first home owners spend this money by bidding higher at ayctions, or otherwise agreeing to pay more.

hc said...

I agree the home owner's grant is dumb - the silly idea is that the way to make something more affordable is to subsidise it. Wrong the price, as you say, will reflect the grant if there aare even a few new home buyers in the market.

The difficult thing is that once these schemes are introduced they are politically difficult to reverse. Like tariffs. But, yes, they should be. And both leaders should commit to remove them.

observa said...

The FHOS is probably little more than a Federal transfer payment to the States' stamp duty offices nowadays.

hc said...

By the way the grant should increase such transfers.

Bring Back CL's blog said...

Notice how our Arry cannot dispute the structural detriroation of the budget nor make the case how ALP wage policy pushes up costs!