Tax burden still increasing

Despite the Budget rhetoric, almost nothing has been done to stop the steep increase in Australia’s tax burden. We have tax cuts, but they are almost exactly offset by tax increases. As a result, the upwards trajectory remains: the tax to GDP ratio is forecast to go up by 1.4 percentage points over the five years from 2015-16.

The personal tax threshold of $80,000 is set to increase to $87,000, costing $0.95bn in 2017-18. However, this cut pales into insignificance with the $12.5 billion tax cut that, according to CIS modelling, would be required to fully address bracket creep in that year. As a result, the impact of bracket creep remains largely unaddressed. And there is no plan to address the ongoing impact of this tax hike every year such as through indexation of the tax thresholds.

The Budget makes a welcome commitment to reduce the company tax rate to 25%, which will ease our uncompetitive corporate tax burden. However, this cut is phased in over a 10-year period, and other countries are likely to reduce their company rates 

over this decade as well. As a result, Australia’s relative position may remain unchanged. The company tax cut will primarily result in increased foreign investment and have a smaller impact on domestic investors, because of the imputation system. However, there are risks that the various new tax avoidance measures will dissuade the very investment that the tax cut is designed to attract.

Treasury modelling released with the Budget supports a central CIS argument: tax cuts provide the greatest economic benefits when they are financed by removing wasteful government spending, rather than by increasing other taxes. Yet the Budget takes the second funding approach, meaning the economic benefits of tax cuts are smaller than they could be. We have a right to be unimpressed.