Hillary Bray writes:

In
politics, the best ideas are often the simplest – and Democrat tax
spokesperson Andrew Murray has a very simple idea to lower income tax.
Oddly enough, you probably haven’t heard it.

It’s not a
be-all-and-end-all kind of idea, but it’s an idea that stops and makes
you think in what is often a grossly oversimplified area of debate.

Murray
circulated an article that canvassed it to at least five newspapers
last year when then-shadow treasurer, Mark Latham, came under criticism
from some of his own for calling for tax cuts for people earning up to
eighty odd grand a year – but it was rejected.

That was an
oversight. The Democrats might be slumping in the polls, but they are
still the third largest voting bloc in the Senate.

The opinion editors should have realised that. John Howard and Mark Latham surely do.

No
one seriously expects a double dissolution election. That means that
there will be seven Australian Democrats – no matter what happens at
the election – sitting and voting in the Senate until June 30 2005.

If
the Government wants to put tax changes through before an election –
and it’s dropped plenty of hints that this is the case – they’ll want
those seven votes. L-A-W tax cuts are still fresh in voters’ minds –
and tax bribes will need to look solid if they’re going to work.

Tax
will be on the agenda at the Labor National Conference next week. While
we cannot yet tell the final form of Labor’s policy, it is clear the
party wants to do introduce at least some concessions.

If
a Latham Government is elected, it will want to implement its proposals
quickly –while those seven Democrats are still around. Labor knows from
the L-A-W law experience and the backlash of 1993 how broken tax
promises can quickly start unravelling an election win.

When the major parties disagree, the Democrats have a crucial role to play – particularly on issues such as tax.

The
Greens and independents lack the interest, the skills and the resources
to make any significant contribution in this sort of debate. The
Democrats have 25 years of experience to draw on.

The Mayne Man likes to say that Crikey is like Las Vegas. We’re the best venue to stage to fight.

Murray deserves an appreciative audience – and he’s kindly given us his original article.

Tax is clearly going to be a crucial election battleground. Murray’s piece is now even more relevant.

He
writes: “[The Democrats] say we do not so much need increased taxes as
increased revenue… But tax cuts it will be. The two majors will have
the numbers. So, if tax cuts seem inevitable, what is the right way to
go?”

His suggestion?

“Target the tax and
welfare intersects. The working class and the middle class get the
rawest income tax deal. Low and lower income Australians struggle with
a tax threshold that kicks in at a ridiculously low level of $6000, and
they struggle with the highest effective tax rates of all because as
they earn more, welfare benefits reduce.

His hypothetical?

“Imagine
if the government had the ticker to raise the tax-free threshold from
$6,000 to $20,000. ACOSS, in their `Info 347′ June 2003 paper, say that
the average tax rate on all income for someone earning $20,000 a year
is presently 12 per cent, or $2,400.

“So, if the tax-free
threshold were raised to $20,000, that low-income wage earner would
have $2,400 more per annum, or $46.15 more per week disposable income
in their pocket.

“All Australians would get a tax cut
because raising the tax-free threshold to $20 000 would flow right up
through every income level…”

Murray estimates this would
cost $18 billion. That’s a lot of money – but there’s also a lot of tax
lurks, a lot of business welfare and a lot of lawyers who get paid a
lot of money to find loopholes out there. Fix some of those and you
have your starting point.

And that’s what Murray’s article is. A starting point to help us think beyond the obvious political posturing of the big boys.

Read it and see.

A considered tax cut

Big tax cuts are now inevitable.

Labor
has ensured it by endlessly rabbiting on about the Coalition being the
highest taxing Australian Government ever. (True but irrelevant, since
Australia is among the lowest taxing nations in the OECD.)

Labor’s
line is dangerous. It encourages a resistance to raising additional
revenue to invest in education, health and the environment.

The Liberals have guaranteed tax cuts by constantly saying surpluses must be paid back.

So the question is when.

My
bet is in the May budget. One reason is that such an election sweetener
is irresistible for the Government. Two, the Coalition would want to
spend any surplus money in advance, leaving Labor with nothing to
promise. Three, pay packets would only benefit from tax cuts
legislation in the second half of next year, when an election is most
likely. Four, tax cuts will be seen as some relief against expected
higher interest rates.

The Government have trapped Mark
Latham into virtually guaranteeing Labor support for raising the
present top tax rate of 48.5% from $62 500 to a much higher threshold.

ACOSS say anyone earning $100,000 has an average tax rate of 34 per cent on all income. Is that really that high?

The
well off have already had their tax cuts. The Coalition’s 30 per cent
rebate on private health insurance, costing the taxpayer nearly $3
billion a year, favours higher income earners. Capital gains tax was
halved just a few years ago, with Labor support, despite the Democrats’
opposition and despite the fact that it clearly mainly benefited those
wealthy Australians with investment and share portfolios.

Democrats
like me can cry all they like that Commonwealth revenue and expenditure
are still insufficient to meet the pressing and legitimate expectations
and needs of Australians for health, education and the environment,
amongst other things. (Health will remain an issue, even if Medicare
Plus passes the Senate.)

We say we do not so much need
increased taxes as increased revenue. We attack some tax expenditures
and tax wastage as the means of assisting the growth in revenue to meet
expenditure needs.

But tax cuts it will be. The two majors will have the numbers.

So,
if tax cuts seem inevitable, what is the right way to go? What could or
should be the Government priorities and how much money would they have
to spend?

The latter we don’t know, but priorities differ. If you wanted to keep the status quo, then bracket creep would be the target.

Bracket
creep is the impact of inflation related salary increases on the static
progressive marginal tax rates. Indexing tax rates to end the bracket
creep problem would result in a cost to the revenue by 2005-06 of an
estimated $3.5 billion per annum. $3.5 billion less tax to pay annually.

If you wanted to get people off welfare and into work you would target the tax and welfare intersects.

The
working class and the middle class get the rawest income tax deal. Low
and lower income Australians struggle with a tax threshold that kicks
in at a ridiculously low level of $6000, and they struggle with the
highest effective tax rates of all because as they earn more, welfare
benefits reduce.

The most important distributive mechanism for improving the lot of low-income Australians is to improve their disposable income.

From
the employer’s perspective, if the disposable income of low-wage
earners increases as a result of tax cuts, it could take some of the
stress and some of the tension off the low-wage industrial case that
has to be mounted annually.

Imagine if the government had
the ticker to raise the tax-free threshold from $6,000 to $20,000.
ACOSS, in their `Info 347′ June 2003 paper, say that the average tax
rate on all income for someone earning $20,000 a year is presently 12
per cent, or $2,400.

So, if the tax-free threshold were
raised to $20,000, that low-income wage earner would have $2,400 more
per annum, or $46.15 more per week disposable income in their pocket.

All
Australians would get a tax cut because raising the tax-free threshold
to $20 000 would flow right up through every income level and would
cost a massive $18 billion a year.

That would have to be partly paid for by the richer Australians losing tax concessions.

This
is because Access Economics’ projected ongoing surpluses of around $7
billion would never be enough. Massively reducing corporate welfare,
welfare for the wealthy and various tax lurks would be necessary.

The
Democrats argue there is at least $7 billion that could be stripped out
of the $30 billion worth of tax expenditures or concessions, but we
prefer that spent on improving essential services.

And then
there is tax arbitrage – the loss of revenue because smarties work the
gap between income tax rates and capital gains and corporate tax rates.

Despite major reform, the tax act still encourages tax manipulation.

What
is needed is comprehensive reform that broadens the base, lowers
effective tax rates, produces more revenue, and delivers more equity
and less inequality. A tall order!

We are unlikely to get
comprehensive reform next May, so if Labor and the Liberals insist on
tax cuts, lets concentrate on low and middle income Australians.

Andrew Murray’s website is at www.andrewmurray.democrats.org.au