Tax Cuts Dead in Australia as Abbott Cuts Review Off at Knees

Australians face no respite from income tax rates of up to 49 percent as Prime Minister Tony Abbott declares swathes of the government’s revenue base off limits to reform, potentially condemning the country to slower growth.

Abbott on Wednesday ruled out altering levies on the private pension system, following a declaration earlier this year that tax breaks for investors in residential real estate would stay while saying he had no plans to raise or broaden Australia’s goods and services tax. That leaves his government with little room to maneuver on reducing the burden on income.

“We do need to raise more revenue and we need to look at doing that in the most effective, efficient and least distortionary way,” said Heather Ridout, a member of the Reserve Bank of Australia’s board and former head of the nation’s peak manufacturing body. “Ruling out changes to GST, ruling out a number of other areas, is not helpful.”

Australia relies disproportionately on income tax by developed-world standards and the International Monetary Fund warned last month that a failure to modernize the system, among other needed reforms, would see the economy’s potential growth rate slip to 2.5 percent from above 3 percent. Moreover, the economy will be rendered increasingly uncompetitive with the booming Asian region as incentives to work harder and earn more recede.

Abbott is betting on growth returning to 3.5 percent in the years ending June 2018 and 2019, a level achieved only once since 2008, to help repair the government’s budget deficit.

Hope for Best

The Grattan Institute, a think tank in Australia, describes the government’s strategy as “hoping for the best” and has instead proposed reducing tax concessions on private pensions, known as superannuation, changing capital gains tax, broadening the GST and introducing a property levy in response.

Such measures “would all materially increase government revenue with limited collateral damage to the economy and the most vulnerable in our society,” Grattan’s John Daley and Danielle Wood said in a report. Their prescriptions are similar to tax changes proposed by the IMF at the conclusion of its visit to Australia last month.

Australia’s highest earners face a tax rate of 45 percent on income over A$180,000 ($137,700) and also pay an extra 2 percent medical levy and 2 percent budget repair levy, making a total of 49 percent. That ranks as the 12th highest among 142 countries, according to KPMG International.

Tough Sell

The government’s own tax review is currently accepting submissions that will close in three weeks’ time. Yet critics say the process has been neutered by Abbott’s insistence on quarantining large areas from change.

“We have made a very clear decision that we aren’t ever going to increase the taxes on super,” the prime minister said July 1, referring to private pensions. Treasurer Joe Hockey said March 31: “we haven’t got a plan to increase or broaden the GST.”

In the past 30 years there have been two major reforms to the tax system, by Labor Prime Minister Bob Hawke and his Treasurer Paul Keating in 1985-86, and conservative Prime Minister John Howard and his Treasurer Peter Costello in 2000.

On either side of those successes came two spectacular defeats: the conservatives lost the supposedly unloseable election in 1993 when they proposed sweeping tax reform; and Labor was drummed out of office in 2013 after introducing taxes on mining profits and carbon emissions -- both of which Abbott repealed.

RBA board member Ridout advocates lifting the 10 percent consumption tax, which she says is “very pro-productivity” compared to other levies, while acknowledging its impact falls heaviest on the poor. That would require compensating low-income earners, which is difficult given the government’s budget faces “deficits for as far as we can see,” she said.

“It’s a perverse thing,” she said. “It makes it more urgent, but it makes it more difficult, which is why it’s been ruled out.”

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