Aussies Need to Look Beyond Nose, Cut 49% Tax Rate, Fraser Says

Australia needs to overhaul policy and cut the 49 percent top tax rate or face lower living standards, the nation’s top economic bureaucrat said.

The country needs “to look beyond our own nose and accept that structural change is sometimes painful,” Secretary to the Treasury John Fraser said in a speech Friday. “Unless we lift productivity growth, through reforms across all sectors of our economy, we face a future of stagnant and possibly declining living standards.”

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 booming Asia as incentives to work harder and earn more recede.

Fraser, a former chief executive officer of UBS Global Asset Management, cited a study by the National Bureau of Economic Research in the U.S. to buttress his argument. It showed that a 10 percentage point reduction in a country’s top tax rate saw it retain 1 percent more domestic investors and attract 38 percent more foreign ones.

Australia’s top rate of 49 percent kicks in at A$180,000 ($135,000), or 2.3 times the country’s average full-time wage, Fraser said. That’s “a relatively low threshold,” he said, while adding that the top 10 percent of tax payers contribute 46 percent of all personal income tax.

Bracket Creep

“Over the next decade more Australians will move into the top tax brackets,” Fraser told a conference of economists, estimating the proportion in the two highest tiers will increase from 27 percent to 43 percent in the fiscal year ending June 30, 2025.

He called for greater use of indirect taxation to ease the budget’s reliance on high personal and corporate rates and also railed against stamp duties raised by the states. Describing them as “one of the most inefficient and distorting taxes,” he said they nonetheless account for 26 percent of revenue in the country’s states and territories.

Yet Prime Minister Tony Abbott’s government, who Fraser serves, has ruled out altering levies on the private pension system, declared tax breaks for investors in residential real estate will remain in place, while saying it has no plans to raise or broaden Australia’s goods and services tax.

Instead, it 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.

“I worry that we are overly complacent about our longer-term outlook and, especially so, in a region that’s pushing ahead at a remarkable rate of knots and may leave us behind,” Fraser said. “Some of this complacency can be explained by the fact that the Australian economy is now entering its 25th consecutive year of growth.”