Government Needs To Worry About Real Tax Reform, Not Just Bracket Creep

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The Federal government has confirmed it intends to address the problem of the so called ‘bracket creep’.

Bracket creep, if you’re not familiar with the term, directly affects your take home earnings. It does this by pushing your income into higher tax brackets as inflation rises.

It goes without saying that taxpayers don’t take too kindly to bracket creep. It not only negatively affects disposable incomes, but it stunts economic growth as consumers have less money to spend.

Here’s what Treasurer Joe Hockey has to say on the issue:

We must address bracket creep because it’s better to leave money in the pocket of the taxpayer.  

[We should] resist the temptation for the government, using taxpayers’ money, to provide financial support to individuals and families’.

He’s right in one respect. Most taxpayers, as I’m sure you’ll agree, prefer to have more money to spend, not less.

But it’s warped logic to assume that bracket creep will make households more dependent on welfare payments. Mr Hockey isn’t stupid, after all. There’s no way all the tax revenue from bracket creep would flow back to worse off families.

Bracket creep is a net gain for the government, however they spin it.

The amount of tax revenue we’re talking about is not to be sniffed at, either.

According to accounting firm PwC, bracket creep could cost taxpayers $45 billion in the next five years. That would come as handy pocket change for the government, already reeling from a $40 billion budget deficit.

Addressing bracket creep is complicated

Bracket creep will hit middle to low income families the hardest. By contrast, workers on higher incomes barely feel the effects of bracket creep. At higher thresholds, there’s a smaller chance of breaking into a higher tax bracket.

That leaves middle income households at biggest risk of bracket creep. Mr Hockey acknowledged as much:

Bracket creep will mean that the average full time wage ($77,000) will soon sit in the second top income tax bracket of 37 cents in the dollar’.

How does Mr Hockey plan on addressing bracket creep, anyway? That’s not altogether clear.

But the economy is doing a fine job of slowing bracket creep without the government’s help. Wages are growing at 2.5%, the lowest level in over two decades.

But slowing wage growth doesn’t really help the government. This is an institution that survives on taxes. They can deny it all they want, but more taxes are always a good thing as far as the government is concerned.

If they were serious about addressing bracket creep, they would adjust the tax scales to inflation.

Keeping the income tax scales fixed makes the effects of bracket creep all the worse. For example, fixed scales will leave someone earning between $35,000 and $40,000 paying 25% more tax by 2018. Adjusting for inflation instead would go a long way in helping low to middle income families cope with rising inflation.

But the government isn’t going help taxpayers by adjusting taxes to inflation. It’s too sensible for their liking. It would weaken their tax revenue base.

A wider tax review

The government will have no choice but to take a broader look at tax reform.

Treasurer Hockey has already ruled out changes to negative gearing, GST, or super tax concessions in the short term. Not because they are bad ideas. They simply carry too much political risk, especially in the lead up to an election.

The government is essentially absolving themselves of all responsibility, pandering to the crowd instead.

But there’s no getting away from the fact that the tax code needs major reform. The budget deficit is spiralling out of control as taxes from mining operations decline. That means they’ll need to look elsewhere to make up the shortfall.

Eventually, those in power will need to make some hard decisions. But we’ll be waiting until after the election to see any movement. Whether it’s the ALP or Liberals, someone needs to take bold action.

PwC’s Tom Seymour says the government should consider reducing personal tax, and raising the GST to 15% instead. Doing this would raise more revenue than the expected take from bracket creep. Mr Seymour explains:

‘[Bracket creep is] three times the cost of broadening GST to food, health and education at $13.5 billion. [It’s also] under the cost of broadening and raising the GST to 15% at $53 billion’.

But Hockey isn’t budging. He says there’ll be no GST reform without bipartisan and state support. It’d be political suicide prior to an election for the government to slug everyone with a GST tax hike.

That means broader tax reform will remain off the table for now. As long as that’s the case, don’t expect the government to lose sleep over bracket creep.

Mat Spasic,

Contributor, The Daily Reckoning


PS: One tax reform the government could look at is the growing issue of super concessions. Addressing superannuation tax breaks could plug holes in the budget deficit. But any changes to super should come as a result of a broader review of the system.

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