MYEFO tax pain is personal - The Centre for Independent Studies
Donate today!
Your support will help build a better future.
Your Donation at WorkDonate Now

MYEFO tax pain is personal

gst money tax financesAre you happy that your taxes are set to go up over the next three years by about $1,500 per taxpayer? Or have you been snowed by all the arguments that we have ‘massive revenue shortfalls’?

The mid-year budget update released on Tuesday confirms that taxes are on their way up, with tax revenue as a share of the economy estimated to be 22.8% this current year, and forecast to reach 23.6% in three years’ time. This is a tax increase in anyone’s language.

The forecast increase in tax as a share of the economy over the next three years is 0.8 percentage points, which translates to a $15.3 billion increase in 2018–19, or $600 per person. But this underestimates the impact on taxpayers. Pretty much all of the tax increase is due to personal taxes going up as a share of the economy, so the tax should only be allocated to personal taxpayers. Only around 40% of the population do pay this tax, so the cost per taxpayer is likely to be around $1,500.

So much for the argument that we have a revenue shortfall.

The other forecasts revealed in the budget update (also known as MYEFO) compound this problem. Forecasts for growth have been revised down substantially: the economy is expected to be, in cumulative terms, almost 2% smaller in 2018–19 than originally forecast. Economic growth is even more sluggish than the underwhelming figures we saw in the Budget, yet taxes are set to go up.

Wages growth is largely unchanged from previous forecasts — but unchanged at a pretty weak rate of growth. Treasury is forecasting real wages to grow at an extraordinarily slow rate of half a percent in each and every year until 2018–19, except for one year (2017–18) when it is in fact even slower: 0.25%. While unemployment is forecast to be lower than at the budget, there is bad news for business investment, which is forecast to fall even faster than originally predicted.

The interactive graph below shows the change in the forecasts for economic growth and the budget deficit since the last forecasts contained in the Budget. It also shows the forecast increase in the tax to GDP ratio relative to the current year (2015–16).

So we have tax increases with slow economic growth, very slow wages growth and plunging business investment. It shouldn’t take a genius to see this is a problem. In addition, the current share of the economy going in tax is around the various long run averages — so there is no need for tax increases to ‘restore’ tax levels to historical rates.

Based on recent research by the Centre for Independent Studies, it appears that most of the expected increase in tax over the next three years is due to bracket creep, which occurs because tax thresholds aren’t indexed to inflation. It is all too easy for bracket creep to happen, because it can occur without legislation: imagine how difficult it would be for a government of any kind to obtain approval for a tax increase of $1,500 per taxpayer with no compensation.

The tax increases forecast in the budget update should not be occurring. Bracket creep should be stopped by the indexation of tax thresholds. This of course would have a substantial impact on the budget, but the alternative — large tax hikes imposed on taxpayers with no debate — is a cost that we shouldn’t have to bear.

Michael Potter is Research Fellow in the Economics Program at the Centre for Independent Studies. He is co-author (with Robert Carling) of the report Exposing the stealth tax: the bracket creep rip-off, which was released on Sunday.