Cutting income tax: can we add the bacon to the hamburger and milkshake tax cuts?

The key problems in personal income tax are excessive marginal rates and an increasing overall average tax rate as bracket creep goes unchecked. Political objectives aside, there is a sound economic case for tax cuts. The government should give priority to instituting a system of automatic annual indexation of bracket thresholds to average wages and to cutting marginal rates. Going further, more ambitious reform options should be considered, such as abolishing the tax-free threshold in order to cut marginal rates; curbing deductions; and removing distortions in taxation of personal saving. Large income tax cuts are very costly to revenue and the scope is limited over the next few years by the pressing need to bring the budget back into balance and in the longer term by upward pressure on public spending. This constraint reflects the failure of successive governments to wind back expenditure from bloated levels. A more disciplined approach to public spending provides the key to larger medium-term income tax cuts. Until that happens, personal income tax relief is likely to be modest and do no more than check the rising trend in the average tax rate.