Taming the Monster: Reforming Personal Income Tax

Robert Carling
05 April 2016 | Research Report 12
Taming the Monster: Reforming Personal Income Tax

Without any change in personal income tax rates or thresholds, the tax burden will increase substantially and many more taxpayers will face high marginal rates over the next few years.

The adverse economic impact of personal income tax is already high and is set to rise further if these trends go unchecked.

Increasing the thresholds for some or all marginal tax rates to match past growth in average earnings would alleviate the effects of bracket creep. While this has been the typical policy response in the past, it is a band-aid rather than a reform.

Genuine reform would include cuts in marginal rates – including the top rate — and automatic indexation of thresholds to prevent future bracket creep. This approach would provide a long-run supply-side boost to economic growth. A good long-term goal should be a maximum marginal rate of 35%.

Concerns about the ‘fairness’ of such an approach are misplaced. The trend has been for personal income tax to become more, not less, redistributive notwithstanding tax cuts since the 1990s. It is not clear why the system needs to be made more progressive, but that is the implicit judgment behind much recent commentary on tax issues. Indeed, reforms that make the system less progressive should be considered if there is a clear economic pay-off.

Cuts in marginal rates must be reconciled with budget repair. While cuts in marginal rates would help finance themselves in time by providing a boost to economic growth, the initial cost to revenue would be large. Even a medium size tax cut faces this dilemma. It is best resolved by more disciplined management of public expenditure.

Buy Hardcopy
Latest Publications

Fairer Paid Parental Leave
Matthew Taylor
07 July 2014 | T30.11

Australia spends just under $1.4 billion (2012–13) on statutory Paid Parental Leave (PPL) to provide more than 130,000 parents with up to 18 weeks of parental leave paid at the full-time minimum wage. The Abbott government proposes to pay primary carers at their pre-birth wages up to a cap of $100,000 for up to 26 weeks. This policy would dramatically…

Withholding Dividends: Better ways to make the public sector efficient
Alexander Philipatos
29 May 2014 | T30.10

As the commission of audit has uncovered, the government must make significant cuts to spending to get the budget back into surplus. In the quest to find savings, the government cannot ignore the public service. For almost 25 years the government has turned to the efficiency dividend to find budget savings and improve efficiency in the public service. But the…

School Funding on a Budget
Jennifer Buckingham
30 April 2014 | T30.09

Government expenditure on schools has more than doubled in real terms in the last 25 years, while student numbers have only grown by 18%. Funding for school education was 3.1% of GDP in 2012–13, and is projected to reach 3.4% by 2025 under current predictions of economic growth. Large increases in real per-student expenditure have not been accompanied by improved…

Submission to the National Commission of Audit
Alexander Philipatos, Jennifer Buckingham, Jeremy Sammut, Robert Carling, Simon Cowan, Stephen Kirchner, Trisha Jha
01 April 2014 | T30.08

The federal government’s Commission of Audit (CoA) was established in 2013 to review the performance and role of government. This publication is an edited version of the CIS submission to the CoA listing practical solutions aimed at cutting government expenditure. The government should adopt a dual approach to its review of spending. First, spending cuts can save the federal government…

States of Debt
Robert Carling
20 March 2014 | T30.07

While Commonwealth government debt has been the focus of attention recently, this report takes a broader view by bringing state debt into the picture. State debt, like that of the federal government, has also risen dramatically since 2007, when net debt was negative. In the six years to 2013, states added $70 billion to their general government net debt, to…