Yet more on the Single Rate Tax (part 2)

Now from the right. John Stone:

John Stone: Unjust, unimaginative gall of withholding cuts

May 02, 2005

NEXT week's federal budget will apparently provide no relief from our personal income tax burdens. If so, public reaction will be justifiably savage.

In an April 7 interview the Prime Minister said the budget would "have a strong surplus, quite deliberately", because "we need it". This would be after further spending on quite a large agenda of welfare reforms.

The latter was not, he said, "a cost-cutting exercise". Indeed, the now completed Expenditure Review Committee process reportedly did not involve any significant attempts to find savings by abolishing or even cutting existing spending programs.

This general impression of a government complacent about its past high-spending, high-taxing record and devoid of any drive, let alone imagination, to reform our personal income tax system, was reinforced by the Treasurer on the ABC's Insider program on April 24. The budget's key theme is "sustainability". Whatever that may mean, it does not seem to include general tax relief.

To see the absolute gall of such an outcome, consider a few figures. The last budget put this year's underlying cash surplus at $2.4billion, and that for 2005-06 at $1.6billion. More recently, the mid-year economic and fiscal outlook incorporated the new policy expenditures resulting both from the Government's pre-election spending spree and from its election campaign spending promises, totalling $1.6billion in 2004-05 and $2.9billion in 2005-06.

Yet the underlying cash surpluses rose sharply, to $6.2billion and $4.5billion respectively. Last month's Access Economics business outlook saw the surplus outcomes for both years "likely to out-perform official forecasts" even further.

Can it really be that, apart from new spending on its welfare reforms, the Government is simply proposing to hang on to these huge surpluses quite deliberately? To lend some verisimilitude to this otherwise indefensible policy, it has devised a so-called future fund, into which it will pay these surpluses (plus most of the proceeds from Telstra and other future asset sales) to fund, over time, the present large public service superannuation accounts deficit.

It has always been hard to take the future-fund notion seriously. When it first surfaced as a broader inter-generational fund, the secretary to the Treasury, Ken Henry, was openly, and rightly, scathing about it. Now that ministers have decided to erect this nonsense on stilts at the apex of this and future budgets, he has understandably fallen silent.

Our Government should certainly provide annually in its budget for the future pension liabilities it is now accruing. And funding liabilities previously accrued is an appropriate use of asset sale proceeds. But requiring current taxpayers to make good, from their present heavily taxed incomes, the fiscal failings of the past, is as unjust as it is financially unnecessary.

The post-election period has seen a stream of proposals for reforming our personal income tax system. Of course, no reasonable person has expected the Government to do so overnight in next week's budget. What reasonable people have had every right to expect, however, are four things.

First, the Government next week should clearly and unequivocally commit to a significant reform. Second, it should clearly set out that reform's key objectives, including a broad timetable. Third, it should take the first steps towards those objectives, using the huge surpluses now available and in prospect. Fourth, it should stop talking nonsense about hoarding those surpluses for the benefit of some future generation much richer than us.

As to detail, I note two generalisations and three particulars. The first generalisation is that tax reform is best associated with spending restraint. The second is that, so long as we have high marginal personal tax rates, taxpayers will move heaven and earth to (legally) avoid them.

In Kerry Packer's famous words to a parliamentary committee, they will do so because they rightly object to handing over their incomes "to be spent by people like you". The three particulars are, first, the need to align the current 42 and 47 per cent personal tax rates with the 30 per cent company rate (thereby removing the most significant tax avoidance avenue).

Second, to begin gradually removing the $6000 zero-rate threshold, the second-most important tax avoidance area, containing about $70billion of untaxed income and constituting the greatest single obstacle to reform.

Third, to aim ultimately for a single rate tax (thereby automatically removing bracket creep) at not more than 25 per cent, and preferably 20 per cent.

The savagely punitive nature of our present personal income tax arrangements is now painfully evident to everyone enmeshed in them. The Government's apparent disregard of that political reality, if confirmed next Tuesday, will cost it dear.

John Stone, a former Treasury secretary and National Party senator, is conference convener of the Samuel Griffith Society

.