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The Government Is Cutting Taxes With One Hand And Raising Them With The Other

The increase in personal tax through the Medicare levy is reflective of a broader increasing reliance on the PAYG taxpayer.

19/09/2017 10:48 AM AEST | Updated 19/09/2017 10:49 AM AEST
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"For someone earning $85,000 a year, the tax rise from the increase in the Medicare levy is bigger than the tax cut that was delivered last year."

There are two pieces of legislation the Turnbull Government has on the books for Parliament to debate in the next sitting. The first is the corporate tax cut for companies bigger than $50 million. At a time when the budget is under real pressure, this is the second half of the Government's company tax cuts which represents a hit to the bottom line of $65 billion over the next decade.

But last week there was another piece of legislation on the books. The Government wants to increase personal income tax on every PAYG worker earning more than $21,000 a year via the Medicare levy. This is part of more than $20 billion in tax rises that the Treasurer introduced in the last Budget, which was left unmentioned and unannounced during last year's election campaign.

The increase in personal income tax doesn't fit into the Liberal narrative, but it's a fact. Liberal spokespeople like to trumpet the fact that they believe in lower personal tax, but they will go to the election promising just the opposite.

The increase in personal tax through the Medicare levy is reflective of a broader increasing reliance on the PAYG taxpayer.

It wasn't that long ago that we were told something very different. On becoming treasurer, Scott Morrison told us that he believed passionately in personal income tax relief. He told us that dealing with bracket creep was something that would drive him as Treasurer.

Indeed Scott Morrison did deliver some tax relief in his first budget, lifting the $80,000 tax threshold to $87,000 with Labor's support. But this relief is dwarfed by the increase in tax revenue from the tax rise entailed in the Medicare levy increase.

The tax cut for people earning more than $80,000 cost the budget $4 billion over the relevant forward estimates. The tax rise via the Medicare increase takes more than double that amount back, raising $8.2 billion over this year's forward estimates. For someone earning $85,000 a year, the tax rise from the increase in the Medicare levy is bigger than the tax cut that was delivered last year.

Talk about giving with one hand and taking away with the other!

The Government covers this tax rise under the alibi that it needs to fully fund and protect the NDIS. There are two major flaws with this argument. Firstly, the Productivity Commission has said that NDIS costs are running in line with their original projections, no cost blowout here. Secondly, the Government has committed to provide its share of the NDIS and has signed agreements with every state for the NDIS to be delivered. This money is coming from consolidated revenue just like the funding for defence and education.

Is the Turnbull Government proposing to renege on those agreements? No, I would not accuse it of that. Their scare campaign on NDIS therefore falls flat.

The NDIS is fully funded and therefore the real debate is about how best to deliver a fairer tax system.

The increase in personal tax through the Medicare levy is reflective of a broader increasing reliance on the PAYG taxpayer. As a recent Parliamentary Budget Office Report showed, the average tax rate on personal income will rise from 22.7 percent to 25.9 percent over the next decade. While the Government's corporate tax cut is unfunded in specific terms, the corporate tax cut is more broadly paid for by PAYG tax payers paying more through bracket creep.

Of the total real growth in tax receipts over the next decade, the PBO estimates that 56 percent owes to higher taxes on workers. The Government's plan to increase income taxes through the additional Medicare Levy will contribute to this.

Here's the key point, both sides of politics recognise that taxes need to go up: The Liberal Party has the blunt instrument of an increase in personal tax for all taxpayers earning above $21,000 through the Medicare levy. The Labor Party believes in a more targeted approach which begins higher up the income threshold. But the Government is not in a position to lecture Labor about tax when its $20 billion plus in tax rises in the Budget lack a mandate and affect so many.

Labor has taken a different approach. We are being upfront with our plans and carefully laying out those tax concessions that are no longer fit for purpose and need reform in the name of budget repair.

Negative gearing reform, capital gains tax reform, family and discretionary trusts reform: all of these have been in the too hard basket for too long. We are moving them to the 'To Do' list.

These reforms mean that Labor has a credible path back to budget balance. And when budget balance is achieved, tax relief can be considered.

In the meantime the Liberals will continue to with their scare campaigns on tax. But as long as their policy is to increase tax on everyone earning more than $21,000 there will be a rather large hole in that campaign.

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