Tax Cuts and Tax Reform

Published on 22 Feb 16.

So everyone wants Tax Reform do they?

What"s it going to look like? What do we want tax reform to do?

Do we want it to be fair, simple or efficient or even maybe all 3 at once?

Others want reform to grow the economy and make the country more competitive.

(Personally, I"ve never heard a client saying I"m not going to work better or more productively because the tax rate is too high or the system is broken. Therefore I will not bother with this analysis as it would give oxygen to nonsense).

After 30 years as a suburban accountant in public practice, having witnessed myriad changes to the Tax Act I can assure you that achieving all 3 objectives in any piece of tax legislation or Court decision is an impossibility.

So whatever reform is enacted it will need to be within a package of measures where the overall impact should be fair, as simple as practicable and efficient.

Examples of this dilemma include Flat Tax and changes to GST. Lets examine them in detail.

Flat Tax

A flat tax regime is seen by many as a simple tax. But that does not mean it is a fair tax. Let"s examine how this affects different tax payers.

A millionaire pays $460,000 in tax now. A wage earner on $50,000 pays $8,500.This is all calculated using the various tax thresholds of 19%, 30%, 38% and 47%.

However, under a single flat rate tax system of say 20% on all income as proposed by Neo Con politicians, economists and commentators i.e. the Murdoch press,:

1. A millionaire would pay $200,000 in tax. That"s $260,000 less tax than he does now.
2. The wage earner on $50,000 would pay $10,000 in tax. That"s $1,500 more tax than he does now

The result is a very Simple tax system but it probably fails when its judged on equitable grounds, given the country still believes in a progressive tax system.

GST Changes

Theoretically this is a Simple & Efficient tax, especially at 10%. However, the hundreds and possibly thousands of pages of the Tax Act devoted to this tax is sufficient testimony that it is anything but Simple..

Bookkeepers and accountants compliance costs to business have in many cases quadrupled because of the GST introduction in 2000. So it"s not efficient for business.

Where business proprietors prepare their own quarterly BAS (GST) Reports to the ATO, anecdotal evidence from my office is that over 50 hours per year are spent by small businesses in reporting this tax to Government.

At $50 per hour, that"s an opportunity cost of $2,500 each year which business never incurred before the GST. Should those hours have been better spent in growing their business and employing people rather than in acting as tax collectors for the ATO.?

But GST fails worst when Fairness and Equity is considered. GST is a regressive tax which means lower and middle income earners pay more GST as a percentage of their income than the wealthy.

However, income tax is a progressive tax, in that the wealthy pay a higher percentage of tax on their income than the poor and middle income earners.

How is this possible? Surely the wealthy pay more GST because they spend more. Yes that"s true. But the amount of GST paid is a much smaller percentage of their income compared to lower and middle income earners.

This indisputable reality has been defined. It"s called The Marginal Propensity to Consume (MPC). You will not hear it discussed by those advocating an increase in the GST rate or broadening the GST base. Yet is a very real, proven and well known concept understood and accepted by all economists.

Empirical studies confirm the wealthier the taxpayer the LESS they CONSUME GST taxed goods and services as a percentage of their income. They SAVE more into Superannuation, Shares, rental properties and bank deposits on which no GST is paid.

The same studies confirm the opposite for the middle and lower income earners. They CONSUME MORE GST taxed goods and services as a percentage of their income. Conversely they have little to SAVE or spend in GST free services.

The following example proves the above truism.

Let"s take two married males with non working spouses and 2 children

Mr James Havitall earns $400,000 pa. Income tax is $166,000 leaving him

$234,000 to spend. From that he puts :

($ 40,000 pa into Superannuation)

($100,000 pa into his home mortgage)

($ 10,000 pa into GST free food)

($ 40,000 pa for his children"s private school fees)

($ 10,000 pa into his bank account earning GST free interest)

($ 15,000 pa into other GST groceries and incidentals) *

($ 19,000 pa on family holidays and GST goods) *

-------------

($234,000)

So, how much GST has he paid in the year. Would you believe, only $3,090 PA. Only the last two * marked spending areas incur GST i.e. 1/11th of $34,000.

Therefore he pays GST OF .07% of his gross salary or 1.2% of his take home pay.

Mr John Duzittuff earns $100,000 pa. Income tax is $27,000 leaving him

$73,000 to spend. From that he puts

($ 5,000 pa into Superannuation)

($25,000 pa into his mortgage)

($10,000 pa into GST free food)

($ 7,000 pa into his bank account)

($15,000 pa into other GST groceries and incidentals) *

($11,000 pa into other GST family goods and holidays) *

---------------

($73,000)

So, how much GST has he paid in the year. He pays GST OF $2,364 PA. Only the last two * marked spending areas incur GST i.e. 1/11th of $26,000

Therefore he pays GST OF 2.4% of his gross salary or 3.2% of his take home pay.

But don"t stop reading just yet.

Unbelievable that :

1. Mr Duzituff pays almost 400% more GST as a percentage of his salary than Mr Havitall does. That"s unbelievable

2. Mr Havitall pays $726 a year more GST than Mr Duzittuff does, but Mr Havitall has an extra $161,000 in after tax cash to spend. It"s true, yet unbelievable.

That is why GST is a regressive tax. It taxes the people hardest who spend on the bare essentials of life and have little to save. Those that can save into super, spend on expensive education, put money in the bank, negatively gear investments and have more expensive homes are best off under a GST regime.

Of course, if the GST goes to 15%, the situation gets worse for the middle and lesser income earners and better for the wealthy. Such a move just widens the gap between rich and the poor for which Australians were not renowned enthusiasts.

Then to rub more salt into the wound we hear politicians, business and other neo con commentators baying for the extra revenue from the expected 5% GST rate rise to be spent on lowering income taxes (particularly the top rate of 48%) and company tax rates.

The company tax rate was 49% in 1988 and the Keating/Hawke Government dropped it to 33% by 1993. Howard/Costello raised it to 36% for a while then dropped it to its present 30% in about 2001.

So the company tax rate has almost halved in 30 years and yet they want an even smaller tax rate. Just unbelievable. And we won"t go near the multinationals yet. That"s for another discussion.

Personal tax rates are in the middle of similar OECD countries. By cutting the top tax bracket, those on over $180,000 will be the only ones to gain. There will most likely be token cuts down the income scale, but of little significance.

So the poor and middle income earners will pay more tax and the wealthy less when GST is raised in unison with personal tax cuts. Just unbelievable.

SO WHAT HAPPENED TO PAYING MORE GST TO FINANCE HEALTH AND EDUCATION NEEDS INTO THE FUTURE?

Exactly how is that done when you have transferred extra GST raised at 15% to support lower income and company taxes. As far as I can see there is nothing left to put aside for those needs, should they still be a future priority.

OR ARE WE RAISING THE GST TO PAY DOWN GOVERNMENT DEBT.

Well that"s going to be one heck of a trick when you"ve either given the extra 5% GST raised back as tax cuts or in fact spent it on health needs.

At present there is no consistent message from Government or opposition on the priority to which tax reform is directed, which has to be of concern.

In the next edition we will look at some comparative company taxes paid elsewhere in the world. Also the threat to our revenue of the growth in multinational tax avoidance. And I"ll be describing why our budget peril is really a function of the Howard/Costello tax policies of the mid noughties.

If the above treatise at least sparks a conversation and focuses people on the tax debate I will be content. If it galvanises readers to a position on the subject, that is even better.

Comments welcome.

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