tag:theconversation.com,2011:/uk/topics/deficit-levy-10188/articlesDeficit levy – The Conversation2016-06-03T04:44:39Ztag:theconversation.com,2011:article/604322016-06-03T04:44:39Z2016-06-03T04:44:39ZExplainer: what is the temporary deficit levy and why was it introduced?<p>The <a href="https://www.ato.gov.au/General/New-legislation/In-detail/Direct-taxes/Income-tax-for-individuals/Temporary-Budget-Repair-levy/">temporary deficit levy</a> might be here to stay if <a href="http://www.sbs.com.au/news/article/2016/05/31/deficit-levy-will-be-permanent-bowen">Labor is elected</a>. The tax, which targets the wealthy, was actually introduced by the Coalition in 2014 as a means of reducing the budget deficit.</p>
<p>The levy is a 2% increase in the top personal income tax rate from 45% to 47%, which amounts to 49% including the 2% Medicare Levy. It was originally due to expire after three years and the Turnbull Government has planned to honour this. If the Coalition is elected it will end after June 2017.</p>
<p>In his 2014 Federal Budget speech, then Treasurer Joe Hockey said:</p>
<blockquote>
<p>“Tonight we are asking higher income earners to help repair the Budget. From 1 July this year and for just three years, we are asking higher income earners to pay a Temporary Budget Repair Levy.”</p>
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<p>Temporary pain for the budget gain. These types of levies have become popular in Australia and overseas. Australia had the <a href="https://en.wikipedia.org/wiki/Flood_levy">Queensland Flood Levy</a> in 2011 and a New South Wales government <a href="http://www.abc.net.au/news/2015-12-17/uber-x-legalised-in-nsw-under-government-proposals/7037600">temporary levy on point-to-point</a> transport providers in 2015. The governments in <a href="http://www.americanactionforum.org/research/temporary-taxes-that-never-die-short-term-levies-have-lived-to-hit-taxpayer/">the United States</a> and <a href="http://www.releases.gov.nl.ca/releases/2016/exec/0525n02.aspx">Canada</a> have imposed many of these levies as well. These are really just disingenuous tax rises that subsequent governments find irresistibly tempting to prolong beyond their original use by date.</p>
<p>Labor argues that the temporary deficit levy should be kept for two reasons – it raises much needed revenue and it’s fair. The levy <a href="http://www.advivo.com.au/wp-content/uploads/2014/12/2016-May-3-Federal-Budget-Report.pdf">raises about A$1 billion</a> in revenue per year, over each of the next four years. Given a budget deficit of A$37 billion or <a href="http://www.budget.gov.au/2016-17/content/bp1/download/bp1.pdf">2.2% of GDP</a>, keeping the temporary deficit levy reduces the budget deficit by about 3%.</p>
<p>Raising revenue is one way of reducing the budget deficit, reducing spending is the other. Labor argues that the Coalition government has a revenue problem more than a spending problem. </p>
<p>The debate about whether Australia has a revenue problem or a spending problem is like asking whether a person has a weight problem or an eating problem – you wouldn’t have the first if you didn’t have the second.</p>
<p>Governments raise taxes to finance spending. The Coalition government argues that it is important to try to live within its means than hit up taxpayers for more revenue. </p>
<p>It is true that Australia is not a particularly highly taxed country, but it relies relatively heavily on income tax and our top personal income tax rate, it’s high by <a href="https://home.kpmg.com/xx/en/home/services/tax/tax-tools-and-resources/tax-rates-online.html">international standards</a>. Labor wants the top tax rate to remain 2% higher, by keeping the TDL, on fairness grounds. </p>
<p>The problem with Labor’s fairness argument to the temporary deficit levy is that we have no generally accepted standard of tax fairness. There are on the other hand more or less generally agreed standards for a bunch of economic indicators: the maximum sustainable economic growth rate, the lowest sustainable unemployment rate, an ideal target inflation rate. </p>
<p>While we have summary indicators of fairness, like the <a href="https://en.wikipedia.org/wiki/Gini_coefficient">Gini coefficient</a> which is a numerical measure of the distribution of income, we have no agreed ideal number to shoot for. This is partly because it depends on subjective value judgements.</p>
<p>Another problem with the fairness argument is that it cannot validly be applied to a particular tax or welfare measure. We need to look at the whole package of government income redistributive measures including superannuation, family tax benefits, disability payments and so on. One measure may offset another, so it is misleading to look at one change in isolation.</p>
<p>We do know that high marginal income tax rates – and they are high in Australia - have real economic costs that curb average living standards due to the disincentive effects on work, but again <a href="http://www.epi.org/publication/raising-income-taxes/">there is considerable debate</a> about the size of these costs. A combination of inherent value judgements and uncertain costs make the debate about high marginal tax rates, like the temporary deficit levy, fertile ground for political rhetoric. </p>
<p>However it would help if we had a more transparent framework for measuring and reporting the impact of government budgets on established indicators of fairness.</p><img src="https://counter.theconversation.com/content/60432/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Ross Guest has in the past received funding from the ARC.</span></em></p>Labor is arguing that Australia should keep the temporary deficit levy, a tax introduced by the Coalition government to help reduce the budget deficit.Ross Guest, Professor of Economics and National Senior Teaching Fellow, Griffith UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/261032014-05-14T19:26:42Z2014-05-14T19:26:42ZTax still the elephant in the (budget) room<figure><img src="https://images.theconversation.com/files/48463/original/xbffjhkh-1400046864.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption"> Taxes - and what we actually should use them for - are routinely ignored. </span> <span class="attribution"><span class="source">www.shutterstock.com</span></span></figcaption></figure><p>Joe Hockey’s first budget does not contain much tax reform, in spite of headlines on the “temporary budget repair levy”. It does contain some very big cuts to spending in the short and longer term - consistent with Hockey’s claim that “the age of entitlement is over”. But will this lead us to prosperity and opportunity?</p>
<h2>Why a temporary levy?</h2>
<p>That temporary budget repair levy of 2% for those earning over $180,000 is a hit on Australia’s highest income earners who can certainly afford it. It is predicted to raise $600 million this year; $1.2 billion in each of following years. </p>
<p>What’s wrong with that? It could be a good thing to make that levy permanent - Australia would be in company with a <a href="http://www.bloomberg.com/news/2013-11-07/higher-tax-rates-give-top-u-s-earners-year-end-headaches.html">growing number of wealthy countries, including the US</a>, which have been lifting marginal rates on the highest income earners. </p>
<p>And it makes sense to levy it on the highest incomes. The levy brings our top marginal rate to nearly 50%, but the empirical evidence suggests that this is unlikely to negatively affect work or business effort by high income individuals, who are mostly men, and who are not so responsive to higher rates, unlike lower income workers. </p>
<p>But the temporary levy will increase the pressure on tax planning margins, making it more attractive than ever to keep money in companies (at the smaller end, now taxed at 28.5%) or to income split through discretionary trusts. Capital gains will still be taxed at half that top rate. And tax deductions for travel, negative gearing using rental losses to shelter taxable income are more valuable than ever to high income earners. All those negative consequences could be dealt with by tax reform, but that is not on the table yet.</p>
<h2>No business tax reform</h2>
<p>Hockey also has not addressed business tax reform in this budget. Without a carbon tax or mining tax, Hockey still plans to cut company tax by 1.5%, a policy <a href="http://www.abc.net.au/news/2013-08-07/coalition-commits-to-15pc-company-tax-cut/4869602">copied by Abbott</a> from Labor’s failed attempt. The budget has kept the controversial <a href="http://www.humanservices.gov.au/customer/services/centrelink/parental-leave-pay">paid parental leave policy</a> to be funded by large companies who will continue to pay the 30% rate. </p>
<p>Meanwhile, the Base Erosion and Profit Shifting project of the OECD and G20 <a href="https://theconversation.com/the-g20-and-the-taxing-issue-of-making-big-business-pay-21466">continues</a>.</p>
<h2>Funding paid parental leave: let’s tax Peter to pay Mary</h2>
<p>The continuing negotiations around the PPL scheme is a reminder of how controversial these big planks of government policy are.</p>
<p>Its high cost comes from funding the mother’s salary - even at minimum wage - for 18 weeks. It has some great features - a payment that goes to working women, based on their individual income, has to be good both for gender equity and for the broader economy. If it was being introduced with substantial new funding for childcare and help for single parents at the bottom end, I’d be all for it. </p>
<p>By bringing forward Labor’s policy of abolishing the dependent spouse tax offset and mature age worker tax offset, Hockey saves almost enough to pay for parental leave for a year. If he made the temporary levy permanent, this could be enough to cover the cost - in fact, we could see this higher top marginal tax rate as a transfer to some extent from rich men to working women with children. Or alternatively he could cut some of the superannuation tax concessions which are not mentioned in the budget.</p>
<p>The trouble is, the levy is not permanent and the politics mean its unlikely to be retained. And so this turns out, when we examine the cuts to family tax benefit B, to be a transfer from poor women to richer women.</p>
<h2>Taxes are needed: for funding government</h2>
<p>The biggest question, the real one about our shared identity as a nation and our vision for fairness and prosperity, is also hidden in the background to this budget. That is, what size of government do we want and what should it do?</p>
<p>I’ve noticed a troubling discourse that suggests federal tax revenues are too high, or should be capped at some arbitrary level. Australia’s “tax level”, sometimes called the “tax burden”, the ratio of total taxes collected to GDP, is about 31%. Our federal tax level has been <a href="http://www.aph.gov.au/%7E/media/05%20About%20Parliament/54%20Parliamentary%20Depts/548%20Parliamentary%20Budget%20Office/01-2014%20Trends%20in%20Australian%20Government%20receipts/Report01_2014Chapter2.pdf">approximately 24% of GDP since the 1980s</a>. The rest is state taxes. This percentage indicates what proportion of Australian economic wealth goes to shared expenditures and responsibilities, and balancing the budget calls for capping government spending at this level too. </p>
<p>The <a href="http://www.ncoa.gov.au/report/appendix-vol-1/6-approach-to-government-and-new-fiscal-rules.html">Commission of Audit</a> said that a fiscal rule that should be introduced to cap federal tax revenues at this level. The Commissioners think government is too big and imply that this cap is needed for prosperity - but this is false. Nowhere is there some “rule” of tax policy, or good government, that sets 24% of GDP as an ideal size of government. </p>
<p>In fact, Australia’s tax level is low. Its much lower than <a href="http://www.keepeek.com/Digital-Asset-Management/oecd/economics/oecd-factbook-2014/government-expenditures-revenues-and-deficits_factbook-2014-84-en#page1">all comparable rich countries around the world</a>. We are about level with the US, but they borrow more to fund their government than we do. </p>
<p>As the level of development of a country increases, its tax level tends to increase. Among rich countries, the tax level varies from the US and Australia at the bottom, about 30% to Norway, at 57%. Germany is <a href="http://www.oecd.org/economy/germany-economic-forecast-summary.htm">doing just fine</a> on a tax level about 45% of GDP, which enables it to fund childcare and infrastructure. Norway’s free education for all - yes, its a small rich country but then (except in geography) aren’t we? - has set them up for 3% economic growth and one of the most flexible and open economies in the world. </p>
<p>The federal government <a href="http://www.budget.gov.au/2014-15/content/bp1/html/bp1_bst6-01.htm">spends 35% of its budget on social security and welfare</a> compared to 7% on education and 16% on health. Hockey made much of this apparently large share <a href="http://www.budget.gov.au/2014-15/content/speech/html/speech.htm">in his speech</a>, but this is exactly the role of the federal government should be doing, paying out social security to ensure a fair opportunity for all across the country. Australians care about this - <a href="http://www.aec.gov.au/Elections/referendums/Referendum_Dates_and_Results.htm">we even voted for a referendum to amend the Constitution in 1946</a> - so that the federal government would have authority to redistribute taxes to fund social security and medical payments where needed.</p>
<p>The implication in Hockey’s freeze on future education spending, and his comment that funding is up to the states, seems to be that any extra taxes should be levied by them. But our <a href="http://www.budget.gov.au/2014-15/content/bp1/html/bp1_bst5-03.htm">most effective revenue-raising taxes</a> are probably best administered centrally - the income tax and the GST. This is a national issue.</p>
<p>Australians need to think hard about whether we are holding ourselves back as a country, if we don’t start raising tax levels to be just a little closer to those of other rich countries, so that we can spend on education, infrastructure, welfare, health and the environment - not mentioned in Hockey’s budget at all. And that means we need to examine overall tax reform for the future.</p><img src="https://counter.theconversation.com/content/26103/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Miranda Stewart receives funding from the Australian Research Council.</span></em></p>Joe Hockey’s first budget does not contain much tax reform, in spite of headlines on the “temporary budget repair levy”. It does contain some very big cuts to spending in the short and longer term - consistent…Miranda Stewart, Professor and Director of Australian Tax Transfer Policy Institute, Crawford School of Public Policy, Australian National UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/266602014-05-13T10:14:02Z2014-05-13T10:14:02ZInfographic: the promises vs budget measures<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/48369/original/6pq9mnhv-1399978991.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/48369/original/6pq9mnhv-1399978991.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=1894&fit=crop&dpr=1 600w, https://images.theconversation.com/files/48369/original/6pq9mnhv-1399978991.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=1894&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/48369/original/6pq9mnhv-1399978991.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=1894&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/48369/original/6pq9mnhv-1399978991.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=2380&fit=crop&dpr=1 754w, https://images.theconversation.com/files/48369/original/6pq9mnhv-1399978991.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=2380&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/48369/original/6pq9mnhv-1399978991.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=2380&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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Charis Palmer, Deputy Editor/Chief of StaffEmil Jeyaratnam, Data + Interactives Editor, The ConversationLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/266582014-05-13T10:02:19Z2014-05-13T10:02:19ZInfographic: federal budget at a glance<figure><img src="https://images.theconversation.com/files/48552/original/6k9jpmxx-1400117053.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">cormann</span> </figcaption></figure><figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/48444/original/z3s3mb5t-1400036305.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/48444/original/z3s3mb5t-1400036305.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/48444/original/z3s3mb5t-1400036305.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=4534&fit=crop&dpr=1 600w, https://images.theconversation.com/files/48444/original/z3s3mb5t-1400036305.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=4534&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/48444/original/z3s3mb5t-1400036305.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=4534&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/48444/original/z3s3mb5t-1400036305.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=5698&fit=crop&dpr=1 754w, https://images.theconversation.com/files/48444/original/z3s3mb5t-1400036305.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=5698&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/48444/original/z3s3mb5t-1400036305.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=5698&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<p><em>Since publication this infographic has been amended. The original version stated the NDIS was scaled back. There are no planned cuts to the funding of the NDIS.</em></p><img src="https://counter.theconversation.com/content/26658/count.gif" alt="The Conversation" width="1" height="1" />
Since publication this infographic has been amended. The original version stated the NDIS was scaled back. There are no planned cuts to the funding of the NDIS.Charis Palmer, Deputy Editor/Chief of StaffEmil Jeyaratnam, Data + Interactives Editor, The ConversationLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/264472014-05-08T20:37:55Z2014-05-08T20:37:55ZAsset recycling scheme looks more like policy recycling<p>The Abbott government is about to unveil a new A$10 billion <a href="http://www.abc.net.au/news/2014-05-08/government-to-detail-road-funding-and-detention-centre-closures/5437748">infrastructure package</a> in its first budget. Apparently it is to be funded by a “special immediate measure” in the form of a levy imposed on high-income earners over a four-year period.</p>
<p>Discussions about this likely measure seem to have focused on whether or not this levy is a tax. I see it as a hypothecated tax, not unlike the 3+3 fuel excise or the gun buyback levy or the Queensland floods levy, all of which were short-term, designed to cover particular spending needs but operated in the same way as any other tax.</p>
<p>In focusing on the largely insignificant tax-versus-levy issue, discussion has largely ignored the spending side of this special measure, the link to the asset recycling plan being devised by Treasurer Joe Hockey.</p>
<p>About A$5 billion is to be set aside to encourage states to privatise their assets by providing a <a href="https://theconversation.com/capital-recycling-plan-good-in-theory-difficult-in-practice-25855">15% “bonus” payment</a> for privatising state-owned assets, which I assume to include physical assets and public sector agencies and, perhaps, service delivery mechanisms.</p>
<h2>What about regulation?</h2>
<p>The assumptions underpinning such a policy are breathtaking in their disregard for evidence and for their promulgation of simplistic propositions about the relative efficiency of public and private sector management. Importantly, the policy does not recognise the fundamental link between ownership and regulation, and the impact that changes to the regulatory regime, which usually accompanies privatisation, have on market behaviour and the eventual success of any privatising activity.</p>
<p>For example, in promoting the privatisation of Medibank Private, Treasurer Hockey, and Peter Costello before him in 2006, claim that privatisation will reduce private health insurance premiums or at least restrain their growth. But this claim is largely dependent on government being the arbiter (the regulator) of proposals from private health insurance providers for any increases in premiums. </p>
<p>The impact on premiums will also depend on whether there are other regulatory measures imposed to accompany the sale of Medibank Private, such as limits to market share, conditions attached to ownership change (perhaps in the same way that takeover bids involving the four pillars in the banking sector are considered) and, importantly, the management of community service obligations such as any discounts for pensioners or safety net arrangements for other users.</p>
<p>In the debates surrounding the abandoned sale of Medibank Private in 2006, Labor suggested that retaining public ownership would also restrain the growth in premiums, arguing that the significant market share held by the government provider enabled the government to exercise price control through competition in the market place. In short, the impact on premiums had little to do with ownership, rather it depended on the regulatory arrangements that applied and the role that government would play in such arrangements.</p>
<h2>Private isn’t always better</h2>
<p>This brings us to the issue of ownership and its relationship to performance. There is no credible evidence that performance differences between public and private organisations undertaking the same services in similar ways can be attributed to ownership. Over and over again, we see that differences in performance and efficiency relate to the environment in which the organisations operate, especially the regulatory regimes involved.</p>
<p>There is no substance to the argument that private banks, for example, would be any more, or less, efficient than publicly-owned ones, working in the same environments. Differences in performance might relate to, say, government decisions that branches of the publicly-owned bank should be placed in more remote communities which might prove to be less financially viable but will enable greater access to banking services. </p>
<p>Or that publicly-owned hospitals with the same regulation relating to admissions and the like would, by virtue of their ownership, be any less (or more) efficient than their privately-owned counterparts. Or that performance differences found at Sydney Airport under public ownership (and managed by Federal Airports Corporation) in comparison to its subsequent private owners were related to ownership rather than to the different management models used coupled with changes from higher to “lighter” government regulation that accompanied airport privatisation.</p>
<p>And so it is with state-owned assets and organisations. There is nothing in robust academic studies (beyond individual cases, often selectively drawn to support the propositions of superior private, or public, ownership) to back the underlying assumption that state-owned assets will intrinsically be better off in private hands. To propose a policy based on that dubious assumption, and then attach a value of A$5 billion to it, is not only simplistic but leaves the government open to charges of irresponsible policy making based more on belief than on evidence.</p>
<h2>Recycled ideology</h2>
<p>Unfortunately, it reflects a re-emergence, or recycling, of some of the privatisation strategies introduced by the Thatcher and Howard governments. Driven by goals such as blunting union power, providing windfalls for conservative supporters, reducing the size of government and other essentially normative political goals, we witnessed the divestment of many public organisations justified by allegations that they were inefficiently run. </p>
<p>While there were numerous examples of successful privatisations, the literature is replete with examples of poorly managed ones. As a consequence, the public has lost valuable assets and been short-changed by their undervaluing; and governments have paid enormous fees to the consultocracy to manage the processes involved, have sometimes been required to take repair action such as buying back failed privatised entities and have foisted on the public more inefficient private replacement organisations over which they have less control. All because of hasty, ideologically-driven policies of privatisation.</p>
<p>I hope the states will be able to resist the 15% bribe and undertake due diligence of any potential asset sale. This should take into account necessary changes to the regulatory regimes that should, in almost all cases, accompany proposals for divestment of publicly-owned assets. The public deserves from this government a more mature, evidence-based and more nuanced policy rather than a simplistic recycled policy from the Howard era.</p><img src="https://counter.theconversation.com/content/26447/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Chris Aulich does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The Abbott government is about to unveil a new A$10 billion infrastructure package in its first budget. Apparently it is to be funded by a “special immediate measure” in the form of a levy imposed on high-income…Chris Aulich, Professor of Public Administration, Institute for Governance and Policy Analysis, University of CanberraLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/263352014-05-07T20:38:19Z2014-05-07T20:38:19ZAustralia’s tax system is half-baked and a deficit levy won’t help<p>The Victorian government has decided to reduce payroll tax by 0.05%, from 4.9% to 4.85%. The decision comes as the Commonwealth government contemplates an increase in income tax via a deficit levy. </p>
<p>But if the objective is to increase national productivity to meet growing expectations for government services, as well as private consumption, logic would shift the tax burden away from income tax and increase payroll tax. This approach might even provide the basis for more effective and transparent commonwealth-state financial arrangements.</p>
<h2>Stand-alone taxes are not the answer</h2>
<p>A comprehensive income tax system would include tax on wages, but also on capital income, where capital income is the return on accumulated savings, such as superannuation earnings. </p>
<p>Commonwealth taxation is reasonably comprehensive for wages, with fringe benefits concessions and tax breaks for superannuation for those on middle and high incomes. </p>
<p>In the case of capital income, there are many concessions, including the exemption of income earned on savings invested in owner-occupied homes, the half rate on capital gains and the low flat rate on superannuation fund earnings; interest and dividends face no concessions. A progressive rate schedule is applied to taxable income.</p>
<p>By contrast, a comprehensive payroll tax would fall on all labour remuneration, but not on capital income. </p>
<p>In Australia, the states impose payroll tax on a base that covers about half of all salaries. The largest concession is the exemption of small businesses, with the definition of small business varying across the states (and territories). There are exemptions also for other governments and charities. Above the threshold, a flat marginal tax rate is applied, again with different rates in different states.</p>
<h2>Measuring the real impacts of tax</h2>
<p>The ultimate outcome of income tax, and especially of payroll tax, is often misunderstood. It is generally accepted that most of the effect, if not all, of the income tax is borne by households as lower disposable income to buy things; with the tax revenue used to fund government goods and services. But in reality, most of the income tax on labour income is first paid by employers as a PAYG deduction from salaries.</p>
<p>And the economic impact of payroll tax should also be on households as lower take-home pay. Initially, businesses pay the payroll tax bill to government, and with a jump in labour costs some are forced to reduce the number of people they employ, boosting unemployment.</p>
<p>The increase in unemployment induces a slower rate of increase in market wages in order for the labour market to return to a new near full employment equilibrium. That is, in the longer run, households bear payroll tax as a lower market wage and take-home pay.</p>
<p>Further, consider the current payroll tax with its exemption on the half of employees working in small businesses. While large businesses write the payroll tax cheque, ultimately the tax is passed on as lower market wages and take-home pay for employees of both small businesses and large businesses.</p>
<p>At the same time, the selective payroll tax on large businesses distorts the employment mix away from large to small businesses with a loss of national productivity. </p>
<p>Replacing the current payroll tax, with its small business exemption, with a comprehensive base and lower flat rate payroll tax would also result in lower market wages for all employees. But, the distortions of the current system to the mix of big and small businesses would be removed, resulting in a net increase in national productivity.</p>
<h2>The case for a shift from income tax to payroll tax</h2>
<p>Shifting the tax burden away from income tax and onto a comprehensive payroll or consumption tax would reduce the effective tax burden on capital income, leading to an increase in aggregate investment and a more productive mix of different investment and saving options with a final economic impact on higher real wages and household income.</p>
<p>Since the arrival of Governor Phillip, Australia has been a net importer of foreign capital to meet its investment needs. Foreign investors, with options to place their savings in many other countries, require at least an alternative world return on the Australian investment after Australian tax. </p>
<p>A lower Australian tax on capital income, for example a lower income or corporate tax rate, means some marginal Australian investments with a lower pre-tax return become worthwhile. In time, the increased investment means a larger stock of capital and technology per Australian worker, feeding into higher labour productivity and market wages.</p>
<p>Finally, a broader base payroll tax, and possibly also a higher payroll tax rate, along with a reformed land tax, offers a desirable tax reform package to increase the tax revenue of the states.</p><img src="https://counter.theconversation.com/content/26335/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>John Freebairn does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The Victorian government has decided to reduce payroll tax by 0.05%, from 4.9% to 4.85%. The decision comes as the Commonwealth government contemplates an increase in income tax via a deficit levy. But…John Freebairn, Professor, Department of Economics , The University of MelbourneLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/261482014-05-01T01:01:39Z2014-05-01T01:01:39ZAustralia does not have a debt crisis – so just say no, Joe<p>In the lead-up to the federal budget on May 13 there have been the usual test balloons floated by the government. Raise the aged-pension eligibility age? A $6 co-pay for GP visits? Cuts to the ABC? And so on.</p>
<p>But the prize for the most “interesting"— and I mean that in the Ancient Chinese Curse kind-of-way — is the idea of a "debt levy”.</p>
<p>It’s a little hard to tell exactly what the idea entails since neither the Treasurer nor the Prime Minister will really talk about it, but it seems to be simple enough. Tax those Australians earning over a certain income level a special “one-off” amount and use the proceeds to pay down government debt.</p>
<p>Just like the flood levy and the East Timor levy, right? Actually, no.</p>
<p>The flood and East Timor levies were one-off responses to unusual budgetary shocks — one a natural disaster and the other a geo-political necessity. They made sense because they dealt with transient fiscal problems. But structural problems require structural solutions— not one-time levies.</p>
<p>When your local surf club has a fire not covered by insurance it makes sense, painful though it may be, for the members to kick in for the repairs. When the committee says they need a special levy to pay for recurring expenses like petrol for the inflatable rescue boat, there’s a change of committee at the next annual general meeting.</p>
<p>Labor’s response to the proposed levy is as revealing as it is disconcerting. Shadow treasurer Chris Bowen has barely stopped for air in repeating the line “But they said they wouldn’t raise taxes.” Really, Mr Bowen? That’s your problem with it? You’re okay with bad policy if it’s announced in advance?</p>
<p>I do give the <a href="http://www.abc.net.au/am/content/2014/s3992958.htm?site=canberra">shadow treasurer partial credit</a> for borrowing a line from Ferris Bueller’s Day Off — but he missed the real voodoo in the government’s economics.</p>
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<figcaption><span class="caption">“Anyone? Something d-o-o economics: ‘voodoo’ economics…”</span></figcaption>
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<p>First, Australia does not have a debt crisis. Or, to put it another way, Australia does not have a debt crisis. Far from it. Commonwealth net debt is about 11% of GDP, the third lowest in the OECD (the average is 50%), and low by historical standards. Government borrowing rates are at all time lows. Indeed, it was only a few years ago that we were discussing how Australia’s debt being so low was a serious problem because it might lead to the government bond market drying up.</p>
<p>But isn’t all debt bad? I mean, shouldn’t the country live within its means and not spend more than it “earns”?</p>
<p>As Nobel Laureate and New York Times columnist Paul Krugman has pointed out repeatedly: government finances are fundamentally not like personal finances, for multiple reasons. One of them is the huge payback that social investments can deliver.</p>
<p>Government debt levels should typically not be zero. The Commonwealth government can borrow long term at around 5%. The social returns on wise social and infrastructure investments are often more than 15%. Not borrowing at 5% and lending at 15% is to miss huge opportunities. Governments can invest in projects that we never can as individuals: health care, schools, major infrastructure, national defence — and that’s what makes the large returns possible. It is just very different than thinking about maxing out your Visa card to go skiing.</p>
<p>But suppose you don’t believe any of that. The debt levy is still a bad idea. It won’t raise very much money, and it will set a terrible precedent.</p>
<p>Suppose there is a 1% levy on all incomes over A$105,000, for one year — that is, the top 10% of tax payers. This would, by my back-of-the-envelope calculation, yield about $1.9 billion in revenue, all else equal. That would reduce federal government debt by about three-quarters of 1%. That’s basically a rounding error in the scheme of things. So is it going to be bigger, longer, apply to more tax payers? It gets you thinking…</p>
<p>And there’s the “all else equal” part, so often overlooked in public discussions about taxes. If announced for the coming year, workers will rationally adjust the amount they work, hence earn, and hence pay in taxes. Economists of all stripes know that labour supply adjusts to taxes. The result would be not only less revenue than might naively be predicted, but slower growth and private spending as well.</p>
<p>Of course, it could be made to apply retroactively to avoid the labour supply issue. And this brings us to precedent. In this respect a debt levy would be truly disastrous.</p>
<p>If it becomes acceptable for governments to simply jack up taxes because they don’t approve of the policies of the previous government then public confidence will be shaken. It will create a climate of fear and uncertainty that will deter investment in physical and human capital — with potentially severe economic consequences.</p>
<p>One should feel a bit for Mr Hockey. He has got a really bad job. This budget won’t please many people, and it will entail some tricky politics. But it can, at least, be good grounded in good economics.</p>
<p>When it comes to the debt levy the Treasurer should heed the Reagan mantra. Nancy Reagan, that is, and “Just Say No!”</p><img src="https://counter.theconversation.com/content/26148/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Richard Holden is an Australian Research Council Future Fellow.</span></em></p>In the lead-up to the federal budget on May 13 there have been the usual test balloons floated by the government. Raise the aged-pension eligibility age? A $6 co-pay for GP visits? Cuts to the ABC? And…Richard Holden, Professor of Economics, UNSW SydneyLicensed as Creative Commons – attribution, no derivatives.