Tax rates must fall, says Treasurer Joe Hockey

Australia is suffering an “unsustainable risk” from high personal taxes that must be brought down to encourage growth and boost jobs, Joe Hockey will declare today in a move to set a reform agenda for the next election.

Putting tax relief on the table if the Coalition holds power, the Treasurer will warn that personal income taxes are so high they threaten to discourage workers and weaken the economy. Mr Hockey will also sharpen the debate on the GST by insisting state revenue be “aligned” to the spending needed on government ser­vices, an argument that underpins calls for a rise in the consumption tax from 10 per cent to 15 per cent.

“We cannot afford to have a tax burden that stifles growth and costs jobs,” Mr Hockey writes in The Australian today, singling out the $185 billion income tax take.

“We can’t just view the tax system and Australian taxpayers as a collection pool of unlimited funds. So in developing a better tax ­system, we need to consider the sustainability of our heavy reliance on income tax, especially personal income tax.”

Behind the call is a government ambition to offer tax cuts at the next election to reverse some of the “bracket creep” that will force 300,000 workers to pay higher rates over the next two years as inflation pushes up their incomes. The Coalition strategy will be central to the election campaign as Tony Abbott and the Treasurer seek to offer a “low tax” pledge to justify unpopular spending cuts and contrast their fiscal policy with Labor’s spending plans.

The cost of reform is daunting, given Treasury estimates that it would cost $25bn over five years to return all of the “bracket creep” — the increase in the tax take when inflation lifts workers into higher brackets even when their real ­incomes do not change.

Mr Hockey is warning of a wider economic challenge from the tax pressures on workers because Australia’s top marginal tax rate is higher than the average across advanced economies. Workers pay 45c in the dollar on earnings over $180,000 but this rises to 47c when the Medicare levy is added and reaches 49c as a result of the government’s temporary budget repair levy, which stops in July 2017.

The pressures are also hurting workers on incomes of about $80,000 — the threshold at which they begin to pay 37c in the dollar for every dollar they earn. Treasury estimates to be outlined by Mr Hockey today show the proportion of taxpayers in the top two tax brackets will rise from 27 per cent today to 43 per cent a decade from now.

“Our personal income tax revenue is subject to unsustainable risk,” the Treasurer writes. “For example, the top 10 per cent of individual taxpayers pay nearly half the personal income tax collected by the government.

This is an over-reliance and dependence on a narrow base that is increasingly mobile, to support our vital social infrastructure.” Workers paid $185bn in personal income taxes last year and this part of federal revenue is expected to swell to more than $230bn by 2019.

Company tax receipts will be $86bn in 2019 and GST receipts will be $68bn according to this year’s budget papers. Government sources indicated yesterday the Coalition was aiming to go to the election with plans to ease the tax burden, including personal income tax cuts, but that the timeframe remained subject to the budget bottom line.

Mr Hockey does not promise a tax cut but makes it clear he wants reforms — including spending restraint — to enable the cuts. Asked last month if there was hope the government would cut marginal tax rates before the election, he said: “Well, not before the next election, but certainly we’ll be taking a proposal to the Australian people at the next election.’’

The Treasurer’s comments on the overall tax burden reignite a fight with Labor over which side of politics delivers low taxes, given the budget papers forecast that tax receipts as a proportion of economic output will rise from 21.9 per cent last year to 23.4 per cent by June 2019. Tax as a proportion of gross domestic output was lower when Labor was in power, hitting a trough of 19.9 per cent in 2010 as the global financial crisis wiped out some of the revenue Treasury had been counting on. Mr Hockey states that when personal income tax is calculated as a proportion of total tax revenue, the tax level is the second highest in the OECD, the group of advanced economies.

“We must aim to reduce the overall tax burden on the community and work to promote stronger economic growth,” Mr Hockey states. Part of the Treasurer’s tax reform call is an argument for a change to the federation to ensure the power to raise taxes matches the obligation to spend on services.

At the moment, state governments raise only a fraction of the revenue they need to fund health and education and other services, forcing them to rely on the GST and payments from Canberra. Mr Hockey’s reform principles include the requirement that “as best as possible, the revenue-raising capacity of each tier of government should be aligned to responsibilities of funding and service delivery”. That goal could be pursued by raising GST and sharing the higher proceeds with the states so they have greater capacity to pay for their own services.

While NSW Premier Mike Baird has suggested an increase in the GST to 15 per cent, Queensland Premier Annastacia Palaszczuk and Victorian Premier Daniel Andrews have proposed an increase in the Medicare levy instead. The Prime Minister has said he would prefer the GST option to the Medicare increase. Mr Hockey’s comments today support that view, given that a higher Medicare levy would increase the income tax burden and worsen the “unsustainable risk” the Treasurer identifies.