Personal Taxes

index personal tax brackets to CPI to starve the spending beast

From there, the decline in the deficit reverses, as spending rises as a share of the economy and tax receipts are assumed to stay below their 23.9 per cent-of-GDP cap. To do so would mean big income tax cuts at a time when the budget is still strongly in deficit and payments are continuing to rise steadily. And that’s with the IGR’s wildly optimistic assumptions.

This budget may be the Liberals’ last chance this decade to put some brakes on the relentless creep of the state.

The tax-to-GDP cap will inevitably be lifted. We’ve already committed to big new spending on defence, the NDIS, aged care, etc, and we’ll need more revenue to pay for it. Reconsidering some government functions and restraining payments growth should play a role in ensuring long-term fiscal sustainability. But the gap is simply too wide for that alone.

The question should immediately turn to how we should raise it. If we do nothing and abide by the existing cap, the budget is unsustainable. If we lift the cap to 25-26 per cent of GDP and do nothing more, then the budget will become sustainable, but our only growing revenue source – personal income tax – will automatically fill the gap.

I believe this to be belowable. But, unfortunately, given the way our income tax system works – untouched by every government, both Liberal and Labor, since that of Malcolm Fraser – it is inevitable.

Doing nothing is easier than doing something. But some government at some point needs to put an end to it, once and for all. Now is as good a time as any.

Indexing the income thresholds to the consumer price index would at the very least maintain their real value over time.

Productivity gains generating real wage growth would continue to raise people’s average tax rates over time, raising revenue – just less than they do now. It would still be our only major tax base that grows as a share of the economy.

But the structural deficit would not rapidly be filled by income tax revenue. This would force the government to make more active decisions about how to raise additional revenue; to match new spending with new taxes, rather than fall back on bracket creep as Morrison did with the NDIS. And it would provide the impetus to consider genuine tax reform.

This budget may be the Liberals’ last chance this decade to put some brakes on the relentless creep of the state and the sapping of hard work and entrepreneurship, having spent a decade enabling it. If being a Liberal means anything, the Treasurer should deliver it next month – either as a springboard for his own tax reform agenda, or one hell of a welcome gift for his successor.

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