Andrew Murray (WA, Australian Democrats) Share this | Hansard source

The Tax Laws Amendment (Personal Income Tax Reduction) Bill 2007 introduces new personal income tax thresholds and low-income tax offsets as announced in the May federal budget. The bill amends the Income Tax Assessment Act 1936, the Income Tax Rates Act 1986 and the Medicare Levy Act 1986. Proposed changes to the Income Tax Assessment Act 1936 will increase the low-income tax offset and related thresholds. The offset value will increase from $600 to $750, with the phase-out threshold increasing from $25,000 to $30,000. The Income Tax Rates Act 1986 is to be amended to reflect the announced changes in tax thresholds. The tax bands that are affected include the 15 per cent tax band, with its upper threshold increased from $25,000 to $30,000. The 30 per cent tax band now only begins at $30,001, and from 1 July 2008 it will only phase out above $80,000, not $75,000. Most Australian wage earners fall into this tax band. These are both very good changes for lower and middle-income earners.

The final change that the government proposes also begins from 1 July 2008. It is an increase in the 40 per cent tax band thresholds. Individuals are currently affected by the 40 per cent tax rate if their income falls between $75,001 and $150,000. The government proposes changing these thresholds to $80,001 and $180,000 respectively, with the upper 45 per cent tax rate, which excludes the Medicare levy, only applying to income in excess of $180,001 from 1 July 2008.

The final policy change is a change to the Medicare threshold for single taxpayers who are eligible for the senior Australians tax offset as legislated in the Medicare Levy Act 1986. The government proposes increasing the threshold from $24,867 to $25,867 with a related phase-in limit of $29,255 increasing to $30,431. These changes to the Medicare levy threshold for single seniors represent an approximate four per cent increase on the old threshold values, so in real terms the threshold has remained nearly the same.

Sadly, this bill does not propose increasing the income-tax-free threshold of $6,000—a policy initiative strongly supported by the Australian Democrats. The tax-free threshold also continues to decline in real value. I have argued many times that the $6,000 tax-free threshold is way too low and should be increased on a phased basis to at least $20,000. As a starting point, you should not have income tax below the subsistence rate. Australia’s welfare floor is around $13,000, the minimum income required for basic subsistence. There is no justification for income taxing someone earning less than this value. By continuing to tax individuals at an absolute rather than indexed value, this social inequality is magnified each year.

From the perspective of a liveable wage, a viable tax-free threshold is $20,000, preferably indexed to retain its real value. The average income tax on all income for someone earning $20,000 a year is presently over $2,000. There are over two million Australians paid less than $20,000 a year. They could all be taken out of the tax system. Many of these are casual and part-time workers, particularly women, who need not pay income tax at all if the tax-free threshold were at a higher rate. That would be great for struggling families and mothers, amongst others. Taking millions of Australians out of the income tax system provides some revenue savings opportunities. Tax deductions cannot be claimed if your total income is below the threshold. Over 60 per cent of taxpayers earning less than $20,000 claim well over a billion dollars in work-related expenses. This is another example of churning within the Australian taxation system, an effect so beloved by this government. Raising the income-tax-free threshold to $20,000 would enable tax cuts to flow right up through every income level so all Australians would still get a tax cut. Apparently it would cost up to $20 billion a year, so it would best be funded through a phased introduction and by broadening the base to get rid of the numerous and distorting array of tax exemptions, concessions and deductions. Broadening the base would of course help considerably in funding it. That in itself would be a progressive reform. Combined with welfare reform, the aim should be to lower effective marginal tax rates for low- and middle-income earners. Significant equity and efficiency gains would result from a simplified system, particularly for lower income Australians.

I note remarks by the Treasurer attempting to dress up the low-income tax offset changes as reflecting an effective tax-free threshold of $11,000. In his budget speech, the Treasurer stated that the tax offset:

... means that low income earners eligible for the offset will not pay tax until their annual income exceeds $11,000.

He thereby attempted to say that this was a virtual increase in the tax-free threshold. This is misleading and technically incorrect. It ignores the effect of churning since individuals will still pay tax for annual incomes in excess of $6,000 through the PAYE system, which they can only get back a year to 18 months later when they put in their tax returns. Moreover the offset functions so that it can only reduce tax paid to zero as opposed to a rebate which holds greater value. The implication that the offset is equivalent to an $11,000 tax-free threshold is concocted by grossing up the offset value by the lowest income tax rate—that is, the present $600 offset is divided by 15 per cent and multiplied by 100 to give the current value of $4,000. The same method of calculation turns the new offset of $750 into $5,000. This is calculated by dividing $750 by 15 per cent. These values are added to the tax-free threshold of $6,000 to arrive at the imputed values of $10,000 and $11,000 for present and prospective post-offset tax-free thresholds respectively. Yet paying tax on incomes over $6,000 per annum does not change and the proposed offset implies that $750 in tax must be paid for this value to then be offset. Perhaps a more accurate description of the offset might be that low-income taxpayers will continue to pay tax on incomes over $6,000 per annum but for incomes up to $30,000 the first $750 of tax paid can then be offset.

The top two marginal taxation rates have, once again, received attention. Whilst threshold amendments to keep the number of individuals in the top tax brackets low is a good policy principle, on equity grounds the Democrats have argued that low-income taxation rates should receive attention first before those adjustments to top tax rates and thresholds. Although the community and business at large support these budget income tax proposals, charities, social justice groups and the ACTU, for instance, continue to comment unfavourably on the government’s largesse to higher income earners compared with a much lesser improvement in the lot of low- and middle-income earners. The Democrats’ focus on increasing the tax-free threshold as a priority before making changes to the top tax threshold has long been recorded. Indexing tax thresholds has also been a consistent campaign of ours and has strong support across business and the community. The Democrats propose a five-pillars agenda for income taxation reform: (1) to raise the tax-free threshold; (2) to index the taxation rates; (3) to broaden the taxation base; (4) to review and improve negative tax welfare interactions; and, (5) to lower tax rates and raise tax thresholds if sustainable over the longer term.

Today I will continue Democrat efforts to address reform of the tax-free threshold by moving an amendment to this bill which opposes moving the top tax threshold from $150,000 to $180,000 and proposes using the saving so generated to help afford indexation of the tax-free threshold. By not raising the $150,000 threshold to $180,000 we would save $1 billion over four years. With the money saved, plus $1.3 billion over four years from the very large current and forecast future budget surpluses, we propose indexing the $6,000 tax-free threshold from 1 July 2007. The Democrats are not opposed to the notion of reducing the top tax rate or increasing the top tax threshold. We have campaigned for a phased and prioritised reform of the Australian income taxation system, including measures to reduce high income tax for high-income earners. However, any attention to reform for high-income earners should be subsequent to reform for low-income earners. Their needs are more urgent. In the present budgetary context, some income tax reform for low-income earners can only be funded if raising the top tax threshold from $150,000 to $180,000 is opposed.

As I have mentioned, there is widespread support amongst professionals, business and the community for the indexation of tax rates to maintain the present value of tax thresholds and to minimise the effects of bracket creep. Bracket creep is the impact of inflation related salary increases on the static progressive marginal tax rates. The Democrats have long supported the indexing of all income tax thresholds, but, in the absence of sufficient funding to support that reform, the priority is where the impact is greatest—that is to say, low-income earners must be supported first. This means starting indexation with the tax-free threshold of $6,000, which of course then flows through all tax bands. Australia’s income-tax-free threshold of $6,000 is unchanged since 2000. If it had been indexed since 2000, it would now be well over $7½ thousand. Had the 1980 personal threshold of $4,041 kept pace with earnings, the tax-free threshold would now be well over $15,000.

With the caveat that it is difficult to readily compare systems, the data indicates that, in general, Australia’s current $6,000 tax-free threshold is less than half the OECD average. With a CPI increase of 2½ per cent, the effect of indexing the tax-free threshold in year 1 is that an additional annual income of $165 would be tax free. That is a modest but important amount to low-income earners. A tax-free threshold that, as a minimum, maintains its present value has at least four advantages—practical, psychological, immediacy and administrative. The practical point is that excluding low-income earners from the income tax system makes sense for that sector from a personal, equity and efficiency point of view. The psychology of knowing what proportion of your income is entirely yours to keep has high utility. It is an intrinsic good. That utility is not satisfied or is ineffective when a tax-free threshold is too low. This view is well expressed in a 2005 paper by P Saunders and B Maley entitled Tax reform to make work pay: perspectives on tax reform (3)—CIS policy monograph 62. In that paper, they state:

Since the value of the personal tax-free threshold has slipped to less than half what a single unemployed person gets in income support and rent assistance, the government now takes money away from us long before we have secured our own basic subsistence.

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It makes no sense to tax low income earners into poverty, and then to pull them out of it by giving them welfare benefits and/or tax credits. It makes a lot more sense to allow people to keep more of what they earn so that they are not enmeshed in the welfare transfer system.

Immediacy has great attractions. Money earned and received within a week or two of work done is better regarded than any time lag in receiving compensating rebates, credits or welfare adjustments. There are high inefficiencies associated with so-called churning, whereby low incomes are taxed and then rebated back to the same individuals often a year to 18 months later.

Administration has two components—private and public. A high percentage of low-income earners have poor administrative skills and the self-assessed income tax return is a chore that has its own cost, anxiety and lost opportunities. It frequently requires the aid of a tax agent. At the public level is the cost of being part of the tax system, calculated as tax system complexity and compliance costs. Tax rebates and offsets and concessions complicate the tax system and are administratively costly. In real terms, there is no cost to government revenue by indexing the tax-free threshold, since its value only increases relative to inflation. In nominal terms, the cost to government revenue of indexing the tax-free threshold is paid for in total by the annual benefit accrued by government from bracket creep across thresholds. As I have already noted, the notional net cost to revenue of $1.32 billion resulting from the Democrats amendment can easily be funded from the large, current and projected future budget surpluses. The proposed Democrat amendment is a very simple and widely supported concept—that of maintaining, not raising, the value of the tax-free threshold.

To summarise my arguments, indexation is a widely accepted policy principle which is widely applied by this government, and has been by previous governments, to taxes and benefits. The tax-free threshold has not been increased since 2000. In that time, its value, due to the effects of inflation, has depreciated by approximately 22 per cent. All wage earners benefit from indexing the tax-free threshold at an equal rate. Preserving the value of the tax-free threshold has a far greater proportional benefit to a low-income earner than to a high-income earner. Indexing the tax-free threshold to inflation maintains its present value in real terms. A higher tax-free threshold has the additional benefit of removing the number of low-income earners from the taxation system. Australia’s current $6,000 tax-free threshold is less than half the OECD average.

The government proposes to lift the low-income tax offset from $600 to $750. The Democrats support this. The government also proposes to lift the first tax band by $5,000, from $6,000-$25,000 to $6,000-$30,000. The Democrats support this. From 1 July 2008, the government proposes to lift the $75,000 threshold to $80,000. The Democrats also support this. What the Democrats oppose is lifting the top $150,000 threshold to $180,000 from 1 July 2008, not because we oppose lifting the rate per se but because it is a matter of priority. Subject to affordability and sustainability, any attention to reform for high-income earners by reducing the top tax rate and/or increasing the top tax threshold should be subsequent to reform for low-income earners. The needs of low-income earners are more urgent and remain more urgent.

Indexing tax thresholds has been a consistent campaign of the Democrats and it has strong support across business and the community. By opposing raising the $150,000 threshold to a $180,000 threshold, we would save $1 billion over four years. With the money so saved, plus money from the surplus—that is, taking $1.3 billion from it over four years—we would propose indexing the $6,000 tax-free threshold from 1 July 2007. Knowing how the coalition works and knowing Labor’s views on this matter, I expect that our amendment to oppose the higher tax threshold and to index the lowest threshold will be lost. I do not consider that a permanent situation, because any government of the future that has its policy mind in gear rather than its political mind in gear would know that raising the tax-free threshold is a desirable thing to do. Having decided to oppose the higher tax threshold increases, if we lose our amendment then the Democrats will have to decide whether we oppose the bill as a whole or support it as a whole. We will not oppose it as a whole.