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Even with the controversial reductions, taxes on individuals will soon reach record levels and Australia needs to rethink, says Deloitte.
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Revenue ‘too reliant on income tax, with or without stage 3 cuts’
13 October 2022
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With or without stage 3 cuts income tax is on track to hit record levels and Australia badly needs a rethink of how it raises revenue to cover big ticket items, says Deloitte Access Economics.
Deloitte partner Stephen Smith said there were better ways to raise revenue than personal and corporate income tax if Australians wanted to maintain current levels of government spending.
Because of bracket creep, average personal income tax would rise from about 23 per cent today to around 27 per cent by 2030, or closer to 28 per cent if the stage three tax cuts did not go ahead.
“Either way, with the average income tax rate rising to a record high the size of the tax cuts don't make an enormous difference,” he said.
Overall, taxes on individuals accounted for about 45 per cent of federal taxation revenue in the wake of the GST but they were creeping up to the pre-GST level of 50 per cent and without stage 3 cuts, would hit 52 per cent.
“Australia relies pretty heavily on personal and corporate income tax compared to other countries,” Mr Smith said, “and we rely less on consumption taxes, such as the GST, and on taxes on resource sector profits.
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“A different tax mix would allow us to raise the same amount of revenue but not necessarily create the same level of distortion in the Australian economy.”
Mr Smith, who was lead author of this week’s Deloitte Access Economics October Budget Monitor report, said the real question was: “What level of services and government spending do Australians want the federal government to be providing?”
Aged care, disability care and defence involved large spending commitments that would increase over the next decade, he said.
“We don't think necessarily that the stage three tax cuts are a bad policy and have to go, but we do think that the budget is in a structurally unsound position and so more revenue is going to need to be raised. The question is where you get that revenue from.
“Individuals are clearly an important source of tax revenue to a government but arguably there are other areas where we're not taxing enough.”
“Even with those stage three tax cuts, the taxes on individuals in Australia in terms of the average income tax rate is creeping up to a record high.”
Relying on income tax was not inherently wrong, but there were more efficient taxes and it was about the optimal mix.
“We don't necessarily need another Henry Tax Review. I think everyone knows what the answers are. It's more about the political will and really, the recognition across the electorate. Australians want a higher level of spending. Therefore, we pay more tax. There are better ways to do that than, for example, taxes on personal and corporate income.”
The Budget Monitor report said the questions were thrown into sharp relief by the “serious and significant downturn” facing the global economy although Australia’s position had unexpectedly improved since the pandemic.
“The fact that Australia has emerged from the pandemic with a budget position far healthier than most of our peers owes a lot to the strength of the economic recovery,” it said.
“Remarkably enough there is likely still some more left to bank, with Deloitte Access Economics expecting a further $114.4 billion in additional revenue over the next four years to be revealed in the October Budget.”
“But this is likely to be the last budget to unveil an unanticipated write up in government revenue for the foreseeable future. Continuing to repair the budget from here will require a more active strategy.”
Mr Smith said the budget needed to set a sensible tone for the future and prime Australians for a series of modest changes that add up to a more sustainable fiscal position over time.
“To be clear, Australians are signing up for a sustainably higher level of spending in the future, and the federal budget is already in a significant structural deficit. The federal budget will need to raise a greater level of revenue in the future, but that doesn’t necessarily need to come from income tax on individuals.”
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