Families facing $50bn tax hit

Combined impact of looming tax hikes and benefit cuts could top $50bn over four years.

Millions of middle-Australian families will share the burden of returning the budget to surplus as new figures show the combined impact of the federal government’s looming tax hikes and benefit cuts could top $50 billion over the next four years.

As Tony Abbott comes under attack for breaching his “low tax” election promises, new modelling reveals 2.3 million families are likely to be hit by the proposed deficit tax.

The new impost would collect about $2.2bn a year, according to a study by the National Centre for Social and Economic Modelling at the University of Canberra prepared for The Australian. Hidden tax increases will add another $3bn a year to the burden as inflation shifts individual taxpayers into higher tax brackets, with the impact of “bracket creep” snowballing to $15bn a year by 2017-18.

The Prime Minister argued yesterday that a deficit levy would not breach his election pledges because it would not be permanent but Bill Shorten accused Mr Abbott of using “weasel words” to justify a backflip.

Although the levy is yet to be finalised and could be heavily modified in the face of fierce criticism, the combined ­effect of the levy and hidden tax rises would increase the burden on individual taxpayers by $51bn over four years based on NATSEM and Deloitte Access Economics modelling.

The new reliance on revenue gains, rather than spending cuts alone, to end the deficits contrasts with Mr Abbott’s attacks on Julia Gillard’s budget strategy last May, when he declared: “The problem is not a revenue problem, the problem is a spending problem.”

The new figures sharpen the political fight over a controversial new tax that has triggered deep Coalition divisions, rebukes from the nation’s peak business groups and an outright rejection from crossbench senators who could veto the idea in the upper house.

Unions are also warning of higher wage claims to include an “Abbott allowance’’ that covers the cost of the levy on ordinary workers.

Within the government there are fears the debt levy will lead to months of political pain for the Coalition without making a substantial inroad into a projected $667bn commonwealth debt, even if it is legislated.

The levy is now part of a package of tough measures under consideration that include scaling back benefits for families earning more than $100,000 a year and charging more fees for bulk-billed visits to doctors.

NATSEM estimates that putting a cap on family benefits for families with a combined income of $100,000 would hit a further 280,000 families and save $1.1bn.

NATSEM principal research fellow Ben Phillips said loss of the benefit would cost these families an average of $3900 a year and be particularly harsh on larger families. With Tony Abbott stating that no tax cuts are likely for another four or five years, the government will also be relying on inflation pushing an increasing share of all salaries and wages into higher tax brackets.

The failure to adjust tax thresholds will be costing individual taxpayers an additional $3bn each year, according to calculations by Deloitte Access Economics. The added burden is cumulative so that by 2017-18, taxpayers will be paying $15bn more in income tax than they would if the Abbott government was adjusting the tax thresholds for inflation.

This still leaves a substantial gap to be filled by spending cuts, with the Audit Commission warning that the deficit — forecast to be $33.9bn in 2014-15 — would still be above $30bn in 2017-18 in the absence of corrective action.

While the details of the deficit levy are yet to be finalised, it is expected to amount to 1 per cent on incomes over $80,000 and 2 per cent on incomes over $180,000.

Within the government the tax measure is seen as the only way to ensure the pain in the May 13 budget is spread evenly to those on higher incomes, given that cuts to benefits leave richer Australians unscathed.

Labor, the Greens and smaller parties have all declared their opposition to the levy.

Mr Shorten said Mr Abbott was trying to “pretend” a tax increase for a set time was not really a tax increase. “We will fight a tax increase on ordinary Australians, absolutely. It’s a bad idea, it’s a broken promise, it’s a tax increase. Labor will have no part of it,” the Opposition Leader said. “The Abbott government is guilty of gross exaggeration and a broken promise is a broken promise, no matter which way they choose to try and use weasel words to justify it,” he added.

Asked on radio yesterday if the deficit levy was on the table, Mr Abbott said the government was dealing with a “range of options” but he argued a temporary impost would not be a breach of his election promises.

“I think if there was a permanent increase in taxation that would certainly be inconsistent with the sort of things that were said before the election,” he said. “There’ll be lots of argument about all sorts of things in the budget, but I am determined to try to ensure as far as I humanly can, that we keep faith with the commitments that we made to the Australian people before the election.”

Weeks before the last election Mr Abbott said lower taxes were “in our DNA” and the previous year he promised “tax cuts without new taxes” under a Coalition government.

Forced to justify his new position, the Prime Minister yesterday argued that the scale of the budget deficits made unpopular measures necessary. “We want taxes going down, not going up. But, when you’re in a difficult position, sometimes there needs to be some short-term pain for permanent and lasting gain,” he said.

Anxiety spread through Coalition ranks as MPs faced the prospect of explaining the new tax to voters, sparking warnings that the plan contradicted the core belief in low taxes. Some argued that levy, devised without consultation and contrary to election promises, would fuel more dissent over other measures such as the paid parental leave policy.

“We’ll be pushing very hard to make sure it’s temporary,” said one Liberal. Another said the internal pressure would be “extraordinary” if ministers pushed ahead with the levy.

“There is a widespread view that if we are going to start breaking promises then we should start with PPL as it contradicts every other message we are sending,” he said.

Queensland Liberal senator Sue Boyce backed the levy and said there was “room for better-off people to pay” a higher tax rate.

Attacks on the levy have come from the Australian Industry Group, the Business Council of Australia, the Australian Chamber of Commerce and Industry.

While the Australian Council of Social Service supported the tax measure it argued it should be permanent and attacked the government for scaling back benefits for families in need.

NATSEM’s Mr Phillips said family tax benefits delivered equity to the tax system.