Why taxes would rise under Abbott
To most people the idea of permanently paying less tax is hugely attractive. And Abbott is promising to abolish the carbon tax and the mining tax, cut the company tax rate by 1.5 percentage points and abandon Labor's plan to end tax concessions for company cars. All this would cost about $28 billion over four years.
So what reason is there to doubt he would deliver a lasting reduction in taxes? Simply his promise to get the budget back to surplus - plus the knowledge government spending is set to grow strongly in the next decade.
To return to surplus and to do it while avoiding growth in tax collections would require a literally unbelievable degree of spending restraint.
Remember, though it gets little notice, Abbott is also promising to impose new taxes, increase taxes and eliminate tax breaks. These are partly to help cover the cost of the taxes he's getting rid of and partly to help pay for his new spending promises.
He's proposing a 1.5 per cent levy on big companies to cover the net additional cost of his paid parental leave scheme and a 0.5 percentage-point increase in all rates of income tax (aka the Medicare levy) to help cover the cost of the national disability insurance scheme (both raising $16 billion over four years).
To help cover the cost of abolishing the mining tax he's proposing to save $4.7 billion over four years by cutting business tax breaks: ending the instant asset write-off, removing accelerated depreciation for motor vehicles, ending the phase-down of interest withholding tax on financial institutions and ending the "tax loss carry-back".
Also to help cover the cost of abolishing the mining tax he proposes to save $3.7 billion in four years by effectively increasing the superannuation contributions tax for those earning up to $37,000 a year, and save $1.6 billion in four years on no-longer-forgone super tax breaks by delaying for two years phase-up in compulsory employer contributions.
And all this is before we get to Labor's as-yet-unlegislated tax rises, which Abbott has quietly indicated he would proceed with: extra revenue of almost $10 billion over four years from measures to "protect the corporate tax base", cut research tax breaks, increase cigarette tax and impose a levy on savings accounts.
When you see the list of tax hikes that accompany Abbott's grand tax-cutting gesture, it doesn't exactly inspire confidence he could keep taxes down in a way none of his predecessors has managed to.
And when you realise that - according to the earlier reckoning of Saul Eslake, of Bank of America Merrill Lynch - his election promises involve extra government spending of almost $15 billion over four years, it doesn't inspire confidence he could achieve the herculean spending restraint needed to get the budget back to surplus as well as keep taxes down.
The medium-term projections in Treasury's pre-election economic and fiscal outlook, about which I suspect we'll be hearing a lot more after the election, demonstrate how challenging the budget task will be in the coming decade.
According to the projections, if the government elected this Saturday sticks to Labor's strategy of limiting average real growth in spending to 2 per cent a year and not allowing tax collections to exceed 23.7 per cent of gross domestic product, the budget surplus will recover to 1 per cent of GDP by 2020-21.
But, since spending is projected to grow at an underlying real rate of 3.5 per cent a year, this would require an unprecedented restraint. And, even so, it would still require tax collections to grow 1.5 percentage points faster than the economy - equivalent to an ultimate $26 billion a year in today's dollars - over the decade.
Alternatively, were spending allowed to grow at its underlying rate, this could still leave us with a growing surplus, provided unrestrained bracket creep was allowed to cause tax collections to grow 3.3 percentage points (an ultimate $56 billion a year) faster than the economy.
And, get this. Were you to let spending grow at its "natural" rate, but limit growth in tax collections to a ceiling of 23.7 per cent of GDP the rest of the coming decade beyond 2018-19 would see an ever-rising budget deficit.
Whoever wins this election, I'll be amazed if taxes do anything but keep rising.
Frequently Asked Questions about this Article…
The article argues taxes are unlikely to fall overall under Abbott. While he promises cuts like abolishing the carbon and mining taxes and trimming the company tax rate, he also proposes new levies, increases and the removal of some tax breaks to pay for new spending. Given the extra spending he’s promised and Treasury projections, the piece concludes it’s more likely taxes will keep rising.
Abbott’s proposals mentioned in the article include abolishing the carbon tax and the mining tax, cutting the company tax rate by 1.5 percentage points, and abandoning Labor’s plan to end tax concessions for company cars. The article states these changes would cost about $28 billion over four years.
The article lists several revenue-raising measures in Abbott’s plan: a 1.5% levy on big companies to help fund paid parental leave, and a 0.5 percentage-point increase in the Medicare levy to help fund the NDIS — together these raise about $16 billion over four years. He also signals he would proceed with measures that could raise almost $10 billion (protecting the corporate tax base, cutting research tax breaks, raising cigarette tax and imposing a levy on savings accounts).
To help pay for abolishing the mining tax, the article says Abbott proposes $4.7 billion of savings over four years by cutting business tax breaks (including ending the instant asset write-off, removing accelerated depreciation for motor vehicles, ending the phase-down of interest withholding tax on financial institutions and ending tax loss carry-back). He would also change superannuation arrangements to save $3.7 billion and delay employer contribution increases to save $1.6 billion over four years.
According to the article, Treasury projections show the budget task is challenging. If the government limits average real spending growth to 2% a year and keeps tax collections at or below 23.7% of GDP, the budget surplus could recover to about 1% of GDP by 2020–21. But spending is projected to grow at an underlying 3.5% a year, which would require unprecedented restraint or faster growth in tax collections (via bracket creep or other measures) to get to surplus.
The article refers to ‘unrestrained bracket creep’ as one way tax collections can grow faster than the economy. In plain terms, bracket creep happens when inflation or income growth pushes taxpayers into higher tax brackets (or into higher effective taxation) without a change in tax rates. The piece notes that allowing bracket creep to continue could materially boost revenues — one scenario cited would raise tax collections 3.3 percentage points faster than the economy (an ultimate $56 billion a year in today’s dollars).
The article highlights a mixed picture for businesses: Abbott proposes a 1.5 percentage-point cut in the company tax rate but also a new 1.5% levy on big companies to fund paid parental leave. At the same time he proposes removing several business tax breaks (instant asset write-off, accelerated motor vehicle depreciation, tax loss carry-back, and more) to generate savings. The net effect on any individual company would depend on its size, tax profile and how these specific measures apply.
Based on the article, investors should watch policy details and Treasury fiscal projections: proposed changes to company tax rates and levies, cuts to business tax breaks, changes to superannuation taxation and employer contributions, the proposed Medicare levy increase, and any measures to protect the corporate tax base or impose levies on savings accounts. Also monitor Treasury’s pre‑election economic and fiscal outlook and projections for spending growth versus tax‑to‑GDP ratios (the article highlights a 23.7% of GDP ceiling), since these drive longer‑term tax and budget outcomes.
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