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…
Abbott promised 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 company car tax concessions. The package of measures he touts would cost about $28 billion over four years, according to the article.
The article says he would partly offset the cost with a mix of new levies and cuts to tax breaks: a 1.5% levy on big companies to help fund a paid parental leave scheme and a 0.5 percentage-point increase in the Medicare levy to help fund the NDIS (together raising about $16 billion over four years). He would also cut business tax breaks (saving about $4.7 billion), change superannuation contribution taxes for low earners (about $3.7 billion) and delay employer contribution increases (about $1.6 billion). He’s also indicated he would proceed with some of Labor’s measures that raise revenue (almost $10 billion over four years) such as protecting the corporate tax base, cutting research tax breaks, higher cigarette tax and a levy on savings accounts.
The article argues this is highly unlikely. Returning the budget to surplus while keeping tax collections from growing would require unprecedented spending restraint. Treasury projections in the article show government spending is expected to grow strongly (about 3.5% real per year), so achieving Abbott’s goals without raising taxes would be extremely challenging.
Beyond the headline tax cuts, the article notes Abbott is proposing new or increased taxes including a 1.5% levy on big companies, a 0.5 percentage-point rise in the Medicare levy (income tax) and measures that together could raise nearly $10 billion over four years such as tougher corporate tax base protections, cuts to research tax breaks, higher cigarette taxes and a levy on savings accounts.
According to the article, Abbott’s plan involves both reductions in company tax rate and new levies or removal of business tax breaks. Those changes could alter after‑tax profits for some companies — for example, a lower company tax rate can boost after‑tax earnings, while new levies or the removal of deductions can reduce them. The net effect depends on which measures apply to a particular company and how they balance out.
The article cites Treasury’s pre‑election economic and fiscal outlook: if spending growth is limited to an average 2% real per year and tax collections don’t exceed 23.7% of GDP, the budget could recover to a 1% of GDP surplus by 2020–21. But with spending projected to grow at about 3.5% real per year, achieving that surplus would require either very large increases in tax collections or unprecedented spending restraint.
The article says unrestrained bracket creep could increase tax collections enough to produce a surplus even if spending grows at its ‘‘natural’’ rate. To do that would require tax collections to grow about 3.3 percentage points faster than the economy — equivalent to around $56 billion a year in today’s dollars — which the article implies is politically and practically challenging.
The article’s conclusion is cautionary: given the mix of tax cuts, new levies, spending promises and difficult Treasury projections, the author says they would be amazed if taxes did anything but keep rising. In short, investors should expect continued tax and fiscal pressure rather than guaranteed long‑term tax cuts.
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