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Hockey Discusses Income Tax Cuts

by Mary Swire, Tax-News.com, Hong Kong

24 August 2015


Treasurer Joe Hockey has said that Australia's personal income tax system is uncompetitive, with high marginal rates and the effects of bracket creep holding the country back.

In a speech to the Tax Institute and Chartered Accountants Australia and New Zealand, Hockey said: "The price we pay for failing to strengthen and improve our tax system is less income than Australians should receive and fewer jobs than Australians could hold. Our existing taxation system is increasingly reducing the incentive for many Australians to work harder, earn more, invest and, in the end, give our families greater financial security."

Personal income tax is the Government's largest source of revenue, raising around AUD170bn (USD123.3bn) a year. Together, personal and corporate income taxes account for around 60 percent of total tax revenue, compared with an average of 34 percent across Organisation for Economic Cooperation and Development (OECD) countries. Hockey said the highest marginal tax rate is 47 percent and applies from AUD180,000, a figure only 2.3 times the average full-time wage.

Hockey noted that, aside from the increase in the tax-free threshold in 2012, personal income tax brackets have not been significantly adjusted since 2007. He highlighted the negative impact of bracket creep, which occurs when employees are pushed into higher tax brackets as a result of inflation and rising wages.

"In the next two years, without action, about 300,000 Australians will move into the second-highest tax bracket. And in 10 years, if tax cuts don't happen, almost half of all taxpayers will be in the top two tax brackets, a jump from 27 percent to 43 percent," Hockey observed.

According to Hockey, the Government intends to "short-circuit the negative impact of bracket creep on the incentive to earn and be more successful."

Hockey also pointed out while that 2.7 percent of Australians fall into the top income tax bracket, they pay more than 28 percent of all personal income tax. The top ten percent of earners pay almost half of all income tax. In 1996-97, "the tax burden was less concentrated, with the top 25 percent paying a majority of income tax," he said.

Hockey expressed his concern that Australia's "redistributive tax system has created a situation in which we as a nation are over-reliant on a very narrow base." He advocated a tax system that "encourages growth and development, and creates settings that are right for all Australians."

Hockey argued that a lower income tax burden would "encourage our budding entrepreneurs to make something of their ideas; it will give people the jolt they need to get better qualifications; it will provide [an] incentive to go for that promotion – to climb the ladder of opportunity."

The Treasurer's comments were welcomed by the business community. Kate Carnell, Chief Executive Officer of the Australian Chamber of Commerce and Industry, said: "Treasurer Hockey is spot on. Australia's income tax rates are too high and need to be reduced. As it stands many Australians are hard at work only to see a significant share of their income go to the tax collector. This stifles the incentive to work and hurts the ability of households to improve their standards of living."

"Australia needs to ensure its income tax rates are competitive by global standards. Australia's tap rate of income tax can stand as high as 49 percent, while our major competitors have their top rates much lower – 33 percent in New Zealand, 29 percent in Singapore, and 15 percent in Hong Kong. With many entrepreneurs and workers increasingly able to move around the world, this gap makes them less likely to reside in Australia. The effect of bracket creep is particularly pernicious. As inflation pushes up people's incomes a greater share is lost in taxes. This causes economic harm by penalizing people for their work and allows our political leaders to launch a tax grab without publicly making the case for tax rises. Bracket creep amounts to tax increases by stealth," Carnell added.

Carnell said that tax brackets should be linked to inflation and that, over time, the number of tax brackets should be reduced and the top income tax rate brought more into line with the company tax rate.

Jennifer Westacott, Chief Executive of the Business Council of Australia, described Hockey's arguments for a more competitive personal tax system as "an encouraging next step towards creating a tax system that works for everyone."

"The reality is that the case for comprehensive tax reform is compelling because Australia is falling behind the world on competitiveness and productivity, and the tax system is not adequately supporting a growing economy or keeping up with the challenges of the 21st century. As well as lower personal income taxes there must be lower company taxes to make us internationally competitive and support greater investment, which creates jobs and wealth, and removal of inefficient state taxes and a greater reliance on indirect taxes such as the goods and services tax. All options should be kept on the table as the Tax White Paper process debate continues. Reform of the personal tax system is just one element of a comprehensive tax reform package that supports a growing economy and rising living standards," Westacott said.

TAGS: tax | investment | business | entrepreneurs | employees | corporation tax | goods and services tax (GST) | Australia | Singapore | tax thresholds | ministry of finance | tax rates | Hong Kong | New Zealand | revenue statistics | tax reform | standards | trade association | trade | inflation | individual income tax | services

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