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If you're promised a tax cut this Christmas, read the fine print first

Peter Martin

Published: December 6 2017 - 7:30PM

So now they can afford a tax cut?

Just months ago, in the May budget, Scott Morrison and Malcolm Turnbull pushed tax rates up. That's right, up. They lifted the Medicare levy from 2 to 2.5 per cent, beginning in 2019. It'll net them $4 billion a year, money they said they needed to fund the National Disability Insurance Scheme.

And now they can afford a cut?

Maybe they didn't really need the extra money for the National Disability Insurance Scheme after all. And there's an extremely flimsy argument that they didn't.

The mid-year budget update, due within the fortnight, is likely to show the budget is slightly better off. Unexpectedly strong company tax revenue in the first four months of the financial year has put the budget almost $5 billion ahead of target.

Much of it flows from a better than expected run up in commodity prices, which we now know didn't last. But that wouldn't stop an optimistic forecaster or an optimistic government from acting as if it would last and handing out permanent tax cuts of up to $5 billion per year.

The most successful private sector budget forecaster is Deloitte Access Economics, whose senior staff used to prepare the official forecasts when they were in Treasury.

Deloitte says that by the end of the financial year, revenue will be only $2.7 billion ahead of the budget and only $0.9 billion ahead in the following year. It produced a ready reckoner to enable us to calculate what kind of a tax cut those boosts could buy if it was permanent, which it almost certainly will not be.

Three billion could buy a lift in the $18,200 threshold to $19,200 and a lift in the $37,000 threshold to $38,000. That's all.

One billion, a more realistic, though still inflated, guess as to how much extra the government might have long term, couldn't even buy the lift from $37,000 to $38,000. Deloitte director Chris Richardson says it would buy a small sandwich or a small milkshake.

Unless the proposed tax cut applied to hardly anyone, which is a trick they've pulled repeatedly. Lifting the $87,000 threshold by $1000 costs only $110 million per year; lifting the $180,000 threshold costs only $30 million.

It's something to keep in mind if we once again get tax cuts skewed towards the top. It mightn't be so much a case of the Coalition helping out high income mates as making a gesture it can afford.

Middle earners are about to get clobbered. The government's own figures, spelt out by the Parliamentary Budget Office, show the average tax rate faced by middle-income Australians on $40,000 to $50,000 is about to climb 3 percentage points. Within four years.

Instead of handing over 14.9 per cent of their income after low starting rates and the tax-free threshold, middle earners will find themselves handing over 18.1 per cent. Within four years. It's the result of bracket creep, and the increase in the Medicare levy. And the projected return to surplus in 2020-21 depends on it.

The only ways to deliver serious tax relief are to push out further the projected return to surplus (just as it has been pushed out repeatedly by treasurers dating back to Wayne Swan), to fund the needed tax cuts with big spending cuts (something this government and the last have been incapable of, even in non-election years), or to fund the tax cuts by lifting other taxes.

Or by hoping something comes along.

And there's the magic pudding.

Here's how Finance Minister Mathias Cormann put it in a speech to the Business Council last month:

"Something that we keep pointing out again and again, but which doesn't ever seem to be appropriately well understood by analysts or commentators, is that our budget revenue forecasts are based on an assumption imposed on our forecasting model that tax revenue as a share of GDP is not allowed to exceed 23.9 per cent."

"Future tax cuts are already reflected in our revenue forecasting methodology."

He is right. Already baked into the budget projections are tax cuts from 2022-23 when the tax share of GDP is due to hit 23.9 per cent, which is the average take in the years between the introduction of the GST and the global financial crisis.

Five years into the future though those baked in tax cuts will be, they could be delivered as income tax cuts. Except that they mostly won't be, not if the government gets its full company tax cut through the Senate.

The Parliamentary Budget Office says if that happens, the company tax cut will do most of the heavy lifting needed to keep the tax to GDP ratio at 23.9 per cent, leaving little room for cuts in personal income tax, which will "continue to rise as a per cent of GDP".

There's not likely to be a magic pudding, unless the government prioritises personal tax cuts over company tax cuts or gets hit by another mining boom.

Treat sceptically proffered income tax cuts in the months beyond Christmas. They'll be either unaffordable or alarmingly small.

Peter Martin is economics editor of The Age.

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This story was found at: http://www.canberratimes.com.au/comment/if-youre-promised-a-tax-cut-this-christmas-read-the-fine-print-first-20171205-gzzhkj.html