Influential Liberal MP Dan Tehan has proposed changes to the tax system that would slash income tax for millions of Australians and create a single rate for most earners.
But the trade-off would almost certainly involve higher prices through an increased GST.
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The case for increasing the GST
Stronger economic growth can be delivered by changing the tax mix away from income tax towards the GST, argues Liberal MP Dan Tehan.
It comes as MPs within the government trade insults over a possible GST increase, and as Labor used Parliament to reprise an old Tony Abbott line about the carbon tax, saying the higher GST will make everything more expensive.
In an opinion piece for Fairfax Media, Mr Tehan – who has floated policy proposals in the past that have turned out to be well informed – revives a proposal in the Rudd government's Henry Tax review that would have seen all taxpayers earning between $25,000 and $180,000 pay a single 35¢ in the dollar rate of tax.
At present, Australia has five tax brackets – zero cents in the dollar up to $18,000, 19¢ up to $37,000, 32.5¢ up to $80,000, 37¢ up to $180,000 and 45¢ for each dollar over $180,000.
Because of inflation, people are being pushed into higher tax brackets and are therefore "slowly bleeding", Mr Tehan writes.
The government's Re:think tax paper warned that bracket creep would see 2 million extra Australians pushed into the second top tax bracket, people earning $80,000 to $180,000 a year, and another 750,000 more people into the top, over $180,000 bracket by 2024-25.
To tackle this issue, Fairfax understands a variation of the Henry proposal is being closely examined by Treasury.
The proposal would see the 37¢ and 32.5¢ merged and a single rate set of 35¢ adopted, while income tax bracket rates would be raised from $37,000 to ensure people at the bottom end of this tax bracket would not end up worse off.
These changes would affect the bulk of taxpayers, about 7 million people.
Senior government sources confirmed the proposal was under careful consideration.
"Bracket creep will take $5.5 billion from Australian workers this year and over $25 billion between now and 2019. This means that workers earning the average annual wage of $80,000 will see an extra $3,800 go the tax office each year," he says.
" With no changes, in seven years these average earners might be earning thirty percent more in wages but end up paying fifty percent more in tax."
" Only tax reform that includes all options allows us to address the major flaws in our tax system, particularly bracket creep."
Mr Tehan is an ally of Scott Morrison and Liberal sources say the Treasurer is also examining this proposal very seriously as one element in a tax reform package that may or may not include a GST rise.
The federal government was at pains to point out on Thursday, after Fairfax Media revealed a backbench revolt was in the offing, that no decision had been taken.
Anxiety over the government's unstructured tax debate continues to strain Coalition unity with MPs lashing out at colleagues and flagging insurrection.
The opposition leapt on the divisions citing Fairfax Media reports that marginal seat Liberals and Nationals worried about selling a bigger GST to voters, are being derided as "bed wetters".
Veteran Liberal Russell Broadbent, who lost his seat in Parliament in 1998 over the introduction of the GST, called the derision of colleagues "a disgrace" while warning that an expansion of the GST to 15 per cent would be difficult.
"You'd have to have a very good argument to raise a tax by 50 per cent, a very good argument, and that argument hasn't been put to me yet", he said.
The moderate Victorian Liberal also hit back when asked if he appreciated being referred to a "bed wetter".
"No I don't, I think it's a disgrace. It think that people are actually prepared to consider policy options, whether they be a backbencher, whether they be a minister or anybody, (and) when they start to denigrate their colleagues in that way it is an absolute disgrace."
Others from the Coalition's more conservative wing, also questioned the faith being placed in the GST to solve multiple budgetary and tax problems.
"Public debate around the GST, it's kind of like the Thermomix of Australian policy," quipped Nationals senator Matt Canavan.
"It can bake, it can make soup, it can improve your love life, when it can't."
In Question Time, Prime Minister Malcolm Turnbull signalled the government was looking closely at income tax cuts.
"The only realistic option for very significant income tax cuts is by changing the tax mix, and that is why a number of people have advocated increasing the GST for the purpose.
"Compared with other countries, Australia has in its revenue mix, a very large proportion of income tax both levied on individuals and companies and of course average wage earners are moving into higher tax brackets."