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The scent of elections and tax cuts: Democrats offer alternatives

By Andrew Murray - posted Thursday, 27 November 2003


So, if tax cuts seem inevitable, what is the right way to go? What could or should be the government priorities and how much money would they have to spend?

The latter we don't know, but priorities differ. If you wanted to keep the status quo, then bracket creep would be the target.

Bracket creep is the impact of inflation related salary increases on the static progressive marginal tax rates. Indexing tax rates to end the bracket creep problem would result in a cost to the revenue by 2005-06 of an estimated $3.5 billion per annum. $3.5 billion less tax to pay annually.

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If you wanted to get people off welfare and into work you would target the tax and welfare intersects.

The working class and the middle class get the rawest income tax deal. Low and lower income Australians struggle with a tax threshold that kicks in at a ridiculously low level of $6,000, and they struggle with the highest effective tax rates of all because as they earn more, welfare benefits reduce.

The most important distributive mechanism for improving the lot of low-income Australians is to improve their disposable income.

From the employer's perspective, if the disposable income of low-wage earners increases as a result of tax cuts, it could take some of the stress and some of the tension off the low-wage industrial case that has to be mounted annually.

Imagine if the government had the ticker to raise the tax-free threshold from $6,000 to $20,000. ACOSS, in their 'Info 347' June 2003 paper, say that the average tax rate on all income for someone earning $20,000 a year is presently 12 per cent, or $2,400.

So, if the tax-free threshold were raised to $20,000, that low-income wage earner would have $2,400 more per annum, or $46.15 more per week disposable income in their pocket.

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All Australians would get a tax cut because raising the tax-free threshold to $20,000 would flow right up through every income level and would cost a massive $18 billion a year.

That would have to be partly paid for by the richer Australians losing tax concessions.

This is because Access Economics' projected ongoing surpluses of around $7 billion would never be enough. Massively reducing corporate welfare, welfare for the wealthy and various tax lurks would be necessary.

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Article edited by Jenny Ostini.
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About the Author

Senator Andrew Murray is Taxation and Workplace Relations Spokesperson for the Australian Democrats and a Senator for Western Australia.

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Access Economics
Australian Council of Social Services
Australian Democrats
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