Taxable Income

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A large proportion of any cut in personal income tax - especially if the cuts were skewed towards lower and middle-income households with a higher propensity to spend - would likely provide a greater direct stimulus to the Australian economy than an equivalent cut in company tax.
Cutting personal income taxes seems likely to provide much more of a boost to the Australian economy than cutting company income tax. <a href="https://treasury.gov.au/publication/analysis-of-the-long-term-effects-of-a-company-tax-cut/" target="_blank">As the government’s own published modelling</a> shows, the benefits of its proposed cuts to the company income tax rate are small relative to their cost.
<h2>Do we need income tax cuts to provide relief from financial hardship?</h2>
<blockquote>
The treasurer and I have been working on how we can provide more tax relief for hard-working middle income Australian families.
</blockquote>
- Prime Minister Malcolm Turnbull
Over the last five years, <a href="http://www.abs.gov.au/AUSSTATS/abs@.nsf/Lookup/5206.0Main+Features1Dec%202017?OpenDocument" target="_blank">household spending has grown</a> by just 2.6% per annum in real terms, on average - of which more than half has been the result of population growth - compared with an average of 3.6% per annum over the preceding 12 years. Even with that lower growth rate in their spending, households have reduced their saving rate, from around 7% of disposable income five years ago to around 2.5% in 2017. That’s the lowest saving rate since before the financial crisis.
The key reason for this “squeeze” on household spending and saving is of course the ongoing weakness in the growth rate of household disposable income. Over the past five years, real per capita household disposable income has grown at an average annual rate of just 0.4%, compared with an average of 2.6% per annum over the preceding 12 years.
One reason for this is that Australian households have been paying an increasing proportion of their income in taxes. In the years prior to the onset of the financial crisis, almost every budget included personal income tax cuts in some form or other.
By contrast, there have been no changes to Australia’s <a href="https://www.ato.gov.au/Rates/Individual-income-tax-rates/" target="_blank">personal income tax scale</a> since 2008 - apart from the increase in the tax-free threshold (paid for by an increase in the bottom rate) in 2012, the temporary surcharge on top-rate taxpayers which applied between 2014-15 and 2016-17, and the increase in the threshold for the second-top rate (from A$80,000 to A$87,000) which took effect in the 2016-17 financial year.
As a result, in 2017, Australian households in aggregate paid 19.5% of their taxable incomes in income and other direct taxes - the highest proportion since 2005, and continuing a steady rise since 2011.
Households are also spending almost two and a quarter percentage points more of their after-tax disposable incomes on education, health, insurance and other financial services, and utilities than they did five years ago.
Given all this, it’s little wonder that household spending in more “discretionary” areas has been so weak in recent years.
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Well-targeted personal income tax cuts could thus help to ameliorate this multi-faceted “squeeze” on household incomes, and provide a direct boost to the economy.
<h2>Do we need income tax cuts to make up for the fact that we haven’t had a pay rise in a while?</h2>
<blockquote>
It’s been a long time since any Australians had a decent pay rise…this is a real pressure on Australians…we can give them some relief when it comes to their personal income tax.
</blockquote>
- Treasurer Scott Morrison
The other major reason for the very slow growth in real household disposable income over the past few years has been the unprecedented slowdown in wages growth. <a href="http://www.abs.gov.au/AUSSTATS/abs@.nsf/Lookup/6345.0Main+Features1Dec%202017?OpenDocument">Wages have risen</a> at an average annual rate of just 2.2% over the past five years (only 0.3 of a percentage point above the inflation rate), down from 3.7% per annum over the preceding 12 years.
Although, as RBA Governor Phillip Lowe noted in <a href="http://www.rba.gov.au/speeches/2018/sp-gov-2018-04-11" target="_blank">a speech</a> that “the latest data suggest that the rate of wages growth has now troughed”, he went on to warn that the pickup which the RBA expects “is likely to be only gradual”.
Recent experience in other advanced economies clearly suggests that the unemployment rate needs to be lower for longer than in previous business cycles before wages growth starts to pick up. So even assuming that Governor Lowe is right, it may be one or two years before Australian households can expect any meaningful improvement in their financial position from faster growth in their wages or salaries.
Well targeted personal income tax cuts could help provide at least some offset to this likely continuing stagnation in wages growth over the next year or so.
<h2>What’s the verdict?</h2>
Targeted personal income tax cuts could reduce the squeeze on households and make up for persistent low wages.
Of course, it remains crucial that any cuts in personal income tax be sustainable - that is, that they are not funded by bigger deficits, and do not materially detract from the task of putting the nation’s public finances on a sounder footing. This is so we are better placed to withstand any unforeseen economic shocks.
And it’s important to remember that government spending has moved to what appears to be a permanently higher level as a proportion of GDP since the financial crisis. The government’s underlying cash payments averaged 25% of GDP from 2011-12 through 2017-18, up from 24% from 2001-02 through 2007-08. That also represents a constraint on the scope for tax cuts.
However, the apparently greater improvement in the budget <a href="https://www.finance.gov.au/sites/default/files/feb-mfs-2018.pdf" target="_blank">so far this financial year</a>, compared with what was forecast as recently as last December’s Mid-Year Economic and Fiscal Outlook, could give the government a little more latitude for financially sustainable personal income tax cuts in the upcoming budget.
<img src="https://counter.theconversation.com/content/94500/count.gif?distributor=republish-lightbox-basic" alt="The Conversation" width="1" height="1">Perhaps the most sustainable way of providing the “relief” which the treasurer says many Australian households need, would be to abandon the tax cut for companies turning over more than A$50 million a year. The government hasn’t been able to get these through the Senate. These cuts would do far less to boost the Australian economy than well-targeted personal income tax cuts of a similar order of magnitude.
<a href="https://theconversation.com/profiles/saul-eslake-665" target="_blank">Saul Eslake</a>, Vice-Chancellor’s Fellow, <a href="http://theconversation.com/institutions/university-of-tasmania-888" target="_blank">University of Tasmania</a>
This article was originally published on <a href="http://theconversation.com" target="_blank">The Conversation</a>. Read the <a href="https://theconversation.com/budget-policy-check-does-australia-need-personal-income-tax-cuts-94500" target="_blank">original article</a>.
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j.ballantyne1990-6AQqhLzZaK

Does Australia need personal income tax cuts? Saul Eslake

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<img src="https://counter.theconversation.edu.au/content/81099/count.gif?distributor=republish-lightbox-advanced" alt="The Conversation" width="1" height="1">
GUEST OBSERVER
Many people assume Australia’s regions are getting a raw deal compared to the big cities. But beneath the oft-told “tale of two Australia's” is a more nuanced story.
New research released today by the Grattan Institute shows that income growth and unemployment rates are not obviously worse in regional areas. Cities and regions both have pockets of disadvantage, as well as areas with healthy income growth and low unemployment.
But shifts in population are driving a wedge between city and regional Australia. Fewer people are living in remote areas. And because of this, the economy is becoming more concentrated in cities and large regional centres.
<a href="https://www.propertyobserver.com.au/images/2017/08/03/Screen%20Shot%202017-08-03%20at%209.16.25%20AM.png" target="_blank">Click to enlarge</a>
<img src="https://www.urban.com.au/images/2017/08/03/Screen%20Shot%202017-08-03%20at%209.16.25%20AM.png" alt="">
Income growth was particularly high over the past decade in the mining areas of Western Australia and Queensland. But this is not just a mining-state phenomenon: average growth in income per person was similar in cities and regions across every state.
Income growth was high in areas close to the centre of Sydney, Melbourne and Adelaide. But suburban parts of these cities did not fare so well – areas in Sydney’s west and Melbourne’s outer ring had some of the lowest income growth in the nation.
The absolute level of income tends to be higher in the cities than the regions - but this has always been so. The highest taxable incomes in Australia are in Sydney’s eastern suburbs, followed by Cottesloe in Perth and Stonnington in eastern Melbourne. The only regional area in the top 20 areas by taxable income is the mining region of Pilbara in WA.
The lowest taxable incomes are in Tasmania and the regions of the east-coast states, especially the far north coast of NSW, central Victoria and southern Queensland.
Where unemployment is worst
Unemployment is not obviously worse in the regions than the cities, but both have areas of strong disadvantage.
Parts of Far North Queensland have the highest rates of unemployment: 40% or more, compared to the national average of 6.1% in 2016. Most of these areas have had high unemployment rates for many years.
Unemployment tends to be higher in large regional towns than in surrounding rural areas. In the capital cities, unemployment is concentrated along the “spines” - built-up areas that follow major roads.
Unemployment got worse over the last five years in many areas where the jobless rate was already high. The unemployment rate increased in the northern parts of WA, the Northern Territory and Queensland between 2011 and 2016. Unemployment appears to be entrenched in these areas.
Unemployment also got worse along city “spines”: the Ipswich to Carole Park corridor in Brisbane, and the Dandenong to Pakenham corridor in Melbourne. The exception was the Botany Bay to Liverpool corridor in Sydney, where unemployment improved but remains high.
Population growth is much stronger in the cities
The regions are not noticeably falling behind in terms of income growth and employment. But there are big – and growing – differences in the location of economic activity and where people are choosing to live.
A long-term trend in Australia’s economy continued in the past decade: fewer people are working in agriculture and manufacturing, and more are finding jobs in services. The loss of agricultural and manufacturing work is felt most keenly in regional and outer-suburban areas. And many service jobs – particularly professional services – tend to cluster in the centre of cities.
Large regional towns exert a gravitational pull on the populations of smaller rural communities. Major cities have a stronger pull again, drawing younger and more-educated people from the regions as well as the majority of new migrants.
This is evident in the population data over the past decade: in general, populations declined in small towns in the east-coast states and South Australia, but increased in larger regional centres. Population – and unemployment – also tended to increase faster in the towns along the east coast. Populations in the major cities, meanwhile, grew strongly.
Voters in regional areas are increasingly voting for minor parties. It’s often suggested this is because of the deteriorating economic position of the regions.
But given that people in regions have generally fared as well as those in cities over the past decade, major parties may need to look beyond income and employment to discover what is driving dissatisfaction among regional voters.
<a href="https://theconversation.com/profiles/john-daley-1870" target="_blank" style="font-size: 12.16px;"></a>
<a href="https://theconversation.com/profiles/john-daley-1870" target="_blank">John Daley</a><a href="https://theconversation.com/profiles/john-daley-1870"> </a>is Chief Executive Officer, Grattan Institute.
<a href="https://theconversation.com/profiles/john-daley-1870" target="_blank" style="font-size: 12.16px;"></a>
<a href="https://theconversation.com/profiles/carmela-chivers-390957" target="_blank">Carmela Chivers </a>is Associate, Grattan Institute, Grattan Institute.
<a href="https://theconversation.com/profiles/john-daley-1870" target="_blank" style="font-size: 12.16px;"></a>
<a href="https://theconversation.com/profiles/danielle-wood-147710" target="_blank">Danielle Wood </a>is Fellow, Australian Perspectives, Grattan Institute.
<a href="https://theconversation.com/profiles/john-daley-1870" target="_blank" style="font-size: 12.16px;"></a>
All are authors for <a href="https://theconversation.com/au" target="_blank">The Conversation</a>.
<a href="https://theconversation.com/profiles/john-daley-1870" target="_blank" style="font-size: 12.16px;"> </a>
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jchancellor-FAypfDUnLy

Australia’s city/country divide is not as wide as you may think

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Industry lobby group the Housing Industry Association (HIA) has expressed concern at reports that changes to negative gearing might be back on the table, as the government looks at alternative taxation reform options to the GST. 
“New housing is one of the most highly taxed sectors in the economy, and the removal of negative gearing would only make that situation worse and discourage investment,” said HIA chief executive Industry Policy and Media Graham Wolfe. 
The HIA cited research by Independent Economics which concludes that restricting access to negative gearing for residential property hurts investment in housing, erodes affordability and pressures rents on the upside. 
“Negative gearing promotes private investment in the rental market, both stimulating economic activity and taking the pressure off social housing and the public purse,” said Wolfe.
“With an ageing workforce and future pressure expected on publicly funded services, policy settings such as negative gearing that promote wealth creation and self-sufficiency in retirement should be promoted.
“It is important to remember that negative gearing is not the domain of so-called ‘wealthy investors’.” 
He cited ATO figures which show that 79% of tax payers with a rental property declare a taxable income of less than $100,000. 
“In fact, seven out of 10 tax payers with a rental property earn less than $80,000.” 
“A body of independent research has been developed over a number of years that demonstrates categorially that negative gearing is a positive force for the Australian economy,” concluded Wolfe. 
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