Preliminary #2015Budget thoughts: More tax, more spending, more deficits

The following are some preliminary thoughts by John Humphreys, Deputy Director of the Australian Taxpayers' Alliance on the 2015 Federal Budget. A formal statement on behalf of the Australian Taxpayers' Alliance will be released shortly. 

Summary

True to their word, this has been a fairly boring budget since most of the details had already been announced. As expected, the government has introduced a few extra taxes (in addition to bracket creep), and a few new spending projects, and budget deficits for the next four years.

In a continuation of a theme started by Kevin Rudd seven years ago, the budget predicts a large deficit ($35.1 billion for 2015/16) and then hopes that the deficit will be lower in the future as tax revenue is predicted to rise sharply. In particular, the budget predicts that revenue will increase from the current 23.5% of GDP up to 25.2% of GDP in 2018/19.

Revenue as GDP

 

Most of the extra revenue comes from bracket creep and optimistic assumptions of high economic growth in the future, though the government has announced a series of new tax measures including a digital service tax, foreign investment tax, and hunting down firms that don’t pay enough GST.

The best fiscal outcome we can hope for now is apparently a deficit of $6.9 billion in three years time (more than 10 years after the GFC), though all previous predictions of improvement have proven illusory so it’s worth being skeptical.

The 2015/16 deficit is about $4 billion worse than expected half a year ago, which is entirely explained by $4 billion worth of new spending.

The government claims that their budget strategy requires that “new spending measures will be more than offset by reductions in spending elsewhere” but they fail their own test in the budget year and all the forward estimates.  To their credit, while the government has introduced new spending measures, the total real expenditure (per person) remains roughly constant over the next few years. It is this approach of constant spending with rising revenue that underpins the improving budget balance in the forward estimates.

One of the main changes announced in this budget is the introduction of a progressive company tax. While the government is to be applauded in trying to reduce the tax burden on small business, their proposal is problematic. Since the cutoff between small and large business is based on turnover, the progressive company tax will punish firms with large turnover and a low profit margin, compared with firms that have low turnover and a high profit margin. And since the progressive tax is levied at an average rate, it is actually sharply regressive at the $2 million threshold. When a firm increases turnover to just over $2 million their marginal company tax rate is over 100%, creating a disincentive against business growth. Perhaps more concerning is the precedent being set with introducing a progressive company tax.

In summary, this budget is “business as usual” to the degree that we see more tax, a bit more spending, and more deficits, with no progress on structural reform. The result is in line with expectations, but falls far short of what Australia needs to meet the fiscal challenges of the future and reduce the burden on the long suffering taxpayers.

 

Further details

Taxing the internet depends on the states

The government’s plan to tax digital products and services (costing taxpayers about $200 million per year) will only go ahead if all the state governments agree. The budget papers state that the change “will require the unanimous agreement of the States and Territories prior to the enactment of legislation” (BP2-21).

While the states will be eager to collect the additional revenue, this does offer an opportunity for consumer groups to lobby their state politicians in the hope of blocking the tax hike. It is disappointing that the federal government is targeting regular consumers, and the Australian Taxpayers Alliance calls on all state and territory governments to reject this cash grab.

Progressive & regressive company tax



The new company tax arrangement creates a mess of a system, biased against low profit-margin business, and creating a bottleneck where medium sized firms are severely punished for success.

The government has proposed a progressive company tax of 28.5% profit tax for firms with up to $2 million turnover and 30% profit tax for larger firms. Note that it is a profit tax differentiated by turnover (not profit). A firm with $10 million turnover and a 1% profit margin has a profit of $100,000, and will have to pay $30,000 company tax… while a firm with $1 million turnover and a 10% profit margin also has a profit of $100,000, but will pay $28,500 company tax.


Even worse, as a firm crosses over the $2 million threshold the higher company tax rate will apply to all of their profit, creating a high marginal tax rate at the threshold.

Consider a firm with a 10% profit margin and turnover of $1.9 million… earning a profit of $190,000 and paying $54,150 in company tax. For every additional $10,000 turnover they earn an additional $1000 and pay an additional $285 in company tax, until the reach the threshold. At the point that turnover goes from $1.99 million to $2 million the firm will earn an additional $1000 in profit but will pay an additional $3285 in company tax, creating a disincentive against growth.

It’s great that the government is trying to provide a tax cut for business, but their current attempt is dangerous in the precedent set, is unfair to firms with a low profit margin, and sets poor incentives for firms with turnover close to the $2 million threshold, encouraging them not to grow.

Instead of creating this new mess of a system, it would have been better to just cut the rate to 29% across the board… or even better, to cut it to 25% as suggested by the Henry Tax Review





Welfare made easy


From the budget papers… If we took the total amount spent on social security + health + education + housing, and distributed it directly to the poorest half of the country, then each person would be eligible for $22,658 per year. That means that a family of four would receive over $90,000, which puts them easily into the top 1% of global incomes.That fact that poverty persists demonstrates that there is fundamentally a problem with the system, which has nothing to do with a lack of money.


The Budget has also replaced the previous policy of "no welfare for six months for under 30s" and replaced it with "no welfare for one month for under 25s", which appears to be a more more realistic and reasonable proposal, however this still shows up as a spending increase compared to the previous policy

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