Federal budget 2018: Tax cap limit ‘more politics than economics’

Finance Minister Mathias Cormann declared that
Finance Minister Mathias Cormann declared that “as of this budget, we are making it a formal part of our fiscal strategy. Alex Ellinghausen

There is a strong case for reversing incentive-sapping effects of income tax “bracket creep”, but Treasurer Scott Morrison’s pledge to limit taxes to no more than 23.9 per cent of gross domestic product is mostly a political move, say leading economists.

“Bracket creep is very real, and it’s accounting for a big chunk of the return to surplus – by most estimates it’s worth around 80 per cent of it,” said Richard Holden, professor of economics at UNSW.

“That means bigger taxes on middle Australians, year after year. There’s an economic case for giving that back, but I’d prefer them to index the tax brackets to inflation,” he said.

By contrast, the setting of a tax-to-GDP “speed limit” of 23.9 per cent has no basis in economics, he suggested. “It’s not a magic number, or some sort of fundamental law. It looks like a way of wedging Labor. It seems more like politics than economics.”

Attempts to formalise a tax-to-GDP cap – which at 23.9 per cent is near the top of where the measure has been over the ...
Attempts to formalise a tax-to-GDP cap – which at 23.9 per cent is near the top of where the measure has been over the past four decades – are “not that meaningful in isolation,” said Stephen Walters. Jessica Hromas

The remarks by Professor Holden, a strong supporter of the Coalition’s corporate tax cuts, have been echoed by other economists after the government vowed to formalise the tax-to-GDP cap as a new core fiscal rule in Tuesday’s budget.

Speaking on Monday, Finance Minister Mathias Cormann declared that “as of this budget, we are making it…

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