Bracket creep will cost taxpayers $45 billion through higher income taxes: PwC

Treasurer Joe Hockey has reaffirmed his commitment to addressing bracket creep in the upcoming tax review, but has refused to include changes to politically sensitive areas like superannuation concessions, negative gearing and GST, pushing back the onus on the states for GST reform.

When it comes to the GST, Mr Hockey would not commit to change, saying it was a matter the states would have to agree to.

“Let me be very clear: no change will be considered without the unanimous agreement of state and territory governments and bipartisan support in the federal Parliament,” he said.

Mr Hockey noted that Victorian Premier Daniel Andrews on Wednesday ruled out increasing the GST or broadening the base.

“The federal government is not going to be arguing for a tax change that the beneficiary actually doesn’t want,” Mr Hockey told a PwC tax reform forum in Melbourne on Wednesday.

“…If the beneficiary says, ‘we don’t want it’, it’s effectively game over”.

Mr Hockey has indicated previously that he wants to cut personal tax rates. The
Intergenerational Report released by Treasury earlier this year also outlined the problem of bracket creep – where wage inflation places taxpayers in higher marginal tax brackets, leaving them with less take-home pay and giving them less incentive to work.

But the report also said there wouldn’t be money to fund personal tax reform until 2021.

“Bracket creep will mean that the average full time wage – currently around $77,000 – will soon sit in the second top income tax bracket of 37 cents in the dollar,” Mr Hockey said.

“This is just not good enough.”

“We must address bracket creep because it is better to leave money in the pocket of the taxpayer and resist the temptation for the government, using taxpayers’ money, to provide financial support to individuals and families.”

PwC managing partner Tom Seymour attacked both major parties for failing to agree to genuine tax reform.

He said the Abbott government needed to look to New Zealand’s government for the right way forward on tax reform: reduced personal taxes and increasing the GST to 15 per cent.

The impact of bracket creep will be more economically damaging than a small rise in the GST, he said.

PwC research shows that in just five years’ time bracket creep will cost taxpayers $45 billion through higher income taxes.

“That’s three times the cost of broadening GST to food, health and education at $13.5 billion and just under the cost of broadening and raising the GST to 15 per cent at $53 billion,” Mr Seymour said.

“The reality is, not reforming the tax system will hurt more people than some of the proposed changes.”

Mr Seymour said unfortunately there was “a real risk that the right reform won’t be achieved, let alone debated, when the Labor party seems intent on using tax reform as a political battering ram and the Liberal party keeps taking things off the table rather than consistently and thoughtfully making the case for real economic reform”.

He said the recent focus on the amount of tax multinationals pay was where the political focus was, rather than how to set Australia up to become more competitive. “While the broader base erosion and profit shifting focus and debate is appropriate, nowhere did we hear our political leaders putting the case for how we ensure Australia has an internationally competitive tax system to attract the companies of the future to set up business in Australia,” he said.

Australia was becoming uncompetitive. “We have a real opportunity to establish Australia as a hub for businesses looking to do business in Asia,” he said. “Instead, the current debate runs the risk of discouraging international business investment, not encouraging it. What we don’t want is having a great tax system, but no business to tax, because we have become uncompetitive on the global stage.”

He said everything needed to be looked at: “Income taxes and bracket creep, business taxes, state taxes, the GST, negative gearing, the capital gains tax discount, superannuation concessions and base erosion and profit shifting must be part of the discussion. If they have already been ruled out, then we firmly believe they can and should be ruled back in.”

But Mr Hockey once again refused to make any changes to negative gearing and superannuation concessions. He said negative gearing was a fundamental part of the taxation system, and it was economically the wrong time to be tinkering with superannuation concessions that many retirees were dependent on.