CEDA offers mixed report card on tax reform

The federal government’s prioritisation of income tax cuts to relieve bracket creep have been given the tick of approval in a new report, which also offered some surprising conclusions about the Labor opposition’s stance on capital gains tax and dividend imputation.

The Committee for Economic Development of Australia’s sustainable budget report, released today, said income tax relief targeted at the middle class should be a long-term tax reform priority.

That follows a large reform package introduced in the 2018 budget, a seven-year program to reduce taxes by about $144 billion.

“Australia is much more reliant on tax bases that are volatile and have medium to high economic costs, such as taxes on labour and capital than other advanced economies,” the report said.

“This is particularly so now, with surging personal income and company tax receipts driving budget improvement.

“At the same time tax bases on consumption (including the GST), which have a lower economic cost, are narrowing.

“The government has taken steps to lower the burden of personal income tax by reducing the impact of bracket creep through its personal income tax plan, to be fully implemented by 2024.

“Despite this, personal income tax is still expected to increase as a proportion of GDP over the next decade.”

Similarly, if the company tax rate can not be reduced, the government should provide more generous allowances for new investment by businesses, the report said.

CEDA also praised the low level of spending growth in the past couple of budgets.

“In recent years, the budget has seen the lowest levels of real growth in payments for some decades,” the report said.

“Real payments growth has been averaging under 2 per cent per year – the yardstick for expenditure discipline since the GFC.

“Expenditure restraint has been accompanied by stronger than expected economic growth in recent years and a substantial lift in tax revenues which is driving the path to surplus in 2019-20.”

Tightening rules

CEDA also approved of moves to remove refundability of franking credits.

“Contrary to some arguments being made, refundability is fully consistent with an imputation system,” the report said.

“The company tax forms a pre-payment of the shareholder’s tax, with the final tax obligation being paid at their marginal tax rate.

“(Abolishing refundability) will reduce investor demand for high dividend-paying companies, with the potential for a small increase in the cost of equity particularly for those companies without ready access to international capital.”

But CEDA warned that the expected increase in the number of people above retirement age would blow-out the cost of the system.

Removing refundability will also reduce incentives for ex-dividend arbitrage, the report said.

CEDA also provided tepid support for limiting negative gearing and changing the capital gains tax discount.

“CEDA strongly supports the general principle that capital gains should be taxed at a concessional rate,” the report said.

“However, as concluded in CEDA’s 2017 Housing Australia research, over time, excessively generous capital gains taxation has encouraged the flight to property and other assets.

“This has led to overinvestment in property and contributed to housing affordability concerns.

“Part of this excessive generosity has occurred because inflation has been lower than expected when the discount was introduced in the late 1990s.”