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Making some sense of tax rate cuts

IT’S something a breath of fresh air when all the talk around town is focused on the likelihood of a pre-election tax cut.

With a healthy surplus predicted, the economy in good shape and global uncertainty settling down, there is a good chance that a higher-than-expected level of company taxes could be passed on to taxpayers.

While the cynics around might suggest that this is just pork barrelling at a national level, I believe such a move would be positive – not just to those of us who need to pay the mortgage, but as a long-term benefit to the economy.

The only pity with the line of thinking coming out of Canberra is the way such a strategy is likely to be implemented.

The suggestion is that the Federal Government would look to lift the threshold that the top marginal rate of tax kicks in, rather than lower the top tax rate.

From Treasurer Peter Costello’s point of view this move gives maximum electoral impact but limits the immediate effect on the budget that a reduction in the top rate would have.

This is a shame because bracket creep will soon claw back gains provided by lifting the threshold.

Instead, Mr Costello need only look at the effect of cutting corporate tax rates on collections to see that there is more value in lowering marginal rates than there is reshuffling the threshold deckchairs.

I took a bit of time to go back through past budgets and follow the trend in companies’ tax revenue collection since the mid-1990s.

While I admit my methods are not as rigorously scientific as the average economist, the results appear startlingly obvious.

For instance, between 1997-98 and 2003-04 estimate revenue from companies has risen almost 84 per cent, from $19.41 billion to $35.65 billion.

Only tax taken from superannuation funds has increased anywhere near this amount, and that is at a much lower level to start with.

It is worth remembering that during this seven-year period there were two cuts to the company tax rate – from 36 per cent in 2000-01 and then from 34 per cent in 2001-02 – to reach the current level of 30 per cent.

And, allowing for a dip in collections between 1999-2000 and 2000-01, this area of tax revenue has risen strongly each year – including this year, hence the talk of tax cuts.

Compare this with personal income tax collections where tax cuts, from my recollection, have been fairly minimal, including those that came with the GST.

Individuals are expected to contribute $95.86 billion this tax year, compared with $70.82 billion in 1997-98, a modest rise of just 35 per cent over the seven-year period – much more in line with the total tax take which has increased less than 30 per cent during this time.

In other words it appears that lowering tax rates is good for business in all senses of the word, including tax collections.

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