The year was 2005. John Howard and Peter Costello had turned the ship around, the Budget was firmly in the black, taxes were coming down and an ambitious Bill Shorten was making his play for Parliament.
In laying out his manifesto, he called for “fair dinkum tax reform” which he said should see a top marginal rate of 30 cents in the dollar for those earning over $100,000, 20 cents for those earning between $50,000 and $100,000, and just 10 cents for those earning below $50,000.
How times have changed. Now, Opposition Leader, Bill Shorten is promising an increase not adecrease to the top marginal rate and this time, it’s to 49 cents in the dollar.
Higher than the top rate of 47 cents left by Paul Keating over three decades ago, and a top rate of 45 cents left by the Howard Government in 2007.
No wonder then, that Paul Keating, someone that Chris Bowen considers as his political mentor, has just over a year ago, slammed the Shorten tax hike as “too punitive a level where the state is confiscating almost half of people’s income over $180,000.”
Keating rightly recognises that “lower marginal rates will enhance our economic performance by better rewarding initiative.”
According to the most recent ATO data of 2015-16, there were 416,000 individual tax payers on the top marginal rate who contributed 30 per cent of the total personal income tax take.
According to Treasury, this number will increase to 580,000 this financial year and 820,000 in 2024-25, which by then will see those on the top rate pay 36 per cent of total personal income tax collected.
At 49 cents in the dollar, Australia’s top marginal rate is above the United States, United Kingdom, and New Zealand and is one of the highest rates in the world.
It currently cuts in at around 2.2 times the average full time earnings compared to four times average full time earnings in Canada and the United Kingdom and eight times in the United States. In each of these cases the top marginal rate cuts in at a higher threshold. For example, in the United Kingdom at around $270,000 AUD (150,000 British pounds).
This ratio affects our international competitiveness and our ability to attract and retain the best and brightest.
Under Labor, this ratio worsens, sending our country backwards.
This change to the top marginal rate is part of a broader Labor plan for $200 billion in new taxes on housing, savings, business, personal income, and electricity.
These are taxes that punish aspiration and are purely designed to redistribute wealth rather than create it.
It’s a tax grab unprecedented in scale and scope and is part of a big socialist experiment.
While Labor may seek to justify their tax increase by claiming it will raise over $7 billion for spending elsewhere, sadly, the reality is that it will dampen economic activity overall and discourage enterprise.
Ultimately, Labor’s tax increase will leave the government with smaller pieces of a shrinking pie to redistribute.
In the words of Margaret Thatcher “the problem with socialism is that eventually, you run out of other people’s money.”
However, not satisfied with simply increasing the top marginal tax rate, Labor is promising a double whammy by abolishing a legislated increase in the threshold from which the top marginal tax rate applies.
As part of a wider $144 billion package of income tax cuts legislated by the Coalition that will see 94 per cent of all tax payers pay no more than 32.5 cents in the dollar, the top marginal threshold increases from $180,000 to $200,000 from 2024-25.
By repealing this Coalition reform, Labor will push an additional 230,000 tax payers into the top marginal bracket. This will bring to more than a million the number of Australians that are in the top bracket in 2024-25.
Labor’s attack on income earners doesn’t stop there. They will repeal the Coalition’s legislated changes, which will see the 37 cents in the dollar tax bracket abolished and related changes to the threshold in 2022-23. This will put 3.7 million Australian tax payers earning between $90,000 and $180,000 on a 37 cents in the dollar marginal tax rate rather than 32.5 cents. Another hit on Australian income earners.
It’s an inconvenient truth for Labor that Australia has a highly regarded and respected progressive tax system under which the top 10 per cent of taxpayers pay around 45 per cent of the total income tax collected. This is in contrast to 36 per cent just 20 years ago.
In fact, 3.6 million or 40 per cent of all Australian households paid less in income tax than they received in government payments.
Just as Bill Shorten did on company tax, he has abandoned his previous public and strong support for a reduction in the top marginal rate of income tax.
Bill Shorten used to acknowledge the importance of lower taxes as a means to “Australia’s success,” however political opportunism has now taken precedence over his personal beliefs.
At the recent ALP national conference, Labor made it clear that they no longer even pretend to support a tax to GDP limit, preferring a high taxing, high spending approach.
While Labor may like to think it’s a cost free exercise to change the rate and threshold for those in the top income tax bracket, history shows otherwise.
Encouraging enterprise and aspiration while maintaining a progressive tax system, is the better way for Australia to go.
Josh Frydenberg is the Federal Treasurer.