Economy

Policy analysis by Professor John Freebairn, Department of Economics, University of Melbourne

Calculator and coins

Key points

The Coalition promises to:

  • Give business a tax break by making the lower tax rate for small business applicable to businesses with a turnover of up to $10 million a year, from July; and up to $100 million by 2019-2020
  • Raise the 32% marginal rate upper threshold from $80,000 to $87,000, providing a benefit for all with taxable incomes above $80,000
  • Raise the excise on tobacco
  • Increase tax collected from multinational companies
  • Increase the taxation of superannuation at higher income levels

Labor promises to:

  • Increase the tax burden on income earned on investment in rental property, ie “negative gearing”
  • Reduce the capital gains discount on newly acquired rental property, shares and other assets from 50% to 25%.
  • Extend the 2% Temporary Budget Repair Levy on taxable incomes above $180,000 a year beyond July 2017.
  • Raise the excise on tobacco
  • Increase tax collected from multinational companies
  • Increase the taxation of superannuation at the higher income levels

Key tax policy differences between Labor and the Coalition

In general, while taxation as a share of the economy will increase under both parties, Labor proposes a higher taxation share.  

For income taxation, the Coalition proposes to raise the 32 per cent marginal rate  threshold from $80,000 to $87,000 providing a benefit for all with taxable incomes above $80,000. Labor proposes to extend the 2 percentage point Temporary Budget Repair Levy on taxable incomes above $180,000 a year beyond July 2017.

Labor proposes to increase the tax burden on income earned on future investments in rental property. Current period losses on established housing rental property, so called “negative gearing”, will not be available to offset other taxable income. It proposes also to reduce the capital gains discount on newly acquired rental property, shares and other assets from 50 per cent to 25 per cent.

The Coalition proposes a future time path of reductions in the taxation rate on business income. The agreed Coalition and Labor parties small business lower tax rate and expensing of expenditure on capital items of less than $20,000 for businesses with a turnover of less than $2 million is proposed to be raised by the Coalition to businesses with a turnover of up to $10 million a year from July 2016, and larger levels in subsequent years up to $100 million by 2019-20. Way down the track, and after future elections, the Coalition proposes a path to a 25 per cent corporate tax rate (down from the current 30 per cent rate) by 2026-27.

Just to be a little contrarian, the Coalition proposes to tighten eligibility for the small business exemption from the wine equalisation tax, with no comment from Labor.

Key tax policy similarities between Labor and the Coalition

Both the Coalition and Labor have argued for no changes to large segments of the Commonwealth taxation.

For over 80 per cent of taxpayers, neither party proposes to change the income tax system. With no changes to the tax brackets, taxpayers with an annual taxable income below $80,000 will face a higher average tax rate.

The hybrid of different tax systems on capital income earned on different saving options remain.

Both parties propose no changes to the GST, the excise taxes on petroleum products, beer and spirits, and customs duties.

There are a few areas of generally agreed tax increases. The Coalition and Labor propose to increase the excise rate on tobacco in 12.5 per cent steps for each of the next four years.

There is agreement to reduce the transfer of profits to other countries by multinational companies, although with differences in the details of the policy changes. In both cases, it is likely that optimistic estimates of additional revenue to be collected have been made.

Both propose to collect more revenue at the higher ends of contributions to superannuation funds and on the earnings on funds in the retirement phase. The Coalition proposes additional tighter restrictions on eligible tax preferred contributions to superannuation.

Labor agrees with the Coalition 2016 Budget proposal to reduce the tax burden on small businesses with a turnover of less than $2 million a year.

Potential taxation reform

Only very timid and tentative reforms have been proposed.  

A number of comprehensive blue-prints for wide-ranging tax reform with supporting analyses are available. Many aim to raise national productivity and income, while at the same time collecting about the same revenue and with current aggregate taxation redistribution effects.  

The Henry Review of 2010 mapped out many of the reform options and their effects. An updated picture was provided in the 2015 government discussion paper, Re:think. Many proposals by academics and lobby groups, many in cooperative exercises, have contributed to the set of potential reform options. Broad themes of proposed reforms include: packages involving the removal of special exemptions for more comprehensive and broader tax bases combined with a lower tax rate for income, consumption and asset taxes; changes in the tax mix from tax bases with relatively large productivity loss costs to those with lower distortion costs, for example a larger GST and lower income tax mix, and replace conveyance duty with a broad based land tax; and, simpler and explicit special taxes to internalise external costs associated with pollution, road congestion and alcohol with the revenue windfall recycled as lower income tax rates and higher social security rates to maintain equity goals.

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