Morrison's extra $200bn
How much will they hit the economy?

When the prime minister started the year, a big line of his economic attack was the damage the ALP’s extra $200bn worth of tax would do the economy. On 14 January he told ABC Breakfast: “Now is not the time for Labor to go and dump $200 billion of higher taxes on the Australian economy. It’s not a good plan.” Heck, he even found room to mention it in a media release announcing $60m spending on Cairns Hospital.

So what are these $200bn extra taxes, and just how much will they hit our economy?

First off some context – the $200bn is over 10 years. Over that period there is likely to be about $5,959bn of taxation raised by the federal government. So we are talking around 3% more tax.

3% is a significant amount, but rather less massive than a $200bn figure would have you think it is. We also should note that many of the taxes listed do not come into place for a number of years, and some are not “tax rises” but just a policy of keeping the status quo.

Superannuation changes – $19bn

The ALP proposes lowering the annual non-concessional contributions cap to $75,000 and the high income super contribution threshold to $200,000. It also proposes reversing the introduction of catch-up concessional contributions and the 2016-17 budget measure on changes to tax deductibility for personal contributions.

It is hard to see this having much impact on economic growth. In the treasury’s economy-wide modelling for the 2016-17 budget changes to superannuation were listed as increasing labour force participation as changes may see people stay in the workforce longer.

Changes to tax on discretionary trusts – $17bn

Labor proposes a 30% tax rate on distributions from discretionary trusts.

Trusts are used to minimise tax and are very much in need of reform. Ironically we can see this from Geoff Wilson, who has been campaigning against the ALP’s proposed changes to franking credits. Wilson told retirees “all you’ve got to do” to avoid being hit by any changes “is change from a company structure to a trust structure”.

The impact on economic growth would be negligible.

Changes to franking credits – $55bn

The ALP policy to stop tax refunds on franking credits to people who pay no tax will affect around 900,000 individuals, and the ALP accepts it would raise $55bn over 10 years.

But again, what is the impact on the economic growth? By itself, barely anything. Yes, those affected might spend less – but self-funded retirees typically have a much higher amount of disposable income than other retiree households, and they spend a lot more on recreational activities.

While pensioner households spend on average 4.97% of their income on holiday travel and accommodation, self-funded retirees spend on average 13.09%.

Negative gearing and capital gains tax changes – $32bn

The ALP proposes abolishing negative gearing for houses other than new construction, although all current arrangements would be grandfathered. They also propose cutting the capital gains tax concession introduced by John Howard in 1999 that made negative gearing very lucrative from 50% to 25%.

This costing is based on the 2016 policy and will need to be recalibrated to take into effect new starting dates.

One issue is that due to low interest rates, negative gearing has fallen (because interest payments on investment properties is the major cost used to negative gear):

Should low interest rates be considered to continue this could lower the amount calculated to be saved.

This highlights a couple of issues with government’s $200bn extra taxes claim. Firstly the ALP’s negative gearing policy is not a new tax but a removal of the ability to lower your tax liability. And while the government will attack the amount claimed to be saved, should the number be revised down, you can fully expect they will then claim there is a black hole in the ALP’s figures.

As for the impact on the economy, remember in the 1980s when negative gearing was removed for two years, rents only increased in Sydney and Perth where the issue was a lack of supply – something that is not the case now:

Income tax changes – $70bn

Labor proposes to repeal steps two and three of the government’s tax cut plan, which increases tax thresholds from $37,000 to $41,000 and $90,000 to $120,000, increases the top rate from $180,000 to $200,000 and abolishes the 37% tax bracket.

This is only set to commence from 2022-23, so calculating the impact on economic growth is dicey given the big difference between it and the ALP’s tax cuts is that the ALP’s is targeted towards those earning under $120,000, where the majority of stage 2 and 3 of the government’s cuts go to those earning above that:

That the ALP can keep $70bn worth of tax shows just how expensive the government’s tax cut is – and reminds us that a tax cut is actually a cost to the government’s budget, and unless the LNP has suddenly come to believe that balancing the budget is not required then at some point there will need to be spending cuts.

Budget repair levy – $22bn

Labor proposes putting back in place the extra 2% tax rate on top of the highest income tax bracket. However it is very unlikely to raise $22bn. Last year Chris Bowen suggested it would exit only “until the budget is back in sustainable surplus which we would see as being in 2022-23 under our plans”

As a result the ALP suggests it will only raise around $6bn rather than $22bn.

And what would the impact of these last two be on economic growth? Well, raising tax on income would slow growth – although in this case the $70bn extra income tax would not slow growth, but merely not speed it up because as the cuts are only due to come into place from 2022 onwards, no one would notice any increase should the ALP win office.

But measuring growth and only considering tax is like judging a cricket team only on its batting and ignoring its bowling. The impact on the budget of total tax and spending changes and on what areas both apply is more important.

A tax rise on income might slow growth, but an equivalent amount spent on infrastructure or on increasing Newstart could increase growth by the same amount.

If all you are talking about is the tax, then you’re only mentioning half of the story – and right now that is the only half the government wants you to hear.


Article originally published in the Guardian

Greg Jericho is a Guardian Australia columnist