Tax myth busted: This is going to hurt

THERE’S no way around it. In order to fix this problem, you’ll have to pay, and that will expose one of the government’s big promises as a sham.

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TAX reform without people being left worse off is a myth, an economic advisory company warns today.

There is going to be unfairness, possibly for lower wage earners, and without the pain the tax system will not be fixed, says a Deloitte Access Economics analysis of fiscal “myths”.

But it also says the reforms — which could include a rise in the GST and lower company tax — are needed to repair the economy and sustain funding for benefit programs.

“Tax reform is mostly a prosperity story — if you can shift from ‘bad taxes’ to better ones then you can make Australia more popular,” says the report.

Even the good news in the analysis is counterbalanced.

The Deloitte report on tax reform myths says bracket creep — when wage rises push workers into higher tax brackets but inflation lowers the buying power of pay — isn’t as bad as others have forecast.

The Government is promising to take income tax cut plans to the next election to ease what is also known as fiscal drag.

The usual estimate is 80 per cent of tax revenue growth will come from income tax paid by bracket creep casualties. The report says it’s just 10 per cent of increased tax by 2018-19. That’s good.

However, the reason that much money will not be taken from us is not so good: Wage increases are at a record low. We are not getting the pay raises needed to push us into those punitive tax levels.

Another “myth” the report challenges is that middle income earners would be the worst hit by reform. In fact lower income earners are the most at risk of having their tax payments rise. And they could lose some welfare benefits in the process as their income exceeds the means test threshold.

“Federal Treasury’s estimates of the impact of tax reform are effectively based on a simple assumption: some people can only be better off to the extent that others are worse off,” says the report.

“So if you hear commentators demanding ‘no one can be worse off’ as a result of tax reform then what you are actually hearing is someone saying, ‘We can never have tax reform.”

The Government might not have the money to compensate all who would pay more tax under changes, but the report rules out waiting until the Budget gets better.

“After a decade in which we’ve voted for everything from family benefits to disability insurance and tax cuts, Australia now spends rather more than it raises in revenue,” it says.

“So you should be rightly suspicious of tax ‘reform’ plans that are merely proposals for tax cuts.

“Only treat them seriously if they come stapled to matching detailed proposals to cut spending or to raise other taxes. “If they don’t then do yourself a favour and file them cylindrically.”