US is showing the way on tax

Think what you want about Donald Trump, but in less than a year he has managed to achieve what Barack Obama couldn’t in eight years as US president: fundamental tax reform, which is akin, politically, to herding cats. The biggest US tax reform in 30 years is potentially just days away after Republican congressmen and senators ironed out their differences late last week. The US corporate tax rate is set to drop from 35 per cent to 21 per cent, a little higher than the 15 per cent Mr Trump promised in his election campaign but low enough to deliver a significant boost to US competitiveness, in part by attracting investment away from other countries. The US stockmarket has been setting record highs in anticipation.

In a nod to work incentives, the top personal income tax rate will fall from 39.6 per cent to 37 per cent (for earnings above $US500,000), and most workers earning up to $US82,500 will see their marginal rate drop from 25 per cent to 22 per cent.

To help pay for the changes, scope to deduct state and local income taxes will be heavily curtailed, effectively ending a huge subsidy flowing to high-tax California and New York, and there will be reduced scope for homeowners to deduct mortgage interest payments.

The cuts could add $US1.5 trillion to the US deficit across the next decade, but Republicans are confident an economic growth surge will help pay for them.

The reforms put Australia’s puny efforts to shame. Here, the government has been unable to pass even a relatively modest cut in the corporate tax rate to 25 per cent by 2026. Personal income tax reform here has included lifting one income tax threshold from $80,000 to $87,000 to offset almost a decade of bracket creep. Taxpayers deserve better.

Economists agree workers in countries such as Australia, with a relatively high corporate tax rate, stand to lose if foreign investment is lost to the US. The importance of tax reform continues to escape Bill Shorten, a failure the Coalition would be wise to exploit as a key policy difference in 2018.