Tom Minear: The lesson Australia should learn from the US on tax

Australians like to think we know better than Americans, especially on guns and healthcare. But Tom Minear argues there’s a US policy that Treasurer Jim Chalmers should copy.

American exceptionalism often comes undone for Australian expats in one of two ways: when they have to rely on the healthcare system, or when their children have to participate in active-shooter drills at school.

Decades on from Bob Hawke’s creation of the universal Medicare scheme and John Howard’s gun control reforms, the US is still so far from matching those policy achievements, leaving Aussies feeling both frustrated and superior.

John Howard confronts pro-gun supporters while wearing a bulletproof vest in Victoria in 1996. Picture: Ray Strange

But living here also opens your eyes to the lessons our politicians could learn from their American counterparts. Jim Chalmers’s latest budget reminded me of a very simple one.

Its headline cost-of-living feature was the government’s overhaul of the third stage of the income tax reform plan first unveiled by Scott Morrison as the treasurer in 2018.

Broken promise or not, Chalmers’s changes have undoubtedly proven to be popular, given people earning between $45,000 and $120,000 will now get an extra $800 back from July 1.

The risk at the end of this seven-year process, however, is the federal government declaring “mission accomplished” on tax reform.

Australia’s finances rely on income taxes more than most developed countries, placing a burden on workers that ex-Treasury boss Ken Henry calls an “intergenerational tragedy”.

While the three stages of changes will make a difference now, bracket creep will keep on keeping on. And with the budget in a structural deficit, and more big spending coming on aged care, the National Disability Insurance Scheme and defence, it will be tempting for Canberra to maintain that reliance on hoovering up more of our wages.

Jim Chalmers with his US counterpart Janet Yellen. Picture: Loren Elliott (AFP)

The US has a straightforward solution to this. Every year, the Internal Revenue Service increases its tax brackets in line with inflation.

So two years ago, the 24 per cent rate for middle-income earners kicked in at $US89,075. Last year, it rose to $US95,375. Now, it applies to those earning more than $US100,525.

This is fair and sensible – principles we expect from Australia rather than the US – especially in circumstances where inflation has soared and wages have not kept up. It also offers a way to replace the usual pre-election arms race on tax cuts with an enduring solution.

Australia’s Reserve Bank senior economist Luci Ellis said last week that annually lifting our tax thresholds by 2.5 per cent would cost about $4bn a year.

The government might think that is a lot of money – but it is our money.

Originally published as Tom Minear: The lesson Australia should learn from the US on tax