Following on from Sinc’s post, I thought I would pose the following question: who said this?
Some have suggested that if only personal income tax cuts had been avoided in the 2000s things would be better.
As a tautology, it is hard to fault that logic.
But if we had held on to that revenue, it may well have been spent on outlays rather than on tax cuts, meaning average earners would have faced higher marginal and average tax rates than they do now.
Even more importantly, had we held on to that revenue, it could have opened up another sort of problem.
That is, an ever greater than historical reliance on personal income tax to fund government spending.
Of course, one of the some who has suggested this is none other than the economic illiterate, David Marr.
And there are some other interesting figures in what is really a very good speech:
Fiscal drag arises as government revenue increases because taxpayers are pulled into higher tax brackets as their wages rise. In 2015-16, the average full-time employee is expected to pay 39 cents in income tax for each dollar they earn3.
In contrast, over the period 2001-02 to 2009-104, these employees paid only 31.5 cents in income tax for every extra dollar they earned.
By 2023-24, without any return of fiscal drag, the average tax rate for a taxpayer earning the projected average full-time wage will increase to 28 per cent, from 23 per cent this year – a rise in the tax burden for those individuals of almost one quarter.
Keeping fiscal drag for well over a decade is unlikely to be politically feasible. Moreover, in the context of an ageing population, it is hardly likely to be economically desirable given the inevitability of adverse participation impacts from rising marginal and average tax rates.
Such participation impacts would simply exacerbate the impact on living standards from an ageing population by making the detraction from declining labour utilisation even greater, everything else being equal.
However, if tax cuts were provided in order to return fiscal drag and prevent the tax-to-GDP ratio reaching historically high levels, the savings task required to return the budget to surplus would be even larger.
The answer is Treasury Secretary, Martin Parkinson. The speech was Fiscal Sustainablity and Living Standards – the decade ahead earlier this year. It is on the website: www.treasury.gov.au.