Friday, March 13, 2009

Axe the tax cuts

The ones legislated for July this year and July next year cut the 40% rate to 38% and then again to 37%.

Nice, if you earn more than $80000. If you don't, you get indexation.

Why did Swan and Rudd ever legislate to fulfil this reckless election promise?

Here's an extract from John Quiggin's excellent piece in the Financial Review:

"At the time, the government rightly judged that the importance of keeping faith with the voters was paramount, and that nothing had changed since the election to justify repudiating a promise, even an ill-judged one .

"But now everything has changed. The surpluses out of which the tax cuts were to be paid have vanished. A substantial part of the tax cut was compensation for anticipated bracket creep, on the basis of anticipated inflation that is no longer likely.

"In real terms, the tax cuts are larger, and more unaffordable, than when they were promised, even as the real capacity of the government to finance any tax cut has diminished. To keep this promise, the government will have to break many others, abandoning core commitments like the ‘Education Revolution’.

"It is hard to imagine any policy instrument less appropriate to our current circumstances than a permanent tax cut, heavily tilted towards upper-income earners.

"The proposed tax cuts for July 2009 offer a paltry $3 a week to anyone with an income under $80 000, and nothing at all for those under $34 000. The biggest proportional benefit accrues at individual incomes of $180 000 a year. Such regressive tax cuts will do little good in the short run, either to boost consumption, or to repair the balance sheets of middle and lower-income households.

"And in the long run, the implications of the government’s policy are even worse. Tight limits on spending will make it impossible to respond to the long downturn that seems increasingly likely. Delivering the tax cuts will tie the government’s hands for years to come."