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Tax Laws Amendment (Personal Income Tax Reduction) Bill 2008

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5442

 

2008

 

The Parliament of the

Commonwealth of Australia

 

THE SENATE

 

 

 

 

 

 

Tax Laws Amendment (Personal Income Tax Reduction) Bill 2008

 

 

(Amendments to be moved by Senator Murray on behalf of the Australian Democrats in committee of the whole)



(1)        Schedule 1, item 3, page 3 (table item 2), omit “$80,000”, substitute “$75,000”.

[deferred tax cuts]

(2)        Schedule 1, item 3, page 3 (table item 3), omit “$80,000”, substitute “$75,000”.

[deferred tax cuts]

(3)        Schedule 1, item 3, page 3 (table item 3), omit “$180,000”, substitute “$150,000”.

[cancelled threshold increase]

(4)        Schedule 1, item 3, page 3 (table item 4), omit “$180,000”, substitute “$150,000”.

[cancelled threshold increase]

(5)        Schedule 1, item 4, page 3 (table item 2), omit “$80,000”, substitute “$75,000”.

[deferred tax cuts]

(6)        Schedule 1, item 4, page 3 (table item 3), omit “$80,000”, substitute “$75,000”.

[deferred tax cuts]

(7)        Schedule 1, item 4, page 3 (table item 3), omit “$180,000”, substitute “150,000”.

[cancelled threshold increase]

(8)        Schedule 1, item 4, page 4 (table item 4), omit “$180,000”, substitute “$150,000”.

[cancelled threshold increase]

(9)        Schedule 1, item 13, page 5 (table item 3), omit “$180,000”, substitute “$150,000”.

[cancelled threshold increase]

(10)      Schedule 1, item 13, page 5 (table item 3), omit “38%”, substitute “40%”.

[cancelled tax rate cut]

(11)      Schedule 1, item 13, page 5 (table item 4), omit “$180,000”, substitute “$150,000”.

[cancelled threshold increase]

(12)      Schedule 1, item 14, page 5 (table item 3), omit “$180,000”, substitute “$150,000”.

[cancelled threshold increase]

(13)      Schedule 1, item 14, page 5 (table item 3), omit “38%”, substitute “40%”.

[cancelled tax rate cut]

(14)      Schedule 1, item 14, page 5 (table item 4), omit “$180,000”, substitute “$150,000”.

[cancelled threshold increase]

(15)      Schedule 1, item 23, page 7 (table item 3), omit “$180,000”, substitute “$150,000”.

[cancelled threshold increase]

(16)      Schedule 1, item 23, page 7 (table item 3), omit “37%”, substitute “40%”.

[cancelled tax rate cut]

(17)      Schedule 1, item 23, page 7 (table item 4), omit “$180,000”, substitute “$150,000”.

[cancelled threshold increase]

(18)      Schedule 1, item 24, page 7 (table item 3), omit “$180,000”, substitute “$150,000”.

[cancelled threshold increase]

(19)      Schedule 1, item 24, page 7 (table item 3), omit “37%”, substitute “40%”.

[cancelled tax rate cut]

(20)      Schedule 1, item 24, page 7 (table item 4), omit “$180,000”, substitute “$150,000”.

[cancelled threshold increase]



Explanatory note

(to accompany sheet 5442 & 5438)

 

Tax Laws Amendment (Personal Income Tax Reduction) Bill 2008

Issued by Senator Murray: March 2008

 

SUMMARY OF EFFECTS OF THE BILL

 

The Bill introduces the Government’s proposed new personal income tax thresholds and low income tax offsets announced in the November 2008 Federal Election. The amendments will adjust the income tax thresholds as follows:

 

Rate

Thresholds as at 1/7/07

Coalition per Budget 07/08 (from 1/7/08)

Proposed new Labor thresholds (from 1/7/08)

%

$

$

$

0

0-6,000

0-6,000

0-6,000

15

6,001 -  30,000

6,001 - 30,000

6,001 - 34,000

30

30,001 - 75,000

30,001 - 80,000

34,001 - 80,000

40

75,001 - 150,000

80,001 - 180,000

80,001 - 180,000

45

150,001+

180,001+

180,001+

 

New Rates

Proposed new Labor thresholds (from 1/7/09)

Proposed new Labor rates & thresholds (from 1/7/10)

Labor ‘Aspiration’ rates & thresholds

%

$

$

$

0

0-6,000

0-6,000

0-6,000

15

6,001 -  35,000

6,001 - 37,000

6,001 - 37,000

30

35,001 - 80,000

37,001 - 80,000

37,001 - 180,000

38

80,001 - 180,000

[37%]  80,001 - 180,000

[40%]   180,001+

45

180,001+

180,001+

 

 

Cost

$m

2008-09

2009-10

2010-11

Total

07-08 Budget passed

-8 350

-8 785

-9 050

-26 185

ALP proposed

-7 110

-9 790

-13 930

-30 830

Total

-15 460

-18 575

-22 980

-57 015

 

In addition to the various income tax threshold and rate changes, the bill introduces changes that increase the maximum amount of low income tax offset (LITO).  The LITO is set to increase in a structured manner, being:

·         An increase from $750 to $1 200 from 1 July 2008 ;

·         An increase from $1 200 to $1 350 from 1 July 2009 ; and

·         An increase from $1 350 to $1 500 from 1 July 2010.

 

This means that from 1 July 2008, those eligible for LITO will not incur a net income tax liability until their annual income exceeds $14000; and this grows to $16000 by 1 July 2010.  The costing in the table above includes these LITO changes.

 

For the first time from 1 July 2008, low income earners will receive half the benefit of LITO through their regular pay, rather than receiving it all as a lump sum when their annual tax return is assessed.

 

Senior Australians eligible for the Senior Australians Tax Offset (SATO) will not pay income tax until they reach an annual income of:

·        $28867 single, and $24680 for each member of a couple from 1 July 2008 ;

·         $29867 single, and $25680 for each member of a couple from 1 July 2009 ;

·         $30685 single, and $26680 for each member of a couple from 1 July 2010.

Issues

The Treasurer has made a number of points in promoting these tax cuts.  There are four main points:

·          Labor promised specific tax cuts

·          These tax cuts give necessary relief to "working families"

·          Tax cuts will ease pressure on wage claims

·          These tax cuts improve workforce participation

 

There are two sets of tax cuts that apply as from 1 July 2008:

·          Those passed by the previous (Coalition) government

·          Those proposed by the present (Labor) government

 

Essential questions

·          What defines 'working families'?  It is a phrase that does not connote with wealthier Australians.

·          Isn't the idea that wage claims will be influenced above the $75/80 000 threshold fanciful?

·          Isn't the idea that workforce participation will be enhanced above the $75/80 000 unlikely?

·          The RBA will raise rates again if aggregate demand increases to levels it regards as threatening.  Tax cuts increase aggregate demand. Why not cancel or defer non-essential tax cuts?

 

Tax cuts will lead to public spending cuts: The Coalition's election-promise tax cuts adopted by Labor were proposed when the Reserve Bank, Treasury and others were forecasting lower inflationary prospects and more stable economic times than now.  In recent evidence to the Senate Economics Estimates Committee top Treasury officials confirmed two points with respect to fiscal policy and inflation - that having no tax cuts would represent significant fiscal tightening; and, that any negative effects of tax cuts by stimulating aggregate demand would need to be balanced out by reductions elsewhere in government spending.   This means that meeting a tax cuts promise that will contribute to inflation will likely lead to cuts to government spending on services.  If such services are 'essential' this would hardly seem in the national interest.

 

$57 billion not $31 billion: The tax cuts that will increase disposable income from 2008-09 to 2010-11 are actually $57 billion.  $26.2 billion is already locked in from the 2007 Coalition budget, with those legislated tax cuts effective from 1 July 2008.  Labor will add $30.8 billion more in tax cuts.

 

Lower income Australians:

Large tax cuts go to low and middle-income earners, who do need tax cut relief, and who do merit an increase in their disposable income.  However this should not be overstated.  Of the $30.8 billion new tax cuts, approximately $11.3 billion (37% of the cost) is accounted for by low income offset changes. Of the $57 billion total cost, those earning less than $34 000 will only get approximately 26% of the tax cuts.  In contrast, at the top end, wealthy Australians will do very well.

 

Will tax cuts lift aggregate labour supply?

The government says that economic modelling undertaken by Treasury indicates “the personal income tax reforms alone will lift aggregate labour supply by around 65 000 persons in the medium term ”; and that “the increase in the 30% threshold and the Low Income Tax Offset will provide a greater incentive for those outside the workforce to re-enter it and those in part-time to take on additional hours.”   Tax cuts are indeed likely to increase workforce participation for lower income workers.  Tax cuts to the wealthy will not.

Conclusion

There is merit in accepting the LITO changes and lower income tax cuts.  They will provide income relief, and they will assist workforce participation.  There remains the danger of increasing aggregate demand with tax cuts to such an extent that it increases inflationary pressure and results in higher interest rates.  This requires the tax cuts quantum to be cut or the tax cuts timing to be changed.

 

AMENDMENTS

 

The set of amendments on sheet 5438 :

 

     A) Defers some Coalition tax cuts already passed in 2007

·           30% band so that upper threshold does not lift from $75 000 to $80 000 in 08-09 - amendments (1), (2), (5) and (6) sheet 5438

·           but lifts from $75 000 to $80 000 in 09-10 - no change needed to bill as that is as it appears (page 5 of bill)

·           40% band so that upper threshold does not lift from $150 000 to $180 000 in 08-09 - amendments (3), (4), (7) and (8) sheet 5438

·           but lifts from $150 000 to $180 000 in 10-11 - no change needed to bill as that is as it appears (page 7 of bill)

·           45% band so that upper threshold does not lift to $180 000+ in 08-09  - amendments (4), (8), (9), (11), (12) and (14) sheet 5438

·           but lifts to $180 000+ in 10-11 - no change needed to bill as that is as it appears (page 7 of bill)

 

B) Defer Coalition [2007] and Labor [2008] tax cuts so that

·           the 40% rate is not dropped to 38% in 09-10 - amendments (10) and (13) sheet 5438

·           the 38% rate introduced in 09-10 is not dropped further to 37% in 10-11 - amendments (10) and (13) sheet 5438

·           but the 40% rate drops from 40% to 37% in 10-11. - no change needed to bill as that is as it appears (page 7 of bill)

 

The set of amendments on sheet 5442 are proposed in the alternative to the set of amendments on sheet 5438

 

A) Change Coalition [2007] tax cuts already passed last year

 

·           30% band - defer so that upper threshold does not lift from $75 000 to $80 000 in 08-09 - amendments (1), (2), (5) and (6) sheet 5442

but from $75 000 to $80 000 in 09-10 - no change needed to bill as that is as it appears (page 5 of bill)

 

·           40% band - cancel the upper threshold lifting from $150 000 to $180 000 in 08-09 - amendments (3), (7), (9), (12), (15) and (18) sheet 5442

 

·           45% band - cancel the threshold lifting to $180 000+ in 08-09  - amendments (4), (8), (11), (14), (17) and (20) sheet 5442

 

B) Change Coalition [2007] and Labor [2008] tax cuts to

 

Cancel the 40% rate dropping to 38% in 09-10 - amendments (10) and (13) sheet 5442

and cancel the [38%] rate dropping to 37% in 10-11. - amendments (16) and (19) sheet 5442

 

ESTIMATED SAVINGS

 

Present forecast

 

 

 

 

 

 

2008-09

2009-10

2010-11

Total

 

07-08 Budget Changes

-8350

-8785

-9050

-26185

 

ALP proposed

-7110

-9790

-13930

-30830

 

Total

-15460

-18575

-22980

-57015

 

 

 

 

 

 

 

Amendment 1 - deferring top end

 

 

 

 

 

2008-09

2009-10

2010-11

Total

 

07-08 revised

-6749

-7911

-8560

-23220

 

ALP revised

-7457

-9824

-15275

-32556

 

Total

-14206

-17735

-23835

-55776

 

 

 

 

 

 

 

Amendment 2 - cancelling top end

 

 

 

 

 

2008-09

2009-10

2010-11

Total

 

07-08 revised

-6749

-7911

-8109

-22769

 

ALP revised

-7457

-9824

-13408

-30689

 

Total

-14206

-17735

-21517

-53458