Keating reneges on tax cuts

Issue 

By Peter Boyle

Prime Minister Paul Keating on July 22 announced major backtracking on the income tax cuts promised in his 1992 One Nation statement. The changes had been prepared over the preceding period by a series of "leaks" to the effect that "changed economic circumstances" would force the government to break its promises.

Keating's problem is that the rich are demanding a reduction in the government deficit to 1% of GDP by 1996-97. This will require even more spending cuts over the next couple of years and/or increased taxes.

In One Nation Keating promised two stages of income tax cuts for "middle" incomes. A year before the election, these cuts were aimed at higher paid workers whose wages had been eroded by years of the Accord. The promises were:

  • From July 1, 1994, the marginal tax rate for incomes of $20,700-$38,000 was to be reduced from 38% to 34%; for $38,000-$50,000 from 46% to 43%.

  • From January 1, 1996, the marginal rate for $20,700-$40,000 would fall to 30% and the marginal rate for $40,000-$50,000 would fall to 40%.

Melbourne Age economics editor Tim Colebatch estimates that more than half of these $8 billion in cuts would go to the top 15% of income earners. The top 10% of income earners would get a tax cut of about $90 a week while those earning about $30,000 a year would get only $6.50 a week. People earning incomes less than $20,700 would get no tax cuts.

The first stage of the promised cuts has been brought forward by six months, in an effort to stimulate the economy, while stage two has been put off for two years.

Keating cannot deliver all his promises in One Nation because he severely overestimated the rate of economic growth. Since the technical end of the recession, economic growth has been at a rate of less than 1.5% per year, while One Nation predicted an average of 4.5%. Unemployment has remained over 10%, placing extra demands on welfare spending. The projected budget deficit is more than $16 billion.

Bringing forward stage one of the cuts could add $3 billion to the deficit next year. To substantially cut ment is considering a range of indirect taxes and a job levy, which would be a flat tax on the employed. Both measures would make the tax system less progressive.

In addition, some pretty horrendous spending cuts are likely in the August budget. The "need" for such cuts is largely a product of the Labor government's program of reducing taxes for the rich over the past decade.

The scale of this beneficence to the wealthy and the corporate sector has been carefully documented by Laurie Aarons. In a paper recently circulated to unions, Aarons points out that:

  • While the average after-tax income of all taxpayers fell 7% in real terms between 1983 and 1991 and their tax rate rose slightly, incomes of the richest 1% soared and their tax rate plummeted.

  • Between 1983 and 1991, just 75,692 people on high incomes (over $80,000 a year in 1990-91) gained 29% in real terms.

  • The wealth of the Rich 200 list compiled by Business Review Weekly quadrupled in nine years. The Murdoch and Packer families' fortunes increased 15 times. Three others did even better (up to 24 times).

  • The average real after-tax income of the 75 people declaring incomes over $2 million rose 60% in the four years to 1991. Their tax rate fell from 54 cents in the dollar to 23, while workers on $717 a week paid tax of 27 cents in the dollar.

  • Labor raised the profit share at the expense of wages while reducing company tax from 49% to 33% (worth $2.8 billion this year) and cutting the

top marginal rate from 60% to 47% (a gift of about $4 billion a year to a wealthy 5.6% of taxpayers).

  • "Dividend imputation" freed shareholders from paying tax on dividends from companies paying company tax. This gave $1.5 billion to 664,000 (mostly rich) people in 1990-91.

  • The government claimed to balance these corporate tax cuts by introducing the fringe benefit tax and capital gains tax, but while these raise about $1.6 billion a year together, they are far exceeded by other tax cuts to corporations and the wealthy.

"Labor's pro-business policies since 1983 are based on the once plausible theory that capitalists are the creators of wealth. By giving them a much bigger profit share and cutting their tax simultaneously they'll rush to invest billions to create jobs, a theory also known as trickledown", says Aarons.

"Unfortunately for the theory, there's no guarantee the rich will invest their profits in job creation. They might prefer speculation in shares, gold bullion or casinos, or go offshore in search of cheap labour at $8 a week, or invest in luxury cares, paintings or antique silver."

Aarons quotes Keating in the March election campaign admitting that Labor "gave the private sector $30 billion [a year in the 1980s] and they sprayed it about like a garden hose".