The Turnbull Government has been examining how our tax system can be improved to back Australians to work, save and invest by boosting jobs and growth as our economy continues to transition from the mining investment boom.
The Government is squarely focused on tax reform measures that will deliver on the objectives of growth, fairness and reduced complexity without adding to the total tax burden as a share of GDP. Such reforms are necessary to ensure continued economic resilience and prosperity.
The Government has been rigorously testing a range of tax reform scenarios.
Today the Government has released modelling on one scenario involving large income tax cuts funded by raising the rate of GST to 15 per cent.
The modelling shows that the positive growth impact from cutting income tax would be broadly offset by the negative impact of raising GST, once an automatic increase in inflation-adjusted welfare payments is taken into account.
This scenario, however, would fully compensate less than 10 per cent of households in the lowest quintile and around 20 per cent in the second quintile.
Further measures to fully compensate low income households would further reduce the scope for personal income tax cuts, therefore adding to the costs to growth. Implementation risks could be considerable.
This scenario, including the level of compensation, did not represent a preferred option by the Government, but rather one that would test the potential economic benefits of a tax mix switch which maximised personal income tax cuts.
The Government has also released modelling illustrating the economic impact of bracket creep, whereby individuals pay a higher fraction of their income in tax as incomes rise over time.
This modelling is indicative at best and care should be taken with its use.
However the modelling clearly shows the economic benefits that can flow as a result of Australians being unshackled from higher taxes resulting from bracket creep.
It shows why Labor’s “tax and spend” policies would be unsustainable.
The Turnbull Government will continue the task of strengthening the budget while continuing to explore options for reducing the income tax burden for hard working Australians to drive jobs and growth. The Government will put any final tax reform policies to the Australian people and the Budget will provide a clear policy direction for Australia’s tax system.