RBA data shows that taxes are actually rising right now… that is not what this economy needs.
There was a fair bit of chatter last week about tax cuts. Most of it focused on how big the tax cuts would be and who was going to get them.
But today, I want to explain why we actually need tax cuts right now – at this stage in the cycle.
I’m not talking ideology here. I’m not here to say that tax cuts are always a good thing. (I’ll save that for another day.)
I just want to make the point that given where we are at in the cycle, and how things have evolved, we’re actually taking more tax than we intended, and we probably want to rein that in a bit.
To make this point I’m going to draw on some interesting work RBA Deputy Governor Luci Ellis did a few weeks ago – work that was largely ignored.
The short version is that for a few reasons, the tax burden on households has been growing faster than household income, effectively meaning that households have experience a net tax increase in recent years.
… which was never the plan.
She makes the point that right now, taxes are growing about twice as fast as household income.
In the past year, taxes paid by households increased by around 8 per cent, more than double the rate of growth in gross household income of 3½ per cent.
So the ratio is more like a bit over two-to-one at the moment, rather than 1.4 to one.
That is at the high end of the range this ratio reaches, but as this graph shows, it is not unprecedented (Graph 12). But this effect has cumulated over time, so that the share of income that is paid in tax has been rising (Graph 12, bottom panel).
The key picture in all this is that bottom panel. It shows the tax-to-income ratio is steadily increasing, and is approaching record highs.
What that means households are getting less, and the government is getting more – a bigger slice of the pie.
And maybe that’s ok, but it seems to have happened by accident. I don’t remember the Coalition going to the last two elections with a policy of increasing the tax take of government…
More to the point, is this what we need right now?
Economistscould have a field day talking about that one, but given everyone is feeling a bit gloomy about the outlook, given the GDP numbers continue to come in under forecasts, given wages growth remains sluggish, and given most economists now expect the RBA will be forced to cut rates, possibly some time this year… arguably it’s not a great time to be covertly increasing taxes.
In fact, I’d even venture so far to say that even Blind Freddy can see that now is not the time to be increasing the tax burden on households.
Ellis puts this shift down to a few factors – lower interest rates have mean lower negative gearing deductions, and the ATO has made a good fist of increasing the tax take through enforcement and compliance.
So it just worked out that way. It wasn’t been a deliberate decision.
But that doesn’t mean the impact on the economy isn’t real.
And I would argue that at the very least, we need to cut taxes just to bring this back into balance – to lower the tax-to-income ratio back to normal levels.
And this is why we need tax cuts.