Joe Hockey has just outlined a case for major personal income tax reform

Joe Hockey. Photo: Stefan Postles/Getty Images

Treasurer Joe Hockey believes Australia is running an “unsustainable risk” with high personal income tax rates discouraging jobs and economic growth.

Writing in The Australian this morning, Hockey has articulated an argument for the overhaul of the personal income tax system which establishes a reform agenda the government can take to the next election.

Following on from Tony Abbott’s hint last week that the government might be about to prosecute an argument for tax reform, Hockey says that everyone accepts that they must pay “personal income tax to fund essential services”. But he also says that taxpayers want the government to “collect only what is really needed and to make the most of what is collected in taxes by spending it prudently”.

That, Hockey says, means:

“We should find ways to reduce what is collected and stop spending money where it doesn’t need to be spent.

“We must aim to reduce the overall tax burden on the community and work to promote stronger economic growth. This is the essential starting point when designing a tax system for the future.”

Bracket creep, where wage rises move workers up into higher marginal tax rates, was one of the pillars underpinning expectations that the Federal Government’s fiscal position would improve in the years ahead. But Hockey has taken dead aim at his own budget, saying “300,000 Australians are expected to move into the second-highest tax bracket over the next two years”.

“In just 10 years, nearly half of all taxpayers will be in the top two tax brackets — an increase from about 27 per cent today to 43 per cent.”

Hockey also highlighted “the top 10 per cent of individual taxpayers pay nearly half the personal income tax collected by the government. That is an over-reliance and dependence on a narrow base that is increasingly mobile to support our vital social infrastructure.”

It seems Hockey is worried that changes to the Australian and global economies mean that wealthier Australians may be able to alter their tax arrangements. That, he said, means our personal income tax revenue “is subject to unsustainable risk”.

Hockey outlined six principles for tax reform. These include a desire to see the tax system support a stronger economy and promote jobs, and the need for the tax system to be “fit for purpose in the modern economy”.

Hockey also highlighted that the effective marginal tax rate for some workers was a disincentive to work.

He also seemed to take aim at some inefficient taxes, writing that tax should not be paid until it’s earned, the system should encourage “innovation and opportunity” and again put GST reform on the table.

“As best as possible, the revenue-raising capacity of each tier of government should be aligned to responsibilities of funding and service delivery,” Hockey says.

You can read more here.

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