Hockey cannot twiddle the tax levers for some without affecting the rest

Tax reform of the kind Australia needs should not be done in bits and pieces. Any move towards the necessary reform requires considered analysis of how the imposition of taxes can dampen activity or influence spending in certain areas of the economy. It should consider tax rates, tax thresholds and taxation structures, as well as equity and federal-state splits.

In short, tax reform cannot be achieved by twiddling one lever and generating a benefit for some, as politically attractive as that might be. The entirety of Australia’s tax system needs overhaul, which is why the government, rightly, commissioned a white paper and called for submissions. The report is due this year.

To that end, Treasurer Joe Hockey’s indication (for that is all it is) that the Coalition may eventually reduce personal income tax thresholds is yet another disappointing nothingness in a long line of such disappointments from the government. Mr Hockey dressed up his one-line wish-list with a blast of airy rhetoric and a barrow load of secondary school economics in a speech this week. But he provided no details, not even outlines of proposals about likely new thresholds.

Nor did he indicate how the government might recoup the billions of dollars of income it would forego if it made such an adjustment. Mr Hockey suggested the lost income would be overcome because the threshold changes would encourage people to “have a go”– to strive for promotions that would lift them into a higher pay grade.

Which all sounds serendipitous, except his argument is founded on misconceptions about bracket-creep. We suggest Mr Hockey should lay off the treacly rhetoric, wait for the tax white paper before tossing out politically driven short-term ideas, and focus instead on the serious issues threatening Australia’s economy.

For while Australia has one of the fastest growing economies in the world, and other major industrialised economies are starting to pick up the pace after eight years of recession or low growth, there are worrying signs abroad. The volatility in world share markets in the past few weeks, driven by the slide in China’s benchmark Shanghai composite index and its recent devaluations of the yuan, should have jolted our government and focused Mr Hockey’s attention on how Australia’s fortunes are forged with those of China.

As The Age’s Malcolm Maiden points out today, the ructions in China’s share markets may be symptomatic of profound problems in the world’s second-biggest economy. The debt burdens carried by China’s provincial governments and some of its biggest corporations, for example, are hefty.

As for Australia, commodity prices have slumped dramatically in the past year amid constant wind-downs of China’s economic growth rate. That jeopardises the profitability of Australia’s iron ore, coal and base metals mines, and of its oil and liquefied natural gas operations. It puts thousands of jobs at risk – those of miners and engineers, contractors and service providers in regional centres – and it threatens the royalty streams received by state governments.

All this is occurring as the manufacturing sector encounters headwinds of its own. The car manufacturing industry, for example, is preparing to close down, and manufacturers and importers have had to adjust to big movements in the currency in the past year.

Australia’s economy, generally, is in sound shape and growing. But the fear is that China’s powerhouse economy is entering a highly uncertain period. Managing that nation’s economy through this uncertainty will require a skill set of the first tier. Managing the ramifications at this end will require a similar match of skills.

Article source: http://www.theage.com.au/comment/the-age-editorial/hockey-cannot-twiddle-the-tax-levers-for-some-without-affecting-the-rest-20150825-gj7cau.html