Wayne and the Easy Cuts


Wayne Swan’s Robin Hood rhetoric has proved to be just that. Don’t believe the headlines in some of the newspapers this morning: Swan is not really "slugging" wealthy families at all, merely clawing back some of the exceptional largesse they enjoyed under Peter Costello’s watch.

Recall that Labor essentially committed to Peter Costello’s entire program of tax cuts announced in last year’s budget, except for those at the very top of the income tax brackets. Swan duly delivered those $31 billion worth of tax cuts last night. But apart from some modest tinkering around the edges, Swan has failed to attack the many highly regressive tax benefits enjoyed by richer Australians that were introduced by Peter Costello.

The Howard Government spent up big on loosely tested "middle class welfare" provisions, often tied to social policy objectives, such as child rearing. The scale of the largesse is shown by the fact that Swan has raised billions simply from a few strategic nips and tucks.

Thanks to Bill Leak

Modest tightening of one of John Howard’s favourite tax measures, Family Tax Benefit B, means that the wealthiest families – those earning in excess of $150,000 – will no longer qualify for this and other welfare payments, including the Baby Bonus. $150,000 will also be the threshold for Howard-era tax offsets such as the Dependent Spouse, Housekeeper, Child-Housekeeper, Invalid Relative and Parent/Parent-in-law tax offsets.

Nearly $2 billion will be clawed back over four years by tightening the definition of taxable income to include things like salary-sacrificed superannuation contributions, and removing Fringe Benefits Tax exemptions for non-work related perks like home laptops. As flagged in one of last week’s strategic "leaks", Swan also raised the luxury car tax for vehicles costing more than $57,000.

But at the lower end of the tax scale, the result of the Swan-Costello tax cut package announced in this and last year’s budget is significant relief for Australia’s low income earners. The Low Income Tax Offset – a Costello measure – is essentially a de facto welfare payment that "tops up" the tax free threshold for low income earners. But Swan has committed to increasing the LITO from its current $750 (which equates to an $11,000 tax free threshold) to $1,500 by 2010 – equating to an effective tax-free threshold of $16,000.

This matters because low-income earners transitioning from welfare to work actually pay some of the highest marginal tax rates in the country – precisely the sort of barrier to workforce participation that Treasury discusses in a long and interesting attachment to the budget papers here.

But the housing affordability crisis facing Australia (not to mention ongoing spikes in food and petrol prices) means Swan’s working families are facing serious cost of living pressures. In this context, even though the tax cuts will be welcome, Labor’s housing affordability package is token. The first-home saver account plan is little more than a minor prime for the housing industry, while the forecast 50,000 new dwellings over four years under the National Rental Affordability Scheme is welcome but completely inadequate.

Even so, Swan has kept plenty of powder dry for future budgets. There is an extraordinary amount of fat left to cut out of Commonwealth welfare payments and tax breaks, particularly in the areas of superannuation tax and the amazingly generous tax treatment enjoyed by self-funded retirees. Or take, for instance, Family Tax Benefit A, which will still be available for families earning surprisingly high incomes – as high as $120,000.

If Swan wants to go further, he could look at the Capital Gains Tax changes introduced by Costello after the Ralph Review. These have been grossly unfair to "working families" – most of whom earn the bulk of their income as wages and salaries – by taxing investment and capital gain at only half the rate of the middle tax bracket of 30 per cent.

The most counter-intuitive measure of the 2008-09 budget is the change in the Medicare levy surcharge – an additional 1 per cent surcharge on the Medicare levy for taxpayers earning $100,000 (up from $50,000 under the previous government). Because the change in the levy will lead to many people dropping out of private health insurance, the government will actually save $960 million over four years – because it will have to pay fewer people the 30 per cent private health insurance rebate.

Swan should go the whole hog next budget, and abolish the health insurance rebate altogether.

Launched in 2004, New Matilda is one of Australia's oldest online independent publications. It's focus is on investigative journalism and analysis, with occasional smart arsery thrown in for reasons of sanity. New Matilda is owned and edited by Walkley Award and Human Rights Award winning journalist Chris Graham.