|Home | Search | Site Map | Help|
Part IV: Tax Cuts and Compensation Measures
The New Tax System contains measures that negate the overall price effects of indirect tax reform on people's incomes. The income package comprises three distinct elements: reductions in personal income tax; increases in family assistance; and assistance for low income and older Australians. The measures are estimated to cost $17 billion in a full year, an amount equivalent to 20 per cent of the Commonwealth's individual income tax collections in the year prior to tax reform.
These measures more than compensate for price effects as they ensure that disposable incomes will increase by more than the likely increase in prices implied by the changes to the indirect tax arrangements. The generous nature of the measures means that there is no justification for employees to seek higher wages because of the introduction of The New Tax System. This supports the assessment that the change in Australia's tax arrangements will not re-ignite inflationary pressures.
When assessing the adequacy of these measures, it is important to focus on 1999-2000 and 2000-01 as a whole, rather than just the CPI outcome for the September quarter 2000 in isolation. As set out in Part V below, the impact of the revised indirect tax arrangements on prices will not be felt evenly through 2000-01. The increase in the CPI in the September quarter 2000 will be followed by several quarters where prices will increase by less than would otherwise have been the case. This means that any attempt to assess the adequacy of the compensation package against the increase in the CPI in the September quarter alone, will necessarily be misleading.
Personal Income Tax Marginal Statutory Rates
Commencing from 1 July 2000, reductions in personal tax will be delivered through an increase in the tax-free threshold and reductions in marginal tax rates at a cost of $12 billion per year. The existing and new tax scales are set out in Table 1.
Table 1: Income Tax Scales
An indication of the extent to which the reductions in personal tax will increase take-home pay is shown in Chart 2. The chart shows the annual increase in average wages after adjusting for changes in personal tax rates and the effect of The New Tax System on prices in 2000-01. Average real after-tax wages are estimated to increase by around 3 per cent in 2000-01, compared with an average increase of a little below 2 per cent per annum over the previous four years. The estimate for 2000-01 reflects modest growth in real wages (adjusted for ongoing inflation), supplemented by a net reduction in tax flowing from The New Tax System of around 2½ percentage points.
Chart 2: Annual Growth in Real After-tax Average Wages(a)
(a) Real average after-tax wages are defined as average earnings (national accounts basis) adjusted using statutory income tax rates (including the Medicare levy) divided by the CPI.
(b) Includes forecasts for the March and June quarters 2000.
Changes to family assistance under The New Tax System will greatly advantage families by increasing rates of assistance, addressing `poverty traps' and simplifying the number of available benefits. Over 2 million families will benefit from increased assistance of $2.4 billion a year, from 2000-01.
The private health insurance initiative came into effect on 1 January 1999 and provides Australians who are members of private health funds with a 30 per cent benefit on the cost of their health insurance contributions - as either a rebate on tax, a direct payment, or as an up-front premium reduction. In 2000-01 the cost of this measure is expected to be around $1.9 billion.
Pensioners and Allowees
As part of The New Tax System, the maximum rates of all allowances and pensions will be increased by 4 per cent from 1 July 2000. For pensioners, the 4 per cent increase will be paid as a pension supplement on top of the base pension. The base pension will continue to be underpinned by the Government's legislative commitment to maintain the single rate of pension of at least 25 per cent of Male Total Average Weekly Earnings.
The 4 per cent increase to pensions and allowances is comprised of an advance of 2 per cent for future indexation adjustments, and a real increase of 2 per cent above what the pension would have otherwise been with normal indexation. This arrangement will ensure that allowees and pensioners will be 2 per cent better off than they otherwise would have been, regardless of the effect of indirect tax reform on prices.
Other associated allowances, such as the pharmaceutical allowance and the mobility allowance, will also increase by 4 per cent from 1 July 2000. The maximum rate of rent assistance will increase by 7 per cent. The income test-free areas for allowances and pensions will increase by 2½ per cent, as will the pension asset test-free areas.
The pension withdrawal rate with respect to income will be reduced from 50 per cent to 40 per cent.
The Pensioner Rebate (and the Low Income Aged Persons Rebate) will be increased by a further $250 a year for single age pensioners and $175 a year for each of an age pensioner couple, above the amounts which ensure that full-rate pensioners are freed from income tax.
The combined cost of these measures is around $2½ billion a year.
Many senior Australians will also benefit from one-off savings bonuses that are designed to help maintain the value of their savings, following the introduction of the GST. The value of the bonuses is expected to be around $1½ billion.
Box 4: The Impact of Compensation
Table 2 below, shows for single low to middle income earners the tax cut to be introduced on 1 July 2000 and the consequent change in disposable income. As outlined in the table, the increase in disposable income for these groups exceeds the expected first year impact on prices of The New Tax System of 2¾ per cent and is significantly higher than the long run impact of 1¾ per cent.
Table 2: Tax Cuts
Table 3 below, provides an indication of the impact of tax reform measures on disposable income for a number of representative income units. The table shows that the increases in income more than offset the expected first year impact on prices of The New Tax System of 2¾ per cent and are significantly greater than the longer run impact of 1¾ per cent. While demonstrating that each of these groups gain from tax reform, the table highlights the significant gains that accrue, in particular, to single income families. Pensioners and allowees will receive a one-off increase in benefits of 4 per cent on 1 July 2000, in addition to twice yearly indexation.
Table 3: Tax Cuts and Other Benefits - Households
(a) Annual equivalent of ABS Trend AWE, Persons, Total Earnings, Full-time Adult, March quarter 2000 of $810.20 per week (ABS Cat. 6301.0).
(b) One child under 5, one child aged between 5 and 12.
(c) Income split of 67:33, 2 children both over 5.
(d) Income split of 50:50, 2 children both over 5.
(e) This shows the compensation to be provided consequent on the introduction of The New Tax System. This will ensure that pensioners and allowees will be 2 per cent better off than they would otherwise have been. In addition to this one-off compensation, pensions and allowances will also be increased on the normal indexation days in September 2000 and March 2001.