Heavy hints from ministers that planned personal income tax cuts will be brought forward in next week’s budget have sparked debate about the bang-from-the buck from different types of fiscal stimulus.
One objection to an accelerated implementation is that it is less effective in boosting consumer spending and employment than some alternative forms of stimulus. That may be true in the short-term, but to make choices on that basis alone is to take a narrow Keynesian view of the world.
The main reason to bring forward the tax cuts is that they constitute a substantial, welcome and overdue reform of the personal income tax structure. The legislated cuts deliver reductions in marginal rates at all income levels over a wide range — and a constant marginal rate of 30 per cent from $45,000 to $200,000. This is a structural reform that will boost incentive and productivity for years to come. Reductions in marginal rates do wonders for incentives to work, improve, invest, and innovate.
However, the cuts are to be implemented in three stages in 2019, 2022 and 2024, and bringing forward stages 2 and 3 is on obvious option for the budget.
The economy needed productivity-enhancing reform before the pandemic struck and it needs it even more now to counter the long-lasting damage the current deep recession is doing to productive capacity. Personal income tax cuts should be viewed in that context, along with other needed reforms such as to industrial relations, regulation, and training for workplace skills.
It has also been claimed that the tax cut is inequitable. This fails to view stages 1, 2 and 3 of the tax cut as a whole and to recognize that lower income earners were favoured in stage 1; and it fails to recognize that the tax cut as a whole has little effect on after-tax income distribution.
Reinforcing these points — as John Humphreys has demonstrated — is that the true budgetary cost of the tax cuts is likely to be much smaller than the government claimed.
There is an overwhelming case to bring forward stages 1 and 2 for retrospective implementation from 1 July 2020, or failing that, not later than 1 July 2021.
This is an edited extract of an opinion piece published on Spectator as Budget 2020: the overwhelming case for accelerated income tax cuts
Home > Commentary > Opinion > Why income tax cuts should be brought forward
Why income tax cuts should be brought forward
One objection to an accelerated implementation is that it is less effective in boosting consumer spending and employment than some alternative forms of stimulus. That may be true in the short-term, but to make choices on that basis alone is to take a narrow Keynesian view of the world.
The main reason to bring forward the tax cuts is that they constitute a substantial, welcome and overdue reform of the personal income tax structure. The legislated cuts deliver reductions in marginal rates at all income levels over a wide range — and a constant marginal rate of 30 per cent from $45,000 to $200,000. This is a structural reform that will boost incentive and productivity for years to come. Reductions in marginal rates do wonders for incentives to work, improve, invest, and innovate.
However, the cuts are to be implemented in three stages in 2019, 2022 and 2024, and bringing forward stages 2 and 3 is on obvious option for the budget.
The economy needed productivity-enhancing reform before the pandemic struck and it needs it even more now to counter the long-lasting damage the current deep recession is doing to productive capacity. Personal income tax cuts should be viewed in that context, along with other needed reforms such as to industrial relations, regulation, and training for workplace skills.
It has also been claimed that the tax cut is inequitable. This fails to view stages 1, 2 and 3 of the tax cut as a whole and to recognize that lower income earners were favoured in stage 1; and it fails to recognize that the tax cut as a whole has little effect on after-tax income distribution.
Reinforcing these points — as John Humphreys has demonstrated — is that the true budgetary cost of the tax cuts is likely to be much smaller than the government claimed.
There is an overwhelming case to bring forward stages 1 and 2 for retrospective implementation from 1 July 2020, or failing that, not later than 1 July 2021.
This is an edited extract of an opinion piece published on Spectator as Budget 2020: the overwhelming case for accelerated income tax cuts
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