September 11, 2014

Horse 1751 - The 2% Emergency

More than likely, you've probably not been paying attention to the machinations surrounding the 2014/15 Federal Budget, other than the reports of cuts to services and various groups complaining about the unfairness of it all. When it comes down to the nitty-gritty of taxation policy, most of us pay even less attention unless it actually affects us.
Having said that, it's probably even more unlikely that you've been paying attention to the actual rates for the current taxation year, unless you were actually in the industry.

Here then are the Individual income tax rates for the year 2014-15:
Already, I can metaphorically hear you snoring.

For the 2014-15 year, the top headline marginal rate is 45%. The ATO's website though, adds this caveat:
The above rates do not include the Temporary Budget Repair Levy. The Temporary Budget Repair Levy is payable at a rate of 2% for taxable incomes over $180,000.
I find this extraordinary.
The top marginal tax rate for 2005–06 and years prior was 47%, which is precisely the same as 45% + 2%.
Rather than adjust the marginal tax rate, they 2014-15 budget deliberately set out the 2% increase as a separate item. Instead of adjusting one digit, this 2% tax rise will get its own separate item on assessment notices.
What is the purpose of all of this?

In 2014-15 the Medicare Levy rises from 1.5% to 2% to cover the  National Disability Insurance Scheme; fair enough. In 1996-97 the Medicare Levy rose from 1.5% to 1.7% to cover the National Firearms Buyback Scheme, following the The Port Arthur massacre; fair enough. In 2011-12 a Flood Levy was instituted to cover the  Queensland Floods Recovery program; fair enough.
There is a history in Australia were specific tax rises have been enacted for specific purposes and as a nation, I think that we accept these as being fair and reasonable. The problem with the The Temporary Budget Repair Levy is that when a great number of economists doubt that we even have a so-called "Budget Emergency", it's a bit rich to specifically spell this out.
I don't even object to a tax rise. What I question is why there is a need to call a 2% tax increase a specific thing, when just adjusting the tax rates would have and does mechanically achieve the same function.

I think that naming this as the Temporary Budget Repair Levy, is an exercise in propaganda in the truest sense. Propaganda is about communicating a specific message and usually with the intent of  influencing attitudes of people. It's curious that the loaded political term of "staying on message" has entered the lexicon and I think that this is what this is about.
The message that has been repeatedly drilled into us, as though the electorate is moronically stupid, is that the 2014-15 budget is about cleaning up the mistakes left behind by the previous government. Never mind the fact that between 2001 and 2013, there were ten sets of tax cuts which effectively withered away the benefits of the boom of the early 00s, and those twelve years are nicely cleaved in twain by a Federal election. Quite literally those tax cuts were legislated by six of one and a half dozen of the other; so if there is a "budget emergency", both sides were in power and both sides are to blame.
No-one wants to alert us to this though.

This 2% is all about changing peoples' perception; perception is a marvellous thing.
I can't remember who said it but if you were in charge of killing one hundred people, make that one of them is a clown. People will remember that you killed one clown but no-one will care very much about the other 99 people.
So it is here. If the headline marginal tax rate had just risen from 45% to 47% then no-one would have said "boo".

The other thing I find really curious about this is that as strange as this sounds, this tax increase actually might be a marketing ploy to win an election.
As it stands, I think that the next Federal Election should take place between August 6 2016 and the last possible date is 14 January 2017. Before August 2016 though, the government may very well pick up some election triggers because of unpopular legislation.
If people lodging their 2014-15 tax returns are prone to do so later rather than earlier, then they will be lodging them and receiving assessment notices in the first half of 2016. This could very well be during or immediately before an election.
Even if it wasn't it still means that due to changes in the way that the ATO prints assessment notices, they are require by law to disclose the items in those notices; this includes the Temporary Budget Repair Levy. A taxation assessment notice is a perfect piece of propaganda if you want to drive home the case that the previous government was "irresponsible" whilst the current one is cleaning up a "budget emergency".
As a piece of election engineering, using taxation assessment notices is deviously fantastic.

For a start I think that the tax cuts in the boom actually were patently idiotic because taxation is a good counter-cyclical instrument and I also think that it is prudent to undo them. However, to use this as a clarion call that this is especially fiscally responsible as opposed the other side which wasn't, is a little bit dishonest.
It's a bit like having garlic, onions, shallots and radishes for breakfast - it isn't wrong but you just shouldn't do it - and you certainly shouldn't make loud announcements to the person sitting next to you. You might be saying something perfectly sensible but they'll think that your message stinks.

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