Treasurer signals further spending cuts as he says Australia’s top marginal tax rate is higher than other comparable countries and reduces incentives

Joe Hockey is laying the ground for the Coalition to promise personal income tax cuts at the next election, signalling the government would try to further reduce spending to avoid blowing out the budget.

In the latest round of positioning over the yet-to-be-completed tax review, the federal treasurer says Australia’s top marginal tax rate is higher than that of other comparable countries and the tax burden is too heavily concentrated at the top end. He also argues action is needed to stop “bracket creep”.

The government has refused to rule out increasing the GST as part of potential changes to the “tax mix” and has called for a mature debate about reform options – but it has already ruled out some of those options including reining in superannuation tax concessions or rethinking negative gearing.

The renewed focus on tax has prompted the Greens to call on both main parties to avoid “a tax cuts arms race”, warning that the associated spending cuts would erode vital public services.

Joe Hockey rules out GST rise to fund states' expenditure Read more

Hockey outlined “the economic case for personal income tax cuts” in a speech to an event in Sydney on Monday organised by the Tax Institute and Chartered Accountants Australia and New Zealand.

“Our existing taxation system is increasingly reducing the incentive for many Australians to work harder, earn more, invest and, in the end, give our families greater financial security,” he said.

Arguing the tax system represented a structural handbrake on growth, Hockey suggested changes were needed to ensure “reward for effort” when people achieved higher salaries.

Hockey said the starting point for changes to the personal income tax system must be addressing bracket creep – the phenomenon whereby inflation and rising wages pushed people into higher tax brackets – arguing this blunted the incentive for hard work.

“For the average income earner on around $77,000 each year, they are just below the second-highest tax bracket of 37 cents in the dollar, which kicks in above $80,000,” he said.



“At their current wage, they are taxed a marginal rate of 32.5 cents [in the dollar] plus the Medicare levy.



“But say they pick up an extra shift, or are tapped on the shoulder for a promotion. For every extra dollar they earn, they will be taxed at 39 cents, including the Medicare levy, so the reward for effort is to move into a higher tax bracket to pay more tax.”

Hockey suggested Australia relied too heavily on income tax, and this was reflected in “high rates of tax, particularly at the top level”, which would increasingly create an incentive for Australians to live and work overseas.

“In Australia, the highest marginal tax rate is 47 cents for each extra dollar earned. To contrast this, New Zealand’s is only 33 cents; Singapore’s is 20 cents; and Hong Kong’s is only 15 cents,” he said.



“In addition, our top rate kicks in relatively quickly, at $180,000. That is only 2.3 times the average full-time wage. This is extremely low when compared with other OECD nations.”

Hockey hinted that he believed high-income earners were paying too much tax as a share of revenue.

“At the moment, 2.7% of Australian taxpayers fall into the top income-tax bracket and they are paying more than 28% of all personal income tax, and the top 10% pay almost half of all personal income tax,” he said.

“Back in 1996–97, under the Howard government, the tax burden was less concentrated, with the top 25% paying a majority of income tax.”

The Greens MP Adam Bandt said Hockey was proposing wealthy people pay less tax at the very time that the government faced a revenue crisis.

“With the government bereft of any positive agenda, the treasurer is now desperately trying to start a tax cuts arms race,” Bandt said.

Labor argued Hockey could not be believed on tax cuts.

The shadow treasurer, Chris Bowen, said the Coalition had previously “decried budget emergencies” but now wanted the Australian people to believe that they would deliver “magic pudding tax cuts”.

The Labor leader, Bill Shorten, suggested the announcement was linked to the by-election in the seat of Canning in Western Australia.

Hockey’s second budget, delivered in May, predicted a deficit of $35.1bn this financial year. This would be followed by deficits of $25.8bn in 2016-17, $14.4bn in 2017-18 and $6.9bn in 2018-19, although these figures assume the passage of contentious budget savings that are stalled in the Senate.

The Coalition, when in opposition, placed a high political priority on returning the budget to surplus.

Asked on ABC radio in Brisbane on Monday whether his higher priority was cutting personal income tax rates or returning the budget to surplus, Hockey said: “Well, it’s both … they’re not mutually exclusive.”

In his speech, Hockey said there was “no denying” the fact the government still had a budget to repair but this would be “managed through continued discipline on spending decisions” and cutting government waste.

And he took a swipe at some state and territory governments that he said wanted an increase in commonwealth taxes as a way to get more revenue.

“I confess that I find it unappealing to dress up increased tax and spending as tax reform, especially if it’s the commonwealth raising taxes to help states increase their spending,” Hockey said.

State and territory governments expressed their anger at the Coalition’s decision in its first budget in 2014 to cut about $80bn from long-term projected health and education funding, saying it put them in an unsustainable fiscal position.

The Liberal premier of New South Wales, Mike Baird, has suggested increasing the GST to 15% as a way to meet the growing cost of hospital services - a proposal the prime minister, Tony Abbott, praised as “very sensible”.

But the Labor premier of Victoria, Daniel Andrews, and his Queensland counterpart, Annastacia Palaszczuk, have suggested increasing the Medicare levy applied through the income tax system as an fairer way to raise the necessary revenue.