Taxes and transfers: what will and won't be in the budget

What can we expect in the federal budget speech tonight? As usual, the government has already made several policy announcements about taxes and expenditures including welfare and family payments, so there will not be too many surprises - although the details of announced measures often remain to be thrashed out after budget night.

Tax revenues will continue to be written down. The main causes are flat wages growth, leading to lower personal income tax revenues, and the continuing low iron ore price pushing down company tax collections. The government will keep looking for expenditure savings to try to deliver on its tattered fiscal responsibility agenda.

The government says it wants a national conversation on tax reform and it is currently consulting on its lengthy tax discussion paper. It has promised a tax white paper for the next election - which is not expected until the second half of 2016.

While that means we should not expect major tax reform in the budget, in fact the government has already made a number of tax reform announcements ahead of budget night.

What’s in: the childcare package

We will see some of the government’s response to the McClure welfare review, and the Productivity Commission’s report on childcare, in the just-announced “Jobs for Families” package. Prime Minister Tony Abbott has dropped the paid parental leave scheme as too expensive and in its place, Welfare Minister Scott Morrison has announced a broader childcare package, consistent with the Prime Minister’s February speech.

In the Prime Minister’s own words:

Women, after all, are our country’s most under-utilised source of skills and entrepreneurship - if female participation in Australia were 6% higher, at Canada’s level, GDP would be higher by $25 billion a year. So a better childcare policy is good economic policy as well as fairer family policy.

Some will try to position this childcare package as being poor for “stay at home” mothers, as it is to be traded off against family tax payments. Scott Morrison has said that “support for child care is not a welfare payment. It is a payment that makes the cost of child care affordable for families who need to be in work and choose to be."

There will be a work condition of at least eight hours a fortnight to get up to 36 hours of subsidy, and 49 hours to get the full 100 hours a fortnight. The focus on work is welcome, as long as the most vulnerable children - often in families without work - remain protected by the basic family tax benefit payments. It’s a cheap political shot to put a positive spin on the child care package by saying its “not welfare”. Why stigmatise those who need help most in our highly targeted tax-transfer system?

… a small business tax cut

Small businesses many of which are run by women - might benefit from budget proposals that Small Business Minister Bruce Billson calls “delicious”, but it is important that tax reform is done right. The government has said it will deliver a lower company tax rate to small business, being the 28.5% rate that was previously announced. It’s not clear what the threshold will be - the ATO Taxation Statistics identify more than 700,000 micro or small businesses with turnover up to $10 million in 2011-12.

A small company tax cut won’t assist about 600,000 micro or small businesses operating in partnerships and trusts. It also increases the attractiveness for tax planning using a corporate entity.

Another approach could be a capital investment allowance for small business, while the employee share scheme measures underway might help start ups. We don’t know much about how effective small business tax cuts can be, but there is some evidence from overseas that entrepreneurs respond by increasing business activity.

… and a bank deposits tax

Treasurer Joe Hockey is expected to announce a new bank deposits tax in the budget of 0.05 cents for every $1 on deposits up to $250,000, to be invested in a Financial Stability Fund to be used only if a bank were to collapse. The federal government guarantees bank deposits up to that amount.

The proposed deposit tax is pretty small and makes the government fiscal position look a bit better, as the Fund expected to be about half a billion initially will offset government debt in the budget. Do we really need it? I’m not sure. Remember, no major Australian bank failed in the global financial crisis. The Murray Inquiry recommended an ex post levy - after a crisis - combined with increased capital adequacy of banks.

What’s not in: a Google tax

Despite earlier statements by the Treasurer, it appears the so-called “Google Tax” - targeting multinationals profit shifting - will not be in Tuesday’s budget. Multinational tax planning by Australian and foreign companies is under scrutiny in the Senate Inquiry into Corporate Tax Avoidance which reports in June 2015.

Australia had been tipped to copy the UK diverted profits tax included in its recent Finance Bill. The UK proposes to levy the tax at 25%, above its company tax rate of 20%, where a global business sells goods or services into the UK but avoids having a UK business, or uses tax havens that “lack economic substance”.

The Tax Office is currently finalising its process to publicly report on all large companies and their tax paid, as legislated by the previous government. Hockey did announce yesterday some anti-avoidance measures. There is no detail yet - and in this area, the devil really is in the detail.

Meanwhile the G20/OECD Base Erosion and Profit Shifting project, which is aiming for G20 consensus to lead coordinated action on taxation of multinationals is due to report in November 2015, and negotiation has begun on a multilateral treaty.

The government will go ahead with the “Netflix tax”, which is a reform of the GST aimed at taxing online purchases of goods and services in the same way as domestic purchases.

More broadly, we need a debate about the future of company tax including the tax rate and dividend imputation. Maybe that will happen in the tax white paper, but don’t hold your breath.

…or a response to bracket creep

Finally, personal income tax rates and thresholds were last changed only three years ago in 2012, when most households received a tax cut to compensate for increased electricity prices under the carbon tax. The current government kept those tax cuts although it abolished the carbon tax. Even with nearly flat wages growth and inflation, it would cost about $6 billion to fully return bracket creep from 2012 up to 2015. In the current fiscal context, personal tax cuts are not on the agenda in this budget.

Miranda Stewart has received funding from the Australian Research Council and Academy of Social Sciences of Australia.