23.9 tax ‘speed limit’ arbitrary at best

A new report from the Australia Institute shows the recently announced 23.9 tax-to-GDP cap is entirely arbitrary, and that a strict tax cap with no policy change will severely limit choices in Government spending.

The report shows 23.9 per cent is the average tax-to-GDP ratio between the introduction of the GST and the Global Financial Crisis, a technical assumption.

The report also found implementing a strict tax ceiling of 23.9 per cent does not take into account that, in the absence of a policy change, average tax rates on personal income will constantly increase because of bracket creep.

“There is no objective reason why the government should set this cap. The objective of fiscal policy should be whatever is appropriate for the state of the economy,” Australia Institute Executive Director, Ben Oquist said today.

“This arbitrary tax limit will be driving what new taxes are to be introduced or slashed in future, and undoubtedly, the size and scheduling of the income tax cuts expected to be announced in the upcoming Federal Budget.

“23.9 per cent figure has become the Governments self-imposed “speed limit” on tax, when just last year, Treasury itself recognised the figure was only “an assumption”, and should not represent a Government policy or target.

“This raises the question of, what areas are going to miss out on Government services and funding, all for the sake of an entirely arbitrary tax cap.

“As society’s living standard improves over time it is natural that people want to see improvements in infrastructure, health, education, aged care, the environment and the other things that the government can best provide.

‘’An arbitrary tax to GDP ratio cap ultimately prevents the building of a revenue base needed to fund the society people expect and on which business can best flourish,” Mr Oquist said.

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