Easier ways to fix budget than ‘deficit tax’

Tax credits: Dr Nicholas Gruen of Lateral Economics. Photo: Rodger Cummins Other options: Saul Eslake from Bank of America Merrill Lynch. Photo: Pat Scala

The federal government’s budget deficit could be paid back more easily, and without the political pain, if it considered alternatives to its controversial “deficit tax.”Some of Australia’s most respected economists have suggested simple policy ideas that would help the Abbott government to return the budget to surplus.Some were considered by the Henry Tax Review in 2010, which reviewed the taxation side of the federal budget.Others would affect the expenditure side of the budget, which is being considered by the Commission of Audit.“There are a few big changes we can make,” Dr Nicholas Gruen, of Lateral Economics, said.“There is a very strong case against dividend imputation (tax credits paid to shareholders).”Dr Gruen said the government could abolish dividend imputation and use the money to fund a gradual reduction in the company tax rate, to 19 per cent.He said dividend imputation is not recorded as a tax expenditure, but its cost would be well over $20 billion a year.“It would immediately solve the budget deficit problem,” Dr Gruen said.“Over time you could then phase company tax down to fully reflect the additional revenue that it brought on as the budget position gradually improved with fiscal drag and economic growth,” he said.Saul Eslake, the chief economist of Bank of America Merrill Lynch, said the Abbott government could abolish negative gearing, broaden the base of the income tax system, and stop taxing trusts as companies.“This last idea was something Joe Hockey advocated soon after becoming shadow treasurer, only to be slapped down by many of his colleagues,” Mr Eslake said.“I’d also eliminate the seniors tax offset, and I’d reintroduce indexation of the petroleum products excise.”This  proposal was backed by Chris Richardson, the director of Deloitte Access Economics.“It’s now 13 years since we stopped indexing the petrol excise,” he said.”It’s been frozen at 38.1 cents a litre for 13 years now and there is no possible word to use for that other than ‘dumb’.”That is because we are making the decision every day as a nation to reduce fuel tax as a share of our purchasing power, he said.“And I would prefer that they adopted Henry Review-style treatment of superannuation, so the biggest benefits do not go to the highest income earners”.Mr Richardson supported the Commission of Audit, because it was looking at ways to reduce spending and the “biggest mistakes of the past decade” have been in spending.He said Australian governments “overdid it” with family benefit payments, with baby bonuses, and the increase in corporate welfare.“This happened under both sides of politics,” he said.Mr Eslake said one of the ideas from the Henry Tax Review – to introduce a minerals resource rent tax – was laudable in principle.“[That review] recommended a minerals resource rent tax, and while I am, in principle, in favour of such a tax I never was in favour of the form of it that Henry recommended, he said.“But clearly that’s not going to happen anyway”. 

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