Blogger Nicholas Gruen has written a report for CEDA on tax cuts.* The executive summary:
The Australians facing the strongest disincentives to work are mostly on middle and lower incomes. These people are also the ones most likely to respond to the incentive provided by tax cuts. By contrast, tax cuts for Australiaâ€™s high-income earners will probably do far less to increase the amount of work done in Australia. To encourage more work, tax cutting should focus on lowering the bottom (15 per cent) income tax rate, raising the tax-free threshold, and/or introducing a tax device called an â€œEarned Income Tax Creditâ€ (EITC) for low-income households. Where tax cuts are focused on those on higher incomes, very large savings can be made by lifting thresholds rather than cutting rates. For instance, based on 2002â€“03 tax statistics and the old tax scales, approximately three quarters of the cost of eliminating the top marginal tax rate would have been able to have been saved by lifting the top threshold from $125,000 to $200,000.
Another option – which I don’t think anyone has mentioned so far – is to tweakÂ the $600 low-income tax offset (presently available to Australian residents with incomes below $25,000).Â For people with salary earnings over $6000, we could make it Â a “refundable” tax credit. In other words, if your income is below $25,000, and your tax bill is less than $600, you still get the full $600. A negative income tax, if you like.
* Nicholas has clearly been making good use of the blogosphere – I notice that Mark Bahnisch did some research assistance, and I gave comments on an earlier draft.
Update, 26/5: NicholasÂ has taken the paper off his website, so I have removed the link above. The paper is available for purchase ($16.50) on the CEDA website.