Tax cuts and GST reduction suggested to kick-start economy

Cut taxes. Slash the GST. Spend up on infrastructure. Slash interest rates. It seems everyone has got a big idea for Prime Minister Kevin Rudd and Treasurer Wayne Swan’s soon-to-be-announced stimulus package.

Swan and Rudd say everything idea will be considered and below we have listed some of the ideas they will be looking at. We’d also welcome any suggestions that we can pass on – send them in to feedback@smartcompany.com.au.

• Payroll tax cuts

Now, we know this is really an issue for state governments, but we’d like to see the Federal Government take a pro-active stance and do all it can to convince the states to at least reduce payroll tax on a temporary basis. Perhaps the Rudd Government could even underwrite part of the payroll tax cuts – the Feds transfer plenty of GST revenue to the states each year, why not add a bit more to help pay for the payroll tax cuts.

Likely? Sadly, we doubt this idea will get up. The states love payroll tax too much to ever cut it back too hard.

• Cut the GST in half

Reserve Bank board member and Australian National University economist Warwick McKibbin has suggested slashing the GST from 10% to 5% until February next year in a bid to get the economy going.

“The December stimulus payments didn’t have much impact,” Professor McKibbin told The Age. “The spending wasn’t directed at the right things.

“We know that when the GST was introduced, people increased their spending ahead of time and then cut it afterwards. The trick would be to get people to bring their spending forward again but to get income tax cuts coming in the future so that they don’t cut their spending too much when the GST goes up.”

Likely? There’s not much chance that the Government will consider such a big move, but it is a big, bold idea that would probably boost spending pretty quickly.

• Cut income taxes

Opposition leader Malcolm Turnbull is pushing hard for cuts to income tax, arguing that this is the best way to guarantee a long-lasting stimulus.

“That increases (people’s) permanent income, and when you increase people’s permanent income, they are more likely to spend than if it is just a one-off hit, a one-off bonus windfall,” he told ABC Radio.

The Australian Industry Group (AIG) , the Australian Chamber of Commerce and Industry and the National Retailers Association are right behind this idea, although Wayne Swan seems less sure, arguing that the stimulatory benefits of tax cuts may take too long to lift economic growth.

Likely? Despite Swan’s stance, we’re tipping there will be some form of income tax cuts in the stimulus package, even if it just involves brining forward tax cuts planned for July.

• Give businesses a tax break

The AIG wants to introduce a tax refund for small and medium-sized businesses that are making losses in 2008-09 or 2009-10, arguing this would give businesses a bit of cashflow relief. “It is a measure that would give businesses critical leeway – including for the purpose of retaining employees that might otherwise be retrenched,” the AIG says.

Other business tax break ideas put forward include tax breaks for capital expenditure, bigger tax breaks for spending on training and innovation and a new system that would allow SMEs to get a refund by “carrying back” tax losses incurred this year against profits earned in previous years.

Likely? Unclear. A tax refund on losses would certainly help but while the Government probably sees the merits of business tax cuts, there is more political gain in concentrating on income taxes.

• Infrastructure spending

Everyone seems to be calling for big spending on infrastructure projects – from state premiers through to industry bodies and lobby groups. Public spending on these big projects is seen as a great way to stimulate economic growth and is a direct way the Government can create jobs.

Likely? Yes. The only question is how much the Government will decide to spend on infrastructure.