Labor should stick with stage three tax cuts, but on one condition

Australia’s Medicare Levy also sits “off schedule” and has proved an enduring feature of our tax landscape. It was introduced at 1 per cent of taxable income by the Hawke government in 1983, replacing a previous levy to fund healthcare. It was increased to 1.5 per cent in 1995 and to its current rate of 2 per cent in 2014, coinciding with the introduction of the National Disability Insurance Scheme.

In reality, the levy does not raise enough to cover anything like the full cost of Medicare, or indeed the NDIS. But it has proved a popular source of funding for these efforts.

Progressive types point out that it is actually a “flat tax”, being neither “progressive” (applying at a higher percentage rate for higher-income earners) or regressive (applying at a lower percentage rate for high-income earners).

Labor has toyed with the idea of making the Medicare Levy progressive in the past. In 2017, the Morrison government proposed increasing the levy to 2.5 per cent for all taxpayers, but Labor countered it would only support an increase for people on incomes above $87,000 (the idea was later abandoned).

Well, I think it’s time for Labor, now in government and confronting huge budget deficits and mounting bills for disability and aged care, to revisit the idea. It’s time to put the divisive and potentially politically perilous debate about ditching stage three cuts behind us and move on to designing a more innovative solution to our present budget woes.

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So, leave the tax schedule as promised under stage three and replace the Medicare Levy with an expanded “Care Services Levy” to cover not only healthcare services, but also aged, disability and childcare services.

It could be designed to be revenue positive and also truly progressive, kicking in at a low rate of, say, 0.5 per cent for low-income earners and rising to higher rates for higher-income earners (up to, say, 5 per cent for those earning above $200,000).

In doing so, Labor could not only claw back some or all of the tax relief delivered by the stage three changes to the official tax schedule, but also deliver real tax relief to those on lower incomes.

More broadly, it could kickstart the conversation we need to have as a nation about how we simply must pay for the rising demands we are putting on government, particularly when it comes to aged and disability care.

Yes, we should also make sure the money is well spent, but continuing to run structural budget deficits only passes on the tab for current spending to future generations.

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It’s time for Labor to lead a national reckoning on the state of the federal budget and also offer a positive vision of a potential solution for voters to embrace at the next election.

A tax strategy that could potentially bolster both political trust and the federal budget? That’s a win-win in my book.

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