Peter Costello's annual tax cuts have added up to a very real tax reform. What's proposed will take reform a very significant step forward - delivering both equity and fairness.

Yes, they have been unveiled as a promise in an election campaign. But they would have been delivered in the normal - budget - course anyway.

As previously noted, they are really only next May's regular and now coherent instalment brought forward - in announcement terms only - to October.

When Costello took his first very tentative step back in the 2003 budget, it was only a tax cut. It did not constitute even the first stage of a calculated reform program.

It was also a very small tax cut at that - $11 billion spread over four years. The last two, in the 2006 and 2007 budgets have been over $30 billion and the latest was close to $45 billion on a four year budget cycle. Indeed if not greater.

The $34 billion figure headlined was over three years, 2008-09 to 2010-12. But it also presaged further, both sensible and almost certainly affordable steps after that.

That tentative tax cut step though in 2003 has evolved into overall reform. True, driven by the surge in China-based budget revenues, but with a cohesive structure nevertheless.

Perhaps the most important element is the least understood or appreciated. Leaving the tax free threshold unchanged at $6000 through all the cutting.

The "easiest" way to give a tax cut to lower-income earners and win applause from the gallery would be to raise the threshold to $10,000 or $15,000 or, as one tax 'expert' has suggested $30,000.

Surely, after all, it's unfair to ask low income earners to pay any tax.

The answer is that they don't.

That's genuine low income earners who get the low income tax offset (LITO).

Each year Costello has raised the LITO. So the nominal threshold has stayed at $6,000 - so higher income earners start paying tax from $6,001.

But the effective tax free threshold for low income earners goes to $14,000 next July compared with just $6,882 back in 2003 and will go to $16,000 in 2010 on the way to $20,000.

That is effective fairness as part of effective reform.

The other two elements have been to push out the brackets and to cut the higher rates.

The first has meant all taxpayers will next year only move into the basic 30¢ bracket at an income level of $34,000 compared with $20,000 in 2003.

And instead of exiting it into the next tax rate at $50,000, as was the case in 2003, the 30¢ bracket now goes all the way to $80,000.

This income bracket has got the least of the tax cuts. Not because Costello wants to favour 'the rich' but much more simply because this is 'where the money is'.

The vast bulk of taxpayers earn less than $80,000; and incidentally pay a majority of the tax. It is very expensive to give them tax cuts.

What Costello has done at the top end was to make the next rate above 30¢, until last Monday a 40¢ rate, the effective top rate. Only 2 per cent of taxpayers earn above its top end of $150,000, going to $180,000 next July.

Now that effective top rate will also be cut to 37¢; so the top rate will become 42¢ down from its current 45¢.

Another way to look at it, Costello has moved the entry point to the 40¢ / 42¢ bracket out from income of $50,000 back in 2003 to a massively higher $180,000 in the next few years.

This cleverly promotes incentive. You'd be able to earn up to $180,000 while still paying not much more than one-third in tax (37¢).

Without compromising fairness and equity. Huh?

The answer is where the money comes from to fund the tax cuts: booming company tax.

Who owns companies? It ain't genuine low-income earners.

Source:Terry McCrann - Chief Finance Writer - Herald Sun / Sunday Mail