This is an edited version of an address to the Annual Congress of the Australian Council of Social Service, April 3rd 2009, by Julian Disney, Director, Social Justice Project, University of NSW
Key impacts of tax policy
The main role of governments is to promote economic and social opportunities for all their citizens. This includes opportunities to learn and work, to enjoy good health and relationships, to have affordable housing and transport options, to raise children and pursue pastimes, to be treated fairly and to be helped when hardship strikes.
The tax system is, of course, the main source of money on which governments can draw to promote these opportunities by, for example, funding education, health care, social security and transport, or by promoting economic or community development to provide people with work and income.
Public discussion of taxation often focuses on personal income tax scales. But much greater impacts, whether beneficial or not, can result from other aspects of the tax system. These impacts can affect when people are born and how they are educated, where they live and for how long, whether and how they raise a family, and even what they eat, drink and drive.
These impacts come from the design and structure of the tax system, relating not only to the way wages are taxed, but also to the provision of financial benefits that would otherwise be provided through the social security system (eg., Family Tax Benefits); tax concessions and exemptions for particular types of economic activity (Capital Gains Tax, Fringe Benefits Tax); and tax rules concerning specifice activities such as superannuation, housing, health insurance and child care. The design can create effects which greatly increase or reduce hardship and inequity.
Some key problems
Total tax revenue in Australia is very low by international standards, despite our large area and rapidly growing population, which might be expected to require above-average levels of public investment. On the most recent available figures tax revenue would need to increase by 10-20% to reach the OECD average as a proportion of GDP.
There are major unmet needs in areas like health, aged care, child care, education and transport.
The global economic crisis will sharply reduce government revenue while greatly increasing needs for public expenditure. The same applies to the longer-term effects of our aging population.
Governments should seek to avoid avoid distortions that provide unjustifiable tax advantages for some types of economic or social activity to the detriment of others and unnecessary loss of revenue through gaps and loopholes in the tax system.
Areas of current concern with the current system include:
- Savings – there is excessive encouragement to borrow, and a failure to provide an efficient or equitable regime of encouragement for saving especially for lower-income people
- Taxation of property - the regime favours speculation in land and financial markets rather than long-term investment in productive, job-creating enterprises; and has contributed substantially to inflation in house prices and rents, a serious housing shortage and under-utilisation of many houses
- Economic participation – The system unduly discourages lower-income people trying to re-enter the workforce or increase their working hours; and people who need or wish to continue working in their later years.
- Loopholes – Loopholes and distortions in the tax system have encouraged those with the resources to develop them to pursue highly complex structures and activities in order to take advantage of tax avoidance options. Priorities for action include tighter restrictions on tax avoidance through manipulation of private companies, trusts, ‘golden handshakes’ and offshore transactions.
The failures in our tax system tend to affect more severely those people who have lower incomes and lesser opportunities, and promote unfairness and divisive pressures in the community rather than equal opportunity and social inclusion.
‘Problems’ that do not exist
Some aspects of the current system are unduly criticised, often with the aid of distorted statistics and inexpert media. When compared with both overall and specific taxes in other OECD countries, we find that Australians are not overtaxed, and we do not need to lower taxes in Australia to be internationally competitive.
The long-term investors we need will base their decisions on deeper assessments of competing tax systems and on factors such as a well-educated workforce and political stability.
The current woes of Ireland and Iceland starkly illustrate the dangers of attracting speculative or ill-conceived investment through excessively low tax rates.
Some priorities for reform
Workers and families
The economic crisis is increasing the need to avoid imposing high effective marginal tax rates on lower-income people, especially those who can only find part-time or intermittent work. Key reforms would involve:
- social security reform – relaxing Newstart income tests and raising its threshold
- tax reform – substantially increasing the Low-Income Tax Offset, and abolishing the tax-free threshold for higher earners
- assistance for families – needs to be simplified and better targetted into a single means tested Family Tax Benefit, along with a stronger Child Care Benefit. Grants to non-profit child care providers should be increased and the Child Care Rebate and FBT on workplace child care should be abolished.
Housing and transport
House price inflation has severely damaged our economy by inflating debt, increasing pressures on interest rates and wages, fuelling excessive luxury consumption and eventually creating a collapse in the housing industry. The main enduring victims will be lower-income private renters and would-be homebuyers who do not have access to substantial family assistance.
It is futile to expect ‘market forces’ to fix the problem when they are so severely distorted by the unrestricted exemptions which owner-occupiers enjoy from capital gains tax, land tax and the pension assets test. A better approach would be to:
- limit the land tax and pension test exemptions, (at high levels), and cut stamp duty on all transfers below, say, the median value.
- remove excessive tax incentives for ‘negative gearing’, by only allowing the deduction of expenses from the same source (eg., property investment, not an executive salary)
- provide incentives (transparent, targetted and capped) for investment in low rent housing (eg., the new National Rental Affordability Scheme)
- restrict or abolish Fringe Benefits Tax concessions for work related car travel, and boost public investment in public transport for lower-income areas (outer suburbs and commuter towns)
Tax concessions for superannuation can be a desirable way of encouraging saving and reducing hardship in retirement. The current system, however, provides little or no tax concessions for lower-income Australians and very large concessions for those on higher incomes. Most higher-income people do not need this added incentive to save.
A much more cost-effective and equitable approach would be to:
- tax superannuation contributions in the same way as other remuneration; and
- provide a progressive tax credit or co-contribution by, for example, matching a person’s contributions at a decreasing rate per dollar up to a modest level (very much lower than the concessions currently enjoyed by higher-income earners).
Manylower-income people have special mid-life needs relating to parenting, unemployment, etc at least as pressing as those in retirement. Early access to some accrued superannuation should be allowed on a broader, fairer and more cost-effective basis; and tax concessions should be provided for designated Lifelong Savings Accounts into which contributions (up to a modest total) and withdrawals can be made at any time, subject to age related limits.
Each of these changes would make the tax system simpler, fairer and more cost-effective. Most would enhance productive economic development and none would retard it. A number of them are eminently suitable for immediate implementation to help minimise the adverse impacts of the recession, promote recovery and reduce the erosion of government revenue. Others could be planned for introduction over time, possibly as part of broad packages which provide a suitable balance of impacts.
A Taxation Scorecard
(The taxation scorecard has been prepared by the Community Tax Forum and is available at http://taxwatch.org.au)
- Total tax revenue in Australia is in the bottom-third of all 30 OECD countries. It is at least $40 billion less than if we matched the OECD average as a proportion of GDP.
- The level of taxation based on incomes, whether paid by individuals or by corporations, is in the bottom half of all OECD countries.
- The top marginal tax rate and threshold for personal income tax are generous by OECD standards.
- Total tax per dollar earned has fallen by at least 20% for high-earners over the last two decades but there has been little or no decline for lower-earners.
- The proportion of corporate profit which is paid as income tax is lower than it was a decade and two decades ago.
- The tax rates on corporate income and on capital gains are not especially high by OECD standards and there is no evidence that general business taxation is high. Moreover, we have a very generous system of dividend imputation.
- Taxation of goods and services is relatively low by OECD standards, partly because most European countries have a GST rate of 15% or more.
- Australia is one of only four OECD countries without some form of gift or death duty.
- Public support for ‘social spending’ rather than ‘tax cuts’ rose from 25% to 47% over the last decade while the preference for tax cuts fell from 47% to 34%.
- Our corporate income tax rate is not high
- Employers’ compulsory contributions based on payrolls are lower than in many OECD countries
- Our approach to ‘negative gearing’ is unusually generous
- Our general taxation of assets is not especially stringent, partly because almost all other OECD countries have a gift, death or wealth tax.
- Our tax rates for high-income earners are also not high.
For further information see the TaxWatch online report: Aspects of the Australian Tax System: A Preliminary Outline, which can be found at http://taxwatch.org.au