The best thing to come out of the GST deal is an idea – the idea of a minimum company tax of 20 per cent.
It is a good idea because the poor of PAYE taxpayer is being hit harder and harder. And we need a simple way to make the wealthy pay their way. The wealthy may not see it, but ultimately it is in their interests, too. The more unequal society, the higher incidence of poor health and crime, both of which affect us all.
I’m sorry there will be a quite a few numbers in the following explanation. I’ll try to round them. The general proportions and general directions matter more than the precise figures.
So how would the new company rate work. At present we have a flat maximum company tax on profits of 36 per cent. Companies in Australia make about $170 billion a year gross profit. Yet the total company tax brought in by the Government totals on $21 billion. That is only about 12 per cent. Something is wrong here. The main problem is that companies can claim a lot of deductions, particularly for interest charges. They can also move their money about to avoid tax.
Let’s contrast that with individuals. Individuals in Australia make about $280 billion in total. And the total tax is $77 billion. That is about 28 per cent. So mug wage and salary earners get the tax swiped out of their pay before they a look in. So what’s new? Well, the trend is continuing apace.
Now let’s compare the share of wealth.
In 1981-82 wages and salaries comprised 63 per cent of the income in gross domestic product. It is now just 55 per cent. And this is through 17 years of more women coming into the workforce. So the number of wage slaves has gone up substantially, but their proportion of the wealth being created is falling.
And what about profits? Profits have gone from 13.5 per cent of GDP in 1981-82 to 18 per cent now.
So the proportion of wealth creation going to profit (that is, payment for use of capital) is increasing, while the proportion of wealth going to labour is falling. While at the very same time the burden of tax is increasing on labour and reducing on profit (which is doing very well, thank you very much). PAYE taxpayers can feel rightly put upon.
Why is this so? A major reason is tax minimisation. Companies can do it much more easily that individuals. And so can high-income individuals. The Tax Office tells us that more people are using tax agents to help them minimise tax and that there is an increasing number of trusts and companies lodging tax returns – once again more mechanisms for tax avoidance and a greater burden on middle-income people who cannot avoid.
Through tax minimisation, companies are dragging the 36 per cent they are supposed to pay on their profit down to an average of 12 per cent. A flat rate of 20 per cent would change this. The rate would apply on gross company income. That is, income before deductions for negative gearing, inter-company loans and repatriation to tax shelters like the Cayman Islands. A minimum rate of 20 per cent on gross company income would raise an extra $13 billion – that is $34 billion on present company profits of $170 billion, instead of the present $21 billion. However, that would have to be offset a little by fewer dividends working their way into the personal tax regime.
And speaking of personal tax, a similar minimum should apply there. In the over-$70,000 bracket the average tax paid is 31 per cent, despite the marginal rate being 47 per cent. And this is in the case of declared income.
The trick in both the company and the personal tax regimes would be to limit the amount of deductions, so that there would be a minimum tax floor. In the case of companies that would be 20 per cent of gross income, according to the Democrat-GST deal. But there is no reason why that should not apply to individuals, so that a minimum tax floor of, say 30 per cent, would apply to the whole income of anyone whose gross income is over, say $100,000.
This might be better than outlawing negative gearing outright. Companies and individuals would have to tailor their gearing so they could still meet some tax obligations.
The figures in the Budget papers, the Australian Bureau of Statistics and the Australian Tax Office together reveal a picture with two trends. More wealth going to the corporate sector and the incidence of taxation moving way from the corporate sector and towards middle incomes.
And in this respect, there is a downside to the Democrats GST deal. It will once again hit PAYE taxpayers earning between $60,000 and $100,000. (Those above $100,000 usually have enough disposal income to start rearranging their tax affairs.) The $60,000 to $100,000 group have already been hit with the Medicare surcharge and the superannuation levy in the past few years. Means testing has wiped them from every form for welfare. They are easy targets for government. There are few enough of them not to be a big voting block, but enough of them to make a fiscal difference when they are hit. Moreover, there is little sympathy for them in the broader community because they are not “”battlers”.
Before the Democrats deal, they had a glimmer of hope they would at last get a little relief. But that has been taken away.
The trouble here is that the $60,000 to $100,000 are the middle management and professional group. They help drive efficiencies in the economy and improve standards of living. They also work longer working weeks with all the costs that entails. Sure, the tax scales should go up with income. Sure, welfare should be means tested. But we saw the creation of a welfare trap in the 1980s at incomes around $25,000 to $30,000. We should try to avoid piling on the tax burden on people at a breakthrough point in managerial and professional ranks which acts as a large disincentive to seek promotion or wider professional practice.
A good way to do that would be to attack company tax and the tax avoidance schemes that allow companies and very-high-income-earners to pay such a comparatively low proportion of their income in tax.