Surely we have tried too hard with with the tax system. All the efforts at reform to produce fairness and efficiency have led to an Income Tax Assessment Act which has more than a million words.
On top of this we have hundreds and thousands of words in GST and social-security legislation which affect take-home incomes.
Yet this week Treasurer Peter Costello announced yet another inquiry into the tax system.
I suspect Costello realises that political demands mean that not much can be done to fix the tax system, but equally politics demand that something must be seen to be done lest others steal his limelight as the economic supremo of the Howard Government.
The nature of the inquiry suggests that it is window-dressing. It is a short inquiry into a comparison between the Australian tax system and its OECD counterparts headed by a leading a big-business lobbyist and a big-business executive helped by eight leading Treasury officials. It is an inquiry into what we already know, led by people who have no time to find out anything new, reporting to a Treasurer who could not do much about it even if they did.
The main gripe of those most vocal in calling for change is the “high” top marginal rate. And notice they are calling for tax “relief” which implies that they are “suffering a burden”.
The high marginal rate is deceptive. At 48.5 per cent it appears that people are losing half their income in tax. Next financial year people on $125,000 pay just 33 per cent of their income in tax. Even people on $200,000 pay just 40 per cent of their income in tax. And that is income after deducting the leased BMWs, computers or anything every vaguely related to their business or job.
Moreover, the tax contributes to making Australia one of the most livable countries in the world – only behind countries that have even higher tax rates.
If Australia is losing the talents of people who flee to low-tax regimes purely for tax reasons, maybe we are better off on two counts: one they are selfish, and, two, they are not bright enough to realise that you get what you pay for. If you want a top marginal rate of 20 per cent you might have to cop an appalling environment in which to live and bring up your children, and an expensive place where you have to pay for everything because the government gives nothing.
Others who leave Australia to work would go anyway.
If the Government was really concerned about losing high-flyers it could have a “hump” rate. The scales would rise to 48.5 at $125,000 but at, say, between $150,000 and $200,000 taper back down in steps to, say, 33 per cent. Sounds a bit weird, but if you graphed the total tax take it would rise and then flatten without much of a hump at all.
But the main reason for cutting the top marginal rate is because it is such an incentive for tax avoidance. It is better to tax spending more and income less. But the politics are impossible. Every unthinking shock jock would point out that for every percentage point of cut a person on $1 million or so would get a $10,000 tax cut, while the strugglers would get nothing.
It is no good pointing out that so many high wealth people simply do not pay the top marginal rate and that if we converted a 10-percentage-point cut in all the income tax rates a 5-percentage-point increase in the GST, high wealth people would end up paying more tax. (Provided the revenue did not go to the financially inept states.) But you could never sell it to the electorate.
Another pressing point is how the low tax-free threshold of $6000 is a disincentive for people on government benefits to go to work. People pay 15 per cent tax on earning over $6000 and lose benefits the more they earn. To many (especially if you add child care and going-to-work costs) it is not worth going to work.
Again, politics makes it impossible to change. The Howard Government is the biggest social-welfare-paying government in Australia’s history (as a percentage of government spending or the absolute amount), largely through family benefits (much of which are misdirected to well-off families). Taking them away in return for tax cuts would cost too many votes.
And raising the threshold might help the poor, but it would also benefit the spouses of high-income earners who dabble in a bit of part-time work.
Then we come to lurks. It is simply not possible to cut a tax-deduction without setting off a campaign of marginal-seat squawkers that would make the backbench twitch like an air doll outside a car yard. Sugar-cane growers, the film industry, family first, ethanol makers, cow cockies, the housing industry, the uniform makers, unions, charities and the list goes on.
You can hear the squawks and read the headlines now: “North Queensland’s sour pill.” “Building trades down drain.” “Heartless Government scalpels coronary charity.” etc.
It would be followed by the typically selfish grasp for exemptions – similar to the GST campaigns. No-one would be allowed to be worse off, even if the country as a whole would have a simpler and fairer system.
Sure, if Governments wanted to help an industry they could hand it out cash in a finite and accountable way, not through an open-ended sneaky tax deduction.
Maybe Costello has been right to sit on hands on tax reform, only now budging with a Clayton’s inquiry because he has to be seen to be doing something.
But actually doing something could only result in adding a few more thousand pages to the already bloated tax law, making even worse the one damning comparison with the OECD that Costello’s inquiry cannot wish away: the complexity of our system has resulted in a higher percentage of people in Australia having their tax done by an agent or accountant than any other OECD country.
And that is just income tax. Let’s leave the nightmares of superannuation, capital gains and company tax for another day.