Of the scores of inquiries, ideafests and commissions instituted by the new Rudd Government, one was sadly missing – an inquiry into tax.
Any new occupants of the Treasury benches should go into the legislative and policy cupboards and throw out all the things that have past their used-by dates or are growing mould. Much will be worth keeping, but a lot needs a pretty good sniff, and if off, thrown into the garbage can of history.
On tax, some fundamentals are wrong. The election-campaign income-tax cuts are the least of the problem. In fact they were just another bout of handing back what inflation and bracket creep have taken away. Even with the so-called “generous” tax “cuts” it is likely that the total income-tax take in the next few years will not be very much different from the previous three.
The main tax follies of the Howard-Costello years were several. First, the vote-buying middle-class welfare of taxing families and then handing it back in the form of “family benefits”.
Secondly, the vote-buying gifts to oldies.
Thirdly, capital-gains tax. The so-called Costello halving of capital-gain tax was nothing of the kind.
Fourthly, the compromise over the GST has meant that the most efficient and fair tax in Australia’s history is not working as well as it should.
Despite all of its rhetoric on incentive and hard work, the relative and absolute amounts of welfare in the federal budget grew in the Howard years to record highs. It is now more than $80 billion.
Much of this was “churn” money – stereotypically, taken from Dad in the form of tax and given to Mum in the form of family benefit. True, Mum is more likely to spend the money on kiddies’ clothes whereas Dad might spend it at the pub. True, Mum might get some independent money. But the downside is the disincentive to work. Many young women face the prospect of working a whole week for just $100 gain, after taking into account loss of welfare payments, child-care and work costs, and tax. Would you bother working for $3 an hour – other than for the social interaction?
It is a double loss. Tax revenue is lost from people with no incentive to work and the welfare spending continues.
On oldies, the Government is wasting more than $200 million a year on concessional allowances for self-funded retirees in the form of direct payments and pharmaceutical and utilities concessions. The Costello gift of tax-free superannuation withdrawals for anyone over 60 was an outrage of unfairness. Many of these people are double millionaires with their homes and cars paid off. Why shouldn’t they pay 15 per cent tax on exit, given that the earnings on the fund were taxed concessionally?
The cost is snowballing: $25 billion last year to a conservative $32 billion in 2010.
Capital-gains tax is a sleeper. In 1999 people thought Costello had halved the tax. Wrong. Before 1999 the full gain was added to taxable income, after allowing for inflation. After 1999 only half the gain is added to taxable income if you hold the asset for at least a year, but there is no allowance for inflation.
In the past nine years inflation has been low and capital gains – especially on housing – has been high. Real capital gain has outstripped inflation. But before long housing prices will level as government attend to affordability while inflation, according to most projections, is going up.
Say you buy an investment house for $1 million in 2008. Say inflation goes to 4 per cent a year and housing prices also go up 4 per cent a year for the next 10 years. Then you sell. The house goes for $1.5 million, which is a notional gain of $500,000, but in fact no actual gain because the value has merely kept up with inflation at 4 per cent compound. Nonetheless you get hit with $250,000 being added to your taxable income, with a probable tax bill of $120,000 – for no actual gain.
It would be the same for artworks, vintage cars, jewellery and other capital items.
That is not a fair tax system. A better system would be to have a sliding capital-gains scale, reducing by, say, 10 per cent a year, so nothing is payable if you keep the asset 10 years.
That would get rid of the speculators and end the long tail of capital gains which under the present system can be passed down generations for a century or more.
Lastly, the GST. With all governments now Labor, it would be a good time to increase the GST in return for income tax cuts and, more importantly, indexation of the tax thresholds. At the same time all the exemptions could be removed, particularly on fresh food.
In my casual observation, it is always the down-and-out at the supermarket queue who have their trolleys stacked with taxable processed foods and the well-heeled who have the greatest proportion of untaxable fresh stuff.
The GST is fair because people who consume cannot avoid it. And the more they consume the more they pay.
Alas, much of this is politically too difficult. The squeals from the immediate losers drown out the argument for overall benefit.