Australia’s next generation of tax slaves

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By Leith van Onselen

Business Spectator’s Rob Burgess wrote a great article over the weekend arguing how the current structure of Australia’s Budget risks generating a generation of tax slaves, as younger generations are forced to pay more tax (and consume less) in order to pay for the generous entitlements and health care provided to the old. Accordingly, widespread reform of the tax and expenditure system is required, in order to both return the Budget to a more sustainable footing and to restore inter-generational equity:

…The NDIS, pension increases and general health spending will disproportionately benefit retirees – when you get older, sickness and disability increase. The paradox is that there are major holes in the current tax base that older Australians enjoy.

The main one is the tax concession older Australians make the most use of close to retirement – so called ‘super tax concessions’…

On the other side of the coin, the same retirees love the super tax concessions they got in their last few years of work. They love that their primary residence (the house they’ll leave to the kids) is not part of the pension asset test, and that by spending superannuation dollars on it they’re channeling low-tax dollars to their children’s inheritance and hastening the day they’ll get a chunk of pension income.

That impossible tension cannot last – voters loving both their tax concessions and the benefits the missing tax dollars would have helped pay for…older Australians will have to be convinced that the argument of “it’s my money, so hands off!” must be followed by the corollary “so please tax my children more!”

Burgess’ arguments are broadly in line with views expressed by me on this blog (for example, see here).

According to the Grattan Institute, without corrective action, the Federal Budget deficit could hit $60 billion per year by 2023, or up to 4% of GDP, due mostly to rising health and welfare costs. Current welfare policies also overwhelmingly favour the elderly at the expense of the young – an unsustainable situation in light of Australia’s rapidly ageing population, which will see the ratio of working-aged Australians supporting dependents (mostly the aged) trend lower, slashing the tax base at the same time as age-related outlays expands.

Two of the biggest and fastest growing areas of Budget expenditure – the aged pension and superannuation concessions – are at the heart of the problem. Both are incompatible with Australia’s rapidly ageing population. More importantly, they are both poorly targeted, providing too much assistance to those on high incomes and/or with substantial assets (see here).

As such, reforms are desperately required to improve the integrity, fairness and sustainability of the retirement system, including:

  • Increasing the eligibility age for the Aged Pension to 70 years (from 65 currently and 67 from 2023);
  • Increasing the access age to superannuation (from 60 years currently) so that it more closely matches the pension access age;
  • Reducing the ability to draw superannuation as a lump-sum;
  • Providing everyone with the same superannuation concession (e.g. 15%); and
  • Including one’s owner-occupied home (or part thereof) in the assets test for the Aged Pension and/or  reducing the eligibility thresholds for income and financial assets, so that welfare flows only to those in genuine need.

That said, even with bold reform in the above areas, the Budget is still likely to remain in structural deficit given the shrinking tax base and rising health expenditures, requiring increased taxes. In fact, according to The Australian today, Australia’s ratio of tax-to-GDP of 28% is 9% below the OECD average and are also 3% below where they were in 2007. With the proportion of workers across the economy trending lower as the baby boomers retire, along with falling tax revenues as the terms-of-trade declines, the tax take is likely to fall further without reform.

Raising the rate of GST and/or broadening its base is an obvious solution. The Henry Tax Review showed that GST is relatively efficient. It has a relatively low “marginal excess burden” (i.e. a small loss in consumer welfare relative to the net gain in government revenue), because it is broadly applied, is difficult to avoid, and does not significantly distort behaviour (see next chart).

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Another option is to tax rents on land and natural resources via a combination of land taxes resource rent taxes. According to Prosper Australia, economic rents comprise 23.6% of GDP. When these economic rents are not taxed they are privatised and constitute a free lunch for some that underlies increasing inequality. A classic example, as highlighted today by Ross Gittins, is the mining sector which, because it is 80% foreign owned and employs few workers in the production phase, sees Australians benefit little from the exploitation of our fixed resource endowment.

Taxes on rents are also highly efficient. As shown above, the Petroleum Resource Rent Tax (PRRT) creates zero distortions, since it is applied to a tax base that is completely immobile. While not shown above, a broad-based land tax would have similar efficiency to the PRRT and municipal rates, again because land is completely immobile.

Any discussion about tax reform, therefore, needs to also include implementing taxes on rents, along with increasing the rate and broadening the base of GST.

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Comments

  1. Old Rob could have done a little research before writing the article. The NDIS has a cut off of 65.

    This cut off was done on purpose so people who have an aged related disability can not access the NDIS as it would blow the NDIS’s budget out!

    So his first paragraph kind of falls apart. However, He has raised some good points other than that.

    • Strange Economics

      Correction – the benefit (from super, and excluding family house from pensions) goes to the old “plutocrats” (as they call them in the US). It doesn’t go to the old lower income workers. So why (since these people donated through companies to the politicians funding) would anyone vote to change it. Their plutocrat kids will be funded by them.

      The proposed changes would benefit all (except the plutos..who run the parties).

      While at it – why not tax the high earner CEOs in the protected banking industry. British Labour has proposed to do this last week (to pay for unemployed young workers of all things) – a regulated oligopoly industry such as banking should have regulated charges and salaries…

  2. GunnamattaMEMBER

    The general tenor of the piece is pretty much how I see the future unfolding. I think it will run along much the same lines as the affordable real estate debate and that the issue will be denied until such point as ‘fixing’ it requires bankrupting the fortunes of a future generation.

    At some point they will twig, so one assumes that the the later babyboomer early gen X crowd will wear the opprobrium down the line.

    The other thing is that ,although it wont appeal to everyone, that sort of generational strategic outlook points straight to an attitude of those in Australia with kids adopting a ‘soak it up, take the family tax benefits and any other form of welfare you can lay your hands on, blow the HECS entitlement as far as you can’ but, no matter what you do, make sure you arent around in Australia to pay something back, as paying anything is going to be a serf like experience’

  3. I fail to see why everyone is swooning over the GST. It DOES have deadweight costs of ~8% and IS regressive, though less so than vile Payroll tax or Stamp Duty.

    Look at the zero cost of the Petroleum Resource Rent Tax. ZERO! ZERO! ZERO! Same base for the Resource Super Profits Tax, which should be embraced as an ideal for any resource rich country (see: Norway).

    Next best, the municipal rates base, which is a proxy for land tax. That too would have a nil cost if it were applied only to land and not to buildings as well.

    Surprise, surprise, this regime is exactly what Treasury suggested in Australia’s Future Tax System.

    Do it.

  4. “…older Australians will have to be convinced that the argument of “it’s my money, so hands off!” must be followed by the corollary “so please tax my children more!”

    Older Australians will not be swayed by this argument at all. The tax burden will be shared by ALL of the younger generation, but their OWN children will be able to inherit whatever goodies they have managed to accumulate under the current dysfunctional system, without having to pay either death duties or CGT. This is not about old versus young, it is about some families becoming very wealthy and others becoming poor, courtesy of government policy.

    • Excellent point. Also, what little tax is currently levied on inheritances is poorly structured and most open to manipulation by those who can afford to pay it.

      If you know the end is nigh, you might be able to give it all away tax free before you kick on. Tough luck if you drop dead without notice – that’ll be 15 percent thanks.

      A big part of the problem in this country is poorly thought through tax measures. Of course much of this is deliberate so that the vested interests are kept happy.

  5. I’ve already told my Children there are plenty of choices out there in the world once they’ve juiced the free education (HECS) and not to look back.

    Mind you it’s a demographic problem everywhere. They just need to choose the least worst option in the future.

    • Strange Economics

      Unfortunately , like the US, only rich graduate kids will ever get a job. Only 10 % of jobs are good and these used to be reserved for the wealthy by the cost of uni. Now its by the cost of internships..

      If you haven’t noticed, unpaid internships of up to a year on any attractive job ! ie get a rich parent if you want a good career. HECS to get through uni is not enough.

  6. Boomers think they were Henry Fords and not the Homer Simpsons they were regardless of what they did. That’s an impossible level of arrogance to counter. To be fair they were awesome and far better than gen x and y in lots of ways.

    The only hope for housing affordability is a recession/depression.

    • “The only hope for housing affordability is a recession/depression”
      Yes. Legal, moral and fair. Awaken the bearhawk.

      • I don’t know many people under 35 thats not waiting for Australia to crash and burn

  7. At the moment we have about 20% youth unemployment and significant underemployment of those over about 55.

    As the workforce ages there will be greater opportunity for those presently un/underemployed to participate in the workforce.

    The increased workforce might work mainly in aged care and services to the aged and there will be a huge wealth transfer as the aging aged pay for more and more services until they die. And then the remaining wealth will be transferred to their kids.

    All of these analyses ignore the ability of societies to change over time.

    Who would have thought 30 years ago that there would be som many baristas and aged care nurses as we now take for granted?

    • Strange Economics

      Aged care workers will be 457s also, not the un/underemployed. And they are not well paid anyway, so no wealth transfer there.

  8. I have no problem with a broader resource rent tax, maybe somewhat similar to the PRRT. Something more thought through than either the RSPT or its bastard child would be a great idea, though.

    Bleating about 80% of mining profits going to foreigners is ridiculous, however. The simple reason for this is that foreigners paid most of the cost of developing the resources and that somewhere along the line we managed to sell most of the shares in our big miners to foreigners as well. Of course they will get the majority of the profits.

    There were good reasons for this being the way things panned out. The capital to develop the resources could not have been raised in Australia. The mergers of our big resource companies with foreign owned entities was a net positive for those companies, broadening their resource base and expertise. We may only be getting 20% of the profits from these companies, but the pie is huge compared to what it used to be.

    On land tax, this is such a total no brainer on so many fronts that it amazes me that state governments haven’t woken up. Many of them already have a land tax, all they have to do is broaden the base and adjust the rate. The time to do it would be just after an election, give voters time to get used to it and for the positive effects to flow through the economy.

    • Alex, land tax is a no-brainer to Georgists and most Macrobusiness readers….that’d be less than 1 percent of the population, at a guess! I’ve been convinced of the wisdom and fairness of land value taxes (rents really) for more than a decade, but i havent come close to gaining any converts to this view. I’ve had a few very heated discussions (they were het up, not me) but definitely no miraculous conversions. The ‘poor widow’ defence got trotted out with monotonous regularity 🙁

      • Here’s one argument for land value taxes that I tried using on my husband:
        An employee working 40 hours a week earns $50,000 a year. From this $50,000 which was earned by their own exertions, the worker will lose about $10,000 in income tax.
        In that same year, a ‘poor widow’ living in, say, Hawthorn in inner Melbourne, has seen the estimated value of her modest unrenovated edwardian house rise by $50,000. The widow has not caused the $50,000 increase in value – it arises simply through the increased population and desirability of Hawthorn as a place to live. Yet she will not lose a cent of that ( as yet unrealised) increase in tax!

        But no dice – hubby still doesnt think the ‘poor widow’ should pay any tax…

      • Yes, one thing the public generally utterly fails to understand is that you should never base decisions about whether a policy is wise or not on such “worst case” hypotheticals. If such cases really exist, their problems can be dealt with in other ways.

      • drsmithyMEMBER

        The ‘poor widow’ defence got trotted out with monotonous regularity 🙁

        If the “poor widow” defense is “how will grandma pay her land tax bill without any income, she’ll have to move”, then there’s a pretty simple solution: land tax accumulates against the value of the estate to be settled at death.

        Then it becomes a question of “why should the poor widow’s children get something for nothing”.

    • There shouldn’t be any prizes given for realizing Australia needs to transition to land taxes supplemented with estate taxes and broadened GST, thats a simple math exercise.

      The are prizes need to be reserved for the politicians that can first give popular voice to these needed actions and second implement the policies AND remain in government.