Turnbull acknowledges grey gouge (locked)

By Leith van Onselen

Communications Minister, Malcolm Turnbull, appeared at a conference yesterday (see above video) where he took a swipe at Australia’s tax system, claiming that it is overly reliant on personal income taxes and favours older people over younger people:

“Looking at Australia’s tax regime you would say that it is too tough on people earning income… but is incredibly concessional to older people who have made their money…

All of these areas are very hard to deal with because any change invariably… [leads them]… to become very angry. That’s why reform is very difficult…”

Turnbull is correct on a number of fronts.

As highlighted recently by the Australian Treasury, Australia’s tax system is becoming increasingly narrow and overly reliant on personal income taxes – precisely what you do not want as the population ages and the share of workers in the economy is forecast to shrink.

Indeed, under current taxation arrangements, the share of total federal budget revenue raised via personal income tax is forecast by the Treasury to rise inexorably over the coming decade, whilst the take from company taxes, indirect taxes, and the GST will shrink (see next chart).

ScreenHunter_3050 Jul. 01 08.07

In effect, Australia will see the tax burden increasingly fall on the diminishing pool of workers, rather than spread throughout the population.

This not only has harmful equity impacts – since older Australians tend to be the wealthiest (think housing) – but also deleterious efficiency impacts on the broader Australian economy.

As the Henry Tax Review showed, personal taxes have a relatively high “marginal excess burden” (i.e. a big loss in consumer welfare relative to the net gain in government revenue). This is partly because they discourage work, leading to lower labour force participation.

ScreenHunter_3051 Jul. 01 08.15

By comparison, indirect taxes, the GST, and taxes on land and resources have much smaller marginal excess burdens, and would therefore confer productivity gains to the economy if the tax base was shifted away from productive enterprise and onto these sources, along with adequate compensation for the poor (in the case of raising/broadening the GST).

Reform of this nature would also broaden the tax base – since virtually everyone would be captured – and would be far more equitable than making the diminishing pool of workers shoulder the lion’s share of the tax burden.

Turnbull is also correct to question Australia’s overly generous tax concessions.

There is a very strong case to limit superannuation concessions, which have increasingly become a mechanism for richer older people to avoid paying tax, rather than a genuine means for Australians to pay for their own retirement and avoid drawing on the Aged Pension.

The cost of superannuation concessions, which overwhelmingly flow to high income earners, as well as the tax free treatment of superannuation once one turns 60, are ripe areas for reform, both on Budget sustainability and equity grounds.

The Aged Pension is also far too accessible to retirees with significant assets, and should be more tightly means tested. As noted by Treasurer Joe Hockey during his May Budget speech: “currently, an individual with a home and almost $800,000 in assets still qualifies for the age pension; a couple with a home and almost $1.1 million in assets also qualify for the age pension”. This level of support is more generous than necessary and allows precious tax dollars to flow to those that are not in genuine need.

There are very good reasons to quarantine negative gearing losses, so that they can only be applied against income from the same asset, as well as removing the capital gains tax concession on investments (why should they be taxed at a lower rate than income?).

An adequate tax take is a vital element for a civilised society. Moreover, higher taxes are not a concern provided they are raised in an equitable and efficient way, and spent in a well-targeted manner.

Of primary importance is ensuring that the tax base is broadened and built around more efficient and equitable sources. Again, this requires a shift in sources from productive effort (e.g labour) towards taxes on land, resources, and consumption, along with the closure of generous taxation concessions favouring the old and the asset rich.

But simply relying on never-ending increases in personal income tax via bracket creep, while the base of workers shrinks as the population ages and the proportion of retirees rises, is neither efficient, equitable or sustainable in the longer-term.

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