How to fix Australia’s tax system

By Leith van Onselen

A senior tax adviser to the Abbott Government, EY tax partner Glenn Williams, has called on the Abbott government to scrap tax breaks that benefit the wealthy before it seeks to hike the GST and reduce other taxes. From The AFR:

While people earning over $180,000 already face a marginal tax rate close to 50 per cent, he said popular tax breaks that provide most benefits to the wealthy – such as dividend imputation, negative gearing and capital gains tax breaks – could be curbed.

“You can’t go above 50 per cent (income tax for people on the top marginal tax rate) because then there’s a disincentive to work,” he said. “But there’s a general consensus that the tax burden has to fall on those who are more well off”…

“For example, the burden of personal income tax is increasingly falling on people on average income levels, and the superannuation tax settings do not incentivise lower income earners to contribute their own money to their superannuation savings.”

Without reform, the tax system will become increasingly regressive as bracket creep (aka “fiscal drag”) pushes lower and middle income earners into higher tax brackets, significantly increasing their tax burden. The dilemma was spelled-out in yesterday’s Budget report by Deloitte Access Economics:

…there are 1.3 million taxpayers with incomes in the $30,000 to $37,000 range (and whose marginal tax rate may therefore soon jump 14 percentage points), and a further 0.8 million taxpayers with incomes in the $70,000 to $80,000 range (and whose marginal tax rate may therefore soon jump 4 percentage points).

Outgoing Treasury Secretary, Martin Parkinson, has drawn similar conclusions:

…over the decade ahead, the average tax rate paid by that individual is expected to rise from 23 per cent to 28 per cent, an increase of over 20 per cent. Moreover, the increase in the average tax rate for lower income earners is generally greater than for higher income earners. One consequence of this is to make the personal income tax system less progressive

ScreenHunter_4152 Sep. 11 14.09

Williams’ recommendation that the Abbott Government clamp down on superannuation concessions is sound. While the exact budgetary cost of these concessions is difficult to ascertain – since it is difficult to determine behavioural changes as some people move their funds elsewhere – super concessions likely cost the Budget many billions in foregone revenue and are skewed toward high earners.

One only needs to look at the below table, which shows the amount of concession provided at each income tax threshold, to realise that the lion’s share of benefits flow to higher income earners, whilst penalising lower income earners:

ScreenHunter_3605 Aug. 05 09.00

The draft report of the Murray Inquiry into Australia’s financial system agreed, noting that “the majority of superannuation tax concessions accrue to the top 20 per cent of income earners (Chart 4.3). These individuals are likely to have saved sufficiently for their retirement, even in the absence of compulsory superannuation or tax concessions”. 

ScreenHunter_3316 Jul. 15 13.21

Winding back superannuation concessions, therefore, could potentially save the Budget billions whilst also improving the progressiveness of the tax system. It’s a no-brainer.

Unwinding capital gains and negative gearing concessions makes equally good sense.

For example, the Grattan Institute has estimated that quarantining negative gearing losses, so that they can only be claimed against the same asset’s future earnings (rather than unrelated wage/salary income), would save the Budget around $2 billion a year in revenue foregone once lower capital gains tax receipts are taken into account.

These concessions also juice housing demand:

ScreenHunter_5249 Dec. 02 09.57

Without expanding supply:

ScreenHunter_4745 Nov. 03 10.57

Therefore, they should be ‘abolished’ on equity and efficiency grounds, let alone for the sake of Budget sustainability.

Of course, in addition to closing Australia’s world-beating tax concessions, there is also good sense in broadening the tax base to ensure that it is built around more efficient and equitable sources, such as land, resources and consumption, whose efficiency are far higher than personal and company taxes (see next chart from the Henry Tax Review).

ScreenHunter_3498 Jul. 28 09.14

The bottom line is that it is highly inequitable to expect workers – whose share of the population will fall as the population ages and the proportion of retirees rises – to keep shouldering more and more of the tax burden. Nor is it sustainable in the longer-term. This is why root-and-branch reform of the tax system is required, encompassing the elimination of highly distorting and inequitable tax concessions, along with broadening the tax base in favour of more efficient sources.

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Comments

    • It could probably be done if it were undertaken in conjunction with reform of fees which take 25% of people’s super according to David Murray.

      Reducing fees would lessen the sting of an increased tax take and make it more palatable.

      Given that the fees gouge also hits lower incomes harder, it would also be more socially equitable.

      However, when fee reforms aren’t given much more than lip service, even on sites like this, I have to conclude the chances of a decent reform are limited.

      People who are on high incomes will be against it naturally, but also those who have the prospect some time in their careers of getting the higher benefit will want to escape the present situation where fees take most of the tax ‘savings’.

    • Strange Economics

      The LNP’s remaining supporters/funders are the FIRE lobby, the plutocracy of tax avoiders, and the IPA (read FIRE/cigarette/alcohol/gambling financed lobby), and wealthy older (“generational theft” benefitting) groups.

      None of these common sense tax fixes will get their support.
      The Henry tax review of 5 years ago raised the same issues.

  1. We know what has to be done. The question is HOW will it be done?

    KO’D and Bowen have made their LNP/ALP-sanctioned FIRE-friendly assessments of NG crystal clear.

    No issue demonstrates more clearly how badly the major parties are captured.

    Is there any support in the major parties for NG reform?

    • The answer is it won’t be done. These sorts of changes require a community that looks to social and structural improvement over personal gain.

      That is not the culture that exists anymore.

      “Vested interests are the economy”, 3d1k circa 2010.

      • As with the FIRB debacle, the ALP/Bowen/Husic et al, have sold out their constituency on NG for their FIRE backers and “advisers”. They should be exposed and flogged.

    • All reform must begin with genuine Democracy.

      With Democracy all else will follow.

      Without Democracy, all other battles will ultimately prove futile.

  2. Politics and the economy for vested interest are easy when you have this to help your view:
    “The (NZ) Government appears confident of still being in surplus when its books are opened in a fortnight.”
    Cool. Confident about the future. We like that. But….
    “Cabinet already has the final numbers (but) the Prime Minister’s not giving them away…”
    What was that John? You’re confident about your confidence? Little wonder…..

  3. . . . there is also good sense in broadening the tax base to ensure that it is built around more efficient and equitable sources, such as land, resources

    Agghhhh!!

    The odious self-interest. What is most exasperating is that those who argue from blatant self-interest are often completely unaware that they are doing so.

    Why only on land and resources?

    Why not on ALL rents?

    Two obvious answers are:

    a) rent taxes on land disproportionately exempt the very wealthy who hold a greater proportion of their wealth in rent-extracting businesses rather than land. (Gross land value are a proportion of net wealth is highest for those who have just borrowed to buy their house.)

    b) rent taxes on resources disproportionately exempts the rent-seeking metropolises of Sydney and Melbourne while cross-subsidising them from the exporting States of Western Australia and Queensland.

    There is absolute no reason why rent taxes cannot be applied to all business as proposed by The Henry Review itself!!

    And if a generalised rent tax is considered too complex, then why not simply tax rents indirectly through a generalised wealth tax such as used by the Swiss cantons.

    Most wealth is necessarily either:

    a) the capitalisation of future rental streams (you cannot make large wealth in a single generation other than from market failure which generates the potential for rent); or

    b) inherited, in which case its taxation presents no disincentive effects.

    By all means let’s have an honest discussion about reforming tax.

    But this article is not it.

      • Stephen Morris makes a nice point: let’s tax all forms of economic rent. A first bite at measuring these can be found here.

        http://www.prosper.org.au/2013/12/03/total-resource-rents-of-australia-2/

        Karl Fitzgerald’s estimates economic rents are 23.6 per cent of GDP, so we could pretty well do away with all existing taxation.

        Untaxing work and enterprise would turbo-charge economic activity in Australia. All those rent-seekers would be ticket-clipping the air. I’d like to see that.

      • I can think of a few reasons.
        He reasons well.
        Sticks to the facts.
        Has good explanatory skills.
        I’ve probably left a few out but these ones stand out to me.

      • Please Yes! Is there any possible way we could get SM into the Senate. Maybe run him on the motorbiking, knitting and shooting enthusiast ticket?

    • Stephen please state your definition of “rent”.

      Even if all rents are taxed evenly some assets are mobile and can be moved to lower tax jurisdictions or goods can be bought in lower taxed jurisdictions. Examples of this are a company moving offshore to pay less company tax or goods being purchased from the US to avoid GST.

      • The definition of rent?

        The answer to that question is absurdly theoretical and I will therefore place it at the very bottom of this page to avoid inserting a long-winded explanation of marginal relevance to this topic.

        The more relevant answer concerns offshoring.

        This was expressly acknowledged by the Henry Review (see earlier link) where it discussed the need for transfer pricing restrictions. However, these apply to all taxes, not just rent taxes.

        The more difficult issue concerns the timing of tax payments.

        The best way to enter that debate is to note David Collyer comment above:

        . . . economic rents are 23.6 per cent of GDP, so we could pretty well do away with all existing taxation.

        The point is that under a rent-taxing regime, most businesses would pay little or no tax at all!! There is no incentive for them to move offshore. Even for those that did pay rent tax, they would not pay it until after they had achieved their target rate of return.

        In other words for any business:

        a) that makes normal profits; or

        b) has yet to make super-profits,

        the rent tax regime offers lower taxes than would be available in other jurisdictions.

        It is a lower tax, lower risk system and would attract businesses, not deter them.

        The problem arises when a business has established itself in, say, Australia to take advantage of this regime and then – when it begins to make super-profits – tries to move itself offshore in an attempt to have its cake and eat it as well.

        Of course, the easiest solution to that would be an international move to rent-taxing to eliminate the opportunity for arbitrage.

        But even failing that, it is possible in principle simply to tax such a business when it moves, levying a swingeing tax to recoup all the superprofits that would otherwise have been taxed, or an ongoing tax on the company in its new jurisdiction.

        However, that is a risky strategy (as we saw when the Myer profits were spirited away before the ATO could get their hands on them). If a firm moved its intellectual property overnight, it might not be possible to enforce Australian tax law to recover the tax owing.

        A more secure method would be to use a variant of the “pay-and-recover” approach originally proposed for the MRRT, but modified as follows.

        In its simplest form, businesses operating in Australia would continue to be subject to normal company tax, but if the company did not incur any rent tax then any such company tax payments would be reimbursable (with interest) after, say, 15 years or upon the business ceasing. If it did incur rent tax, then the prepayments would be credited to its rent tax liability.

        Even that approach has its problems. For a start, it still leaves the firm out-of-pocket in the years when it is paying company tax (thereby negating the benefit of rent tax). Also, (as with the original MRRT model) it raises the problem of sovereign risk: having got their hands of the money the government may be disinclined to hand it back!!

        I believe that that problem might be overcome using the following approach.

        Rather than simply taking the corporation tax and saying “Trust Us”, Treasury would issue to the taxpayer a bond bearing the taxpayer’s name, the bond being:

        a) redeemable against the taxpayer’s future rent tax liabilities; or

        b) repayable on, say, the fifteenth anniversary of issue;

        BUT

        c) void in the event that the business was moved offshore and ceased to liable to Australian taxes.

        Such securities could be sold in the secondary market to provide immediate cash for the taxpayer. It would then be up to the banks to obtain a “negative pledge” from the taxpayer (probably secured by a charge over its assets) to ensure that it did not “skip the country”.

        Moreover, the widespread holding of such securities would deter sovereign risk. If the government did move to abrogate its obligation to honour the bonds, those to suffer would not be the taxpayer but the widely dispersed bondholders. Thus the sovereign risk is disbursed from a very few profitable firms to the population in general, thereby making it less likely.

    • Rent Seeking Missile

      Rent taxes YES.

      Somebody gets it.

      It’s so obvious.

      If economists are of any use at all to society, it is in their identification of rents and their proving that taxing rents is the most efficient, least distortionary and most equitable form of taxation.

      Good on you Stephen. Hopefully we can get this ball rolling.

    • Stephen Morris, I think the article was a good and honest discussion on tax reform. Conceptually, you are correct, there is a strong argument to tax ALL rents. However, in practice it would be difficult to apply such taxes. Please get back to me if you have any good ideas on how taxes could be designed to suit the different rents made in different industries and different circumstances in those industries. Furthermore, a lot of these rents result from regulations or other preferential status conferred by government. Therefore, removal of such policies will address the rents more directly than taxation.

      From what I have seen, most of those advocating for broader land taxes are not wealthy. But, if this is an issue you are worried about, the broader application of land taxes could retain the progressive tax rates currently used by the States.

      I think a higher, broader GST is a no-brainer. It has the huge advantage over income tax in that it is difficult to avoid. It does not matter how rich you are or how good your tax accountant is, when you purchase a good, GST gets paid. Look at NZ – the 15% GST with very few exemptions appears to have worked wonders for their budget.

      While the tax itself is regressive, any potential inequality issues can be addressed through a combination of targeted welfare spending and progressive income tax rates. Note that many countries typically apply consumption taxes at higher rates than Australia’s 10%. Inequality in most of these countries is no worse than Australia. In fact, many countries with high consumption tax rates have much less inequality than Australia (e.g., the Scandinavian Countries). People who point out that GST is regressive seem to be unaware of this.

      • The general application of rent taxes is discussed in the link to the Henry Review above.

        The problem with GST is its deadweight losses.

        Switzerland – where the cantons tax all net wealth – maintains low transactional taxes.

        The maximum federal income tax rate currently charged is 11.5% (the constitutionally imposed limit). Cantonal income taxes vary from 1.8% to just under 18% in Geneva.

        Capital gains is largely tax free.

        Following a referendum in 2009, VAT has been increased from 7.6% to 8% for 7 years from 2011 to help fund the country’s disability scheme. At 8%, it is still one of the lowest rates in the OECD.

        With such low rates on transactions, there is little disincentive to engaging in productive work and trade.

        On the other hand, accumulated wealth (which often comes not from work but from the exploitation of market power) is taxed. Wealth tax might be considered a form of rent tax levied at a relatively low annual rate on the present value of future rents. As such, it is much less volatile than conventional rent taxes.

        Wealth subject to the tax includes (see http://www.pwc.com/us/en/hr-international-assignment-services/assets/switzerland-folio.pdf) not just real estate but:

        – immovable assets (real estate);

        – movable assets (securities and other investments);

        – cash, gold, precious metals;

        – cash value of life assurance policies;

        – shares in undistributed inheritances;

        – business capital, shares in a partnership; and

        – motor vehicles, boats, etc.

        Pension funds are not considered as assets, and all liabilities can be deducted in order to determine net wealth. In some cantons there is an allowance depending on the status of the taxpayer (married, single, number of dependants) while in others an allowance is made in the tax rate.

        Taxpayers must declare worldwide assets belonging to all immediate family members. Foreign real estate and qualifying business interest are exempt but made be taken into account in determining the tax rate. Liabilities are allocated according to the location of gross assets.

        Typical assessments for 2010 on CHF1,000,000 owned by a married couple were (from the same source):

        Zurich 0.2% (CHF2,000)

        Basel City 0.58% (CHF5,800)

        Geneva 0.62% (CHF 6,200)

        Of course, all this is predicated on democratic government. With democratic government citizens may structure their society as they wish. In the absence of democratic government no such reforms can be achieved, or if they are achieved they will soon be reversed by corrupt politicians beholden to their sponsors.

        Note also that the other side of the democracy-taxation debate concerns expenditure.

        The biggest step in reducing taxes is to stop politicians wasting that money which is raised.

        The system of elective government is systemically biased towards over-expenditure and poorly targeted expenditure.

        Adversely selected political agents – desperately seeking to win the “franchise on monopoly power” – try to buy votes from well-organised minorities and marginal electorates, running up public debts in the process.

    • The deadweight losses of GST would be low compared to wealth taxes. Even in Australia, with its many exemptions from the GST, the deadweight loss is low (see the graph in the above article).

      Wealth taxes would involve substantial administrative costs due to difficulties in accurately valuing assets and liabilities(even the wealthy do not really know what they worth).

      Economic costs would also be substantial – look at the lengths people already go to to avoid income tax. Wealth taxes would encourage people to deliberately try and minimise their measurable wealth, e.g., there will be much stuffing of mattresses.

  4. Do you really think there is any hope of this being done when a conservative government is in power? They have two sets of voters:

    1. Rich people
    2. Poorer people who don’t understand what you have just written about

    What incentive is there for this to happen?

  5. PWC are also due to issue their tax white paper shortly – this combined with the EY, Deloitte and upcoming Govt White Paper should ignite debate.

    The $35billion additional deficit is additional fuel to the fire for change.

    Although Abbott’s IO delusion makes me think he will have to go for any real change to ensue.

  6. fact:
    Top marginal tax bracket is currently at the record low.
    http://archive.treasury.gov.au/documents/1156/images/01_Brief_History-3.gif
    http://archive.treasury.gov.au/documents/1156/HTML/docshell.asp?URL=01_Brief_History.asp

    Marginal tax rate used to be much higher in the past and at the time it wasn’t creating a disincentive to work because people who pay tax at this rate do not earn the money by working hard

    At the moment top marginal tax break is low and it starts at very low level income. This creates situation where middle class people who earn just over twice the average income fall into the “rich” category. In reality they are far far from being rich. With that income ($180k gross) they can barely afford to buy an average house in Sydney (it takes 7 years income to buy just a median house) but tax system sees them as rich and tax them at the highest rate.

    People who are truly rich in this country earn $180k in a day ($40m pa) or less – some of them in an hour ($315m pa) or less.

    The other problem are tax loopholes that allow people who earn a lot to report very little income and pay very little in tax. BWR 200 combined wealth rose by $114b over the last decade ($71b in 2004 to $185b in 2014) but they paid fraction of that in taxes (not even one tenth of top marginal rate)

    The way to fix the system is to close loopholes and introduce one or two more tax bracket with higher marginal tax rate (e.g. all income over $1m should be taxed at 65% and everything over $10m at 75%.

    something like this:

    0 – $18k Nil
    $20k – $40k 15%
    $40k – $80k 25%
    $80k – $160k 35%
    $160k – $320k 45%
    $320k – $640k 55%
    $1m – $10m 65%
    $10m+ 75%

    This country was the most prosperous during the period of extremely high top marginal tax rates.

    • “The way to fix the system is to close loopholes and introduce one or two more tax bracket with higher marginal tax rate (e.g. all income over $1m should be taxed at 65% and everything over $10m at 75%. ”

      I’d put a wealth tax in the mix.

    • BUT;

      a) higher income earners already pay the vast majority of income tax – the top 1% pay almost 20% of the total and the top 20% almost 80% of the total. These are ATO statistics.

      b) So far, there has been no mention by anyone of Australia’s transfer payment system, regarded as one of the most generous in the world. Any examination of income tax equity that ignores this is incredibly unintelligent. The transfer system ensures that the bottom 50% of taxpayers (on average) pay no tax, net of transfer receipts.

      c) For some further balance, what about looking at other taxes paid by say the top 5% income earners; $12K luxury car tax on a $100K car, $100K stamp duty on a $2M house, no tax rebate on private health, additional 15% penalty tax on super contributions, no hand outs of any kind whatsoever, no free insulation, no carbon tax compensation, no entitlement to Ausstudy allowances for their children – the list goes on.

      The real taxation problem in Australia is the excessively generous transfer payment system including the high tax free threshold.

      • I don’t think anyone said “bad”, just that there is no rational case for an argument that high income earners are not doing the heavy lifting, or for the inference in the article that they are at the root of Australia’s tax base problems.

      • Put it another way – based on your point (a), a 10% marginal increase on the top 1% (possibly achievable by removing deductions – especially super concessions- rather than increasing the nominal rate) would increase receipts more than any increase available on the bottom 70% or so of taxpayers.

        If your goal is fixing a budget hole, the Pareto principle strongly pushes you down this route.

      • That would be correct if it is accepted that the bottom 50% pay no net tax and that their status isn’t going to change. If each of these tax payers contributed just $1,000 pa in additional tax (or reduced benefits), the tax base improves by over $8B pa. To raise the same amount from the top 1%, they would have to pay more than $50,000 each, making them the highest taxed (proportionately) individuals in the world. In relation to super, the table presented in the aricle clearly shows the top 1% already get a lower tax break than those on between $37K and $80K -are you suggesting reducing it further?

      • I would completely abolish all super-related tax concessions.

        Approximately 20% of Australians who lodged tax returns earned less than $16k (in 2011) – clearly their median income was something less than that.

        Absolutely removing the 15% tax concession for people earning over $300k or the 30% tax concession for people over $180k is preferable to asking someone earning $10k for five weeks income or someone on $16k for 3 weeks income.

      • Most countries have a much lower or nil tax free threshold so any income earned incurs some tax. At those income levels ($10K and $16K) they wouldn’t need to lodge a tax return as they are not yet at the first taxable threshold. A comparison with NZ is relevant: 11.95% tax applies on all income, starting at $1, up to $14,000 pa. In Australia, you would need to earn over $26K before you pay the same tax as someone in NZ earning $14K. At the other end of the scale, an Australian $300K income earner pays $39,000 more tax pa than their Kiwi counterpart…

      • people in the bottom 50% who are working are actually paying more tax than top 1%. They are paying it indirectly via depressed wages (extra profit created by lowering wages going to wealthy business owners and management and gets taxed at highest rate) or via consumption (taxes, rates, duties, … that make up large proportion of their income).

        For example, a low paid worker who buys a below average home worth 10 times his income pays almost 40% (of his annual income) tax in stamp duty. A rich person buying a multi-million dollar home worth half of his income pays 2%.
        it’s similar for cars, clothes, electricity, petrol, …. poor people spend everything they earn, rich people spend just a small fraction …

      • To raise the same amount from the top 1%, they would have to pay more than $50,000 each, making them the highest taxed (proportionately) individuals in the world.

        this is ridiculous. An average income earner in any European country pays higher tax proportionately than our richest people.

        Paying $50k more for someone who is making over a $1m is less tax increase than $1000 for someone earning $50k
        For rich people earning $10m or $100m ,$50k more in taxes would be below rounding error. $1000 for people who earn $50k makes noticeable difference on dinner table

      • Not sure how to fix that one put I am sure it’s not through taxation. Stamp duty is very progressively scaled -which is one of my key points, you can’t look at income tax alone without considering other taxes and transfer payments which add additional layers of “progessivity”. If the low income worker is on $45K and bought a $450K house, his stamp duty of $16K is less than 50% of his after tax income. Someone on $300K buying a $2M house takes home about $180K but pays $96K stamp duty, more than half his after tax income. Yes he has more “left over” but that can not be fixed with more taxation, only caps on how much people can earn.


      • $1000 for people who earn $50k makes noticeable difference on dinner table

        Talking about earning $50k as though it is normal for the lower 50% of wage earners is actually way too optimistic. In tax year 11, 60% of people lodging tax returns earned less than $52k. Of those, the ABS has given us just enough data to infer that the median is something south of $31k – plausibly around $28k-$30k.

        $30k is the figure should be discussing when talking about people in this income bracket.

        I suppose people in that demographic should just be thankful they don’t generally pay much stamp duty.

      • The example I used was someone on $300K which gets them in to the top 1% income earners in Australia. There are less than 10,000 australians with taxable income of $1M pa so you are talking about less than 0.1% of taxpayers, it’s a very small group. If you hit someone on $300K, who is already being taxed at the 8th highest rate in the world, with an additional $50K in tax, you would absolutely push Australia to the highest individual tax rate in the world. If you are talking about applying it at a higher level, we would quickly run out of firepower because of sheer lack of numbers. Collect a $50K levy off all the $1M + earners and it would raise a paltry $500M pa.

      • $500m will do fine.

        What’s these top earners’ beef – on average its not much more than 2% extra. Is that really going to send them all packing?

        If they’re a CEO, for example, in most cases their careers actually don’t seem to be all that transferable from Australia to O/S.

        Otherwise far more people who leave the job with mileage still to go would be out there doing a lap of honour in the US or England.

        Lawyers earning that much can’t easily relocate. Judges not at all. Doctors – maybe – but if you’re earning that much in many cases its because of the significant local practice you’ve built. Accountants might transfer, but you’ll take a pretty good pay cut.

        If you’re a business owner, then in most cases it’s going to mean relocating your whole business. Okay if you’re sales are truly international a la the Rolling Stones, but if you built the business in Australia and are staying for the moment, given the high wages and all, surely if you had customers elsewhere, you were already out the door long ago?

    • Good luck retaining anyone earning over $300K under that regime

      Who on earth would establish their successful (generating employment and taxes) business under such a regime of government theft?

      Plenty of other places in the world to set up a business.

      • tax changes should include removal of loopholes: tax has to be paid in Australia on all income or profit made in Australia.

        where would they go to make their profit or earn their wages?

        majority of of our rent seeking rich class rich would go bankrupt in competitive places overseas. Most of our high paid top managers wouldn’t even get a job overseas, any job.

      • Who on earth would establish their successful (generating employment and taxes) business under such a regime of government theft?

        Perhaps more interestingly, by implication, how on Earth did the world survive before the 1980s ?

      • Who on earth would establish their successful (generating employment and taxes) business under such a regime of government theft?

        Bloody hell Mick Jagger, Paul McCartney and Roger Waters must have been stupid.

        Not to mention Richard Branson.

      • Seriously ?

        The Rolling Stones and Pink Floyd as examples ? Not sure Sir Richard had his tax advisers on board when he was setting up his record company.

        And DrSmithy – what planet do you live on?

        Australian ex-pats abound in executive and entrepreneurial roles in more competitive countries than Australia doing very well.

        Many have actively fled the madness of regulation, taxation, middle class welfare and rent seeking of Australia.

        And most would argue that the standard of living globally by far exceeds that of the early 1980s.

      • And DrSmithy – what planet do you live on?

        The one where businesses and people thrived under tax rates vastly higher than the ones you contend are catastrophic.

        Indeed, the time of humanity’s greatest levels of social mobility, widespread wealth increases and collective prosperity.

        And most would argue that the standard of living by far exceeds that of the early 1980s.

        Irrelevant straw man. Though it is worth noting in context that the countries that persistently top living standards, happiness, educational achievement, GINI coefficient – indeed basically all metrics of civilised society – lists, mostly have substantially higher taxation and regulation than Australia.

  7. Marginal tax rate used to be much higher in the past and at the time it wasn’t creating a disincentive to work because people who pay tax at this rate do not earn the money by working hard

    Yep. How much a CEO’s $10 million is from him working ‘harder’ than the guy who empties his bin for minimum wage? How much of it is due to his company exploiting consumers, or the environment, or just any market failure?

    • I suppose prior to becoming CEO, it incentivised him to work hard on empire building and corporate backstabbing, not to mention entrenching himself (definitely himself in this context) in the pre-existing culture (and in turn, further entrenching that culture) while keeping outsiders out.

      Y’know, the sort of stuff that made Enron great.

      Once he is CEO, it’s just his due.

    • Again I think we need to be very careful about only thinking of the large corporates. The reality in small business is another thing. Incomes can vary enormously year to year. So confiscating all the income when we do happen to have a good year could be terminal.

    • “How much of it is due to his company exploiting consumers, or the environment, or just any market failure?”

      As someone that empties bins for a major company (for slightly above the minimum wage) the amount of waste they produce boggles the mind! It’s not only bad for the environment, it must cost them a fortune!

      That aside, I wonder if this isn’t an example of market failure? I mean are regular shareholders sufficiently informed or empowered to make informed judgement calls on pay rates? Also, what role does power, cultural, greed, group think, and the influence of big fund managers play?

      I certainly think CEOs should be paid well for their skill and efforts, but when they’re earning so many multiples more than other workers questions should be raised!

  8. This tax reform marlarkey that confers advantage on privilege and presents it as progress has just about run its course.

    The problem is much larger than ending Negative Gearing which might save a few billion, while independent forecasts of future budget deficits are in tens of billions – even these I regard as gross underestimates without change.

    Martin Parkinson’s warning is that low and middle income earners – confronted daily by welfare traps and stunning marginal effective tax rates – are likely to abandon formal paid work if the PAYG tax schedule moves much more against them – as it is set to do.

    And when the fruit cakes at the IPA enthusiastically support a bigger GST, reasonable people should be bristling with suspicion. The GST is regressive and mimics Britain’s Corn Laws 1813-46 that nearly destroyed the country. This might suit the financial and class agenda of some, but the voters won’t stand for it. See: Victorian election 29 November 2014.

    The best answer comes from Treasury and sits righty before us: Australia’s Future Tax System.

    In short, introduce two taxes: a Land Value Tax and a Resource Super Profits Tax, and use the proceeds to abolish 125 very bad taxes. We could even restore federalism by obliging the states to use their State Land Tax powers properly for the LVT part..

    This is the path of reform. It removes the veil government hides behind with taxes that are paid by one while the incidence falls on another (Stamp Duty, Payroll Tax, etc, etc). Never mind the deadweight costs are staggering – in the vicinity of 5-6 per cent of GDP, spilled on the grounds so government can have a quiet life.

    Grow up, everyone. Don’t abandon tax reform to vested interests with an insistent agenda of shifting the tax burden off the already-advantaged.

    • Actually, Treasury’s suggestion was for a comprehensive system of Rent Tax, but the rent-seekers of Sydney and Melbourne watered this down to a rent tax on resources only, a tax which would subsidise them with resource rents from Western Australia and Queensland while exempting the rents from their own market exploitation.

      What about the rent extracted by the FIRE sector. What about the billions of dollars of rent being channelled – by government mandate – to superannuation fund managers? Why should that rent go untaxed??

      What about the rents extracted by Australia’s raft of oligopolies? Why should that rent go untaxed??

      Likewise, a tax on all net wealth (such as used by the Swiss cantons) has been watered down by the vested interests to be a tax on land only, a tax which disproportionately exempts the very wealthy who hold only a small proportion of their net wealth in the form of land.

      The greatest impact of land tax is on those who have just borrowed to buy their own house. They are the ones who would pay the highest rate of (land tax) / (total net wealth), or (land tax) / income.

      Why??

      When even the attack on vested interests is undermined by vested interests, what hope is there???

      • p.s. I now see that you have amended your position in the comment above. That undermines much of my rant here!!

      • Yes, I don’t think we are that far apart, Stephen. I try to keep my arguments concrete and simple so more can keep up.

        Most would see taxi license or fishing license or radio spectrum reform as micro issues, without appreciating the over-arching economic rent capture argument.

        I disagree with your proposition that land tax falls most heavily on those who recently borrowed to buy. The tax is entirely proportionate to the economic rent a lot produces. In practice it falls mostly on those who choose to buy (hold) the most valuable sites.

  9. I’m all in favour of getting of unjustified tax breaks, but how can getting rid of dividend imputation be a good idea, other than raising revenue?

    • “I’m all in favour of getting of unjustified tax breaks, but how can getting rid of dividend imputation be a good idea, other than raising revenue?”

      Not that I have a strong position either way, but we’re in the tiny minority at the moment.

      http://www.taxreview.treasury.gov.au/content/FinalReport.aspx?doc=html/publications/Papers/Final_Report_Part_2/chapter_b2-3.htm

      Australia and New Zealand are now the only two OECD countries to operate dividend imputation systems.

      Countries that have abandoned dividend imputation systems include the United Kingdom (in 1999), Germany (in 2001), Finland (in 2005) and Norway (in 2006). While the move away from imputation for European countries can be partly explained by European Union legal issues, the trend has also been evident in Asian countries. Both Singapore (in 2003) and Malaysia (in 2008) have abolished their imputation systems.

  10. Well, the Discussion paper on tax reform is to be released, either this week or next. Reading between the lines will be required.

    More definitive may be Murray’s view on superannuation, also ready to hit the news stands.

  11. Acme is correct.
    Big companies can go to Super funds and get 3 to 4% money any day of the week with the option of actually paying or not. So to a large company they don’t really have to worry about dividend imputation as long as they adjustt eir executive bonus scheme to allow for the change!
    Small business, on the other hand, has to raise all its capital internally. Dividend imputation will be a killer. But who gives a RA about small business once the ‘it’s oly fair’ brigade get a hold on it.

  12. How about also we have a look at the Public Service while we are attacking small business. How about we cut out all the duplication? How about all teh unnecessary production inhibiting regulation? How about all those who police such stuff?

  13. Dividend Imputation is not a tax break for the wealthy as inferred in this article. It is a credit for the tax already paid on the income by the company – it stops double taxation, ie the company paying tax on the same income as the share holder!
    It benefits all tax payers including low income tax payers who own a few shares.

  14. Glencore, apple, google, ikea, Macquarie bank, news corporation…. And the list goes on…..

    How about fixing the rorts that have been going on for years… Transfer pricing… Interest deductions to subsidiaries, IP artificial deductions…. Think Ireland. I am sick of incompetent politicians and bureaucrats making me subsidise these people.

    Don’t forget those who work on an hourly rate pay the gst on top of the payg making the top marginal rate 55% plus levies.

  15. “Capitalist” above asked for a definition of rent. Because it is complex and arcane I have put it here at the bottom of the page to avoid inserting a long comment of only partial relevance to the main article.

    The definition of “rent”.

    Most people – in fact most professional economists – do not realise what a monumentally complicated question this is to answer.

    Ultimately it is inseparable from the “initial-state” problem, the problem of who is entitled to what in the “initial state”. Most people – in fact most professional economists – blithely assume an arbitrary initial state without even realising that they do so.

    If we look at what are usually regarded as the “resource rents” of, say, Western Australia, do they belong to Western Australians? Or to Australians as a whole?

    Or – going in the other direction – do they perhaps belong to the mining companies? Or to the landholders (as they do in the US, for example.)

    If we assume, for example, that they belong to WA, then any federal rent tax is simply a form of “rent-seeking”. (It is certainly an attempt to “seek” rent! And transfer it from one group of individuals to another.) But if we assume, for example, that they belong to the landowners, then any State tax will be “rent-seeking” activity for the same reason.

    The problem is that one man’s assumed rent is another man’s assumed property right.

    To solve that problem, one needs to solve the “initial-state” problem.

    There is a logical solution to that problem, which is too long to set out here, but an outline may be found here expressed in terms of the “democracy eigenfunction” and the “democratic polity market”.

    If we can assume that that problem has been solved, then a rent may be defined as follows:

    “A benefit sustained over time arising from a metastable distribution of rights.”

    A metastable distribution of rights is a distribution of rights which is not equilibrium – and would be negotiated away in the absence of transaction costs or the anti-catalytic effects of Prisoners’ Dilemma – but is sustained over time due to those barriers.

    If the initial-state is defined, and if transaction costs barriers are eliminated, then any rentier activity giving rise to deadweight losses would simply be eliminated through negotiation.

    From there we may proceed to identify three types of rent:

    a) entrepreneurial quasi-rents (which are not really rents at all but normal returns);

    b) windfall rents; and

    c) incumbency rents (including political rents) which generally arise from incumbency protected by Prisoners’ Dilemma.

    The ultimate solution to rents then is to:

    a) define initial-states as above; and

    b) remove transaction cost barriers

    Given that the biggest of those barrier is political incumbency, that in turn requires some form of direct democracy

    • A rambler is walking over a mountain and a landowner comes out shouting: “oi! Get off my land!”
      “Your land?”
      “Yes my land.”
      “And how come you own it?”
      “Because I inherited it from my father, who inherited it from his father, who inherited it from his father.”
      “And how did he get it?”
      “Well, he fought for it.”
      “OK then, take your coat off, I’ll fight you for it now.”

      • To which the land owner replies, “Sure, but you realise you are fighting the legal and political structures I have put in place to defend my land in exactly this situation, so best put that coat back on”.

  16. You say the average full time employee hits the second highest tax bracket in 2015/16. So an average $80,000 income earner will pay $17547 tax plus 2% medicare less any allowable rebates.
    In a family business with two employees on $92,500 each will pay a total of $44344. They will pay a 2% medicare levy totalling $3700. Total tax take across the two is $48044. This ignores any franking benefit from dividends from the business, personal costs run through the business (food, phone, cars, fuel etc) or business expenses which include dressed up holidays. They are not rich based on your analysis. They are just overtaxed average people. If they are a couple with two dependant children they have $133256 to spend on the family unit after allowing for all the household bills they have run through the business and assuming they do not participate in the black economy
    An employee who earns $185,000 pays $56797 plus 2% for medicare plus 2% for a debt repair levy totalling $7400. Total tax take is $64197. No living expenses can be run through a corporate structure. If it is a one income family then the same gross income has $120803 left out of which all expenses are paid from after tax dollars. A difference of $12453 in favour of income splitting.
    If an investment property loan paid $12453 interest only at 5% (hard to get) then the loan size would be $249060. Not huge but more easily afforded by the income splitters who are already likely to be running lifestyle bills through the business.
    I may have these figures a little out but you can see my point.
    You have 41% of the marginal excess tax burden coming from payroll tax. So employees pay the largest share and we have seen studies showing low wage earners pay net no tax after welfare. So the individual wage earner supporting a household is definitely paying overs relative to the general population and certainly more than a self employed household on the same gross income.
    Your analysis assumes the individual on $185,000 is rich. You assume he should pay more tax on his super contributions even though he is saving for his whole family unit. You assume he is gearing for tax benefits because he’s rolling in it yet it is more likely to be the income splitting family because they have more disposable income than he does.
    The marginal tax rate on that individual is 45%+2% medicare +2% budget levy+ 15% top up tax on his super. The income splitter is miles ahead.
    Your article might read well but the high paid employee sole income provider is getting seriously wacked. The issue is the demographics say that individual is nudging towards retirement and the nature of businesses is to cull high cost employees. That is a structural problem that no one looks at. Better to jump of that rat race and open a coffee shop!
    You also seem to blame negative gearing for the stupid house prices. That ignores the macroprudential impact of the decision to change the risk weighting of mortgages in 1988 and the uncontrolled rise wholesale funding over the last few decades. (http://www.rba.gov.au/speeches/2010/sp-ag-300310.html )
    Claiming an expense incurred in earning an income is a simple clean concept. The problem is the risk weighting the lenders are allowed to apply to loans and the gearing they are allowed to assume. Absolutely get on the case for tighter prudential controls but it is simplistic to blame negative gearing. It is implausible that we would be in this pickle if lenders were better controlled and income splitting was not so rife.

    • Claiming an expense incurred in earning an income is a simple clean concept.

      You seem to be misrepresenting what negative gearing is.

    • “Claiming an expense incurred in hiding an income is a simple concept”

      FIFY

      Median wage is closer to $48k than to $90k. Someone $92k employee is quite a lot above average – a couple where both earn around that much for a total of $184k is in the top 10% of household incomes.

  17. Look at the 2nd chart in the article. It says average earnings will be $80,000 next year. I said-“you say”

    Claiming an expense in the course of earning an income is a simple concept. Be careful what you wish for when you stuff with this.

    • Average = mean, in this context.

      Mean and median not same same.

      NGers are not claiming an expense in earning an income. They are minimising their income in lieu of an expected windfall sometime in the future.

  18. The point I’m making is gross and net incomes are not the same thing. Neither are the commitments for different households. Real employees are not on the same playing as those who can stream their incomes. How many times are you offered a tax receipt by a retailer (eg a coffee), how many times do you see some families have extravagant holidays whilst others can’t afford them? Streaming incomes is more potent than gearing on tax revenues. After tax incomes are dependent on whether you can stream not how much you can borrow.
    Before you get stuck into gearing have a look at how the lender funds itself and how distorted the lending practices have become. Regulate the lender properly and the negative gearing will look after itself. We have been a credit binge for decades fueled by bad regulation. Read the RBA speech I posted the link to and see what they have been doing. Credit has made stupid people look clever buying old houses. Bad regulation has distorted risk.