The Turnbull Government’s preferences for tax reform have become clearer, with The Australian’s David Uren reporting over the weekend that Treasurer Scott Morrison’s tax white paper taskforce is working on options to reform the tax system via some combination of personal income and company tax cuts, changes to the tax on superannuation concessions, limits to negative gearing, and/or an increase in the GST to 15%:
There is support for changing the taxation of superannuation contributions from a flat 15 per cent paid by super funds to taxing them at a person’s marginal tax rate, less 15 or 20 per cent.
The tax reform package would include limits to negative gearing claims and may also include caps on workplace deductions.
Mr Morrison’s approach at the beginning of the year is to increase his options by trying either to win state support for a GST increase or else relinquish their veto over the GST rate.
He has flagged that he is prepared to consider a partial swap of income tax and GST revenue with the states that would give them access to a faster growing source of revenue but would break their effective veto over GST increases.
Raising the GST to 15 per cent would reap an additional $32 billion a year, according to the Parliamentary Budget Office…
The government would aim to finance personal income tax cuts with increases in taxation of superannuation and limits to concessions for negative gearing and workplace expenses.
Reforming the GST remains politically difficult, however, given the differing views at the state and federal level about how the proceeds should be spent. The states want to spend the proceeds on services, whereas the Federal Government wants to spend it on cutting personal and company income taxes. As long as these differences remain, GST reform will likely remain stuck in neutral.
With this in mind, below is my priority list for tax reform, presented in no particular order:
- Unwinding the many tax concessions that are broadly inequitable, cost the Budget significant sums in revenue foregone, and reduce the progressiveness of the tax system, including: negative gearing, the capital gains tax discount on investments held for more than one year, along with FBT concessions on cars ‘purchased’ under a novated lease for private use.
- Taxing superannuation contributions/earnings at a progressive but concessional rate, as advocated by Deloitte, MB and the Henry Tax Review.
- Taxing superannuation earnings in the retirement phase, thus extending the 15% tax rate to fund earnings in that stage (perhaps with an offset for people earning below the tax-free threshold).
- Reducing superannuation contributions limits.
- Placing a lifetime cap on superannuation nest eggs.
- Tightening means testing of the Aged Pension by including one’s principal place of residence in the assets test, supported by an expansion to the Pension Loans Scheme, so that asset-rich retirees can continue to receive income support via a government-run reverse mortgage.
- Eliminating inefficient taxes like stamp duties in favour of a broad-based land tax and greater taxes on resource rents.
- Extending the 2% Medicare Levy to incomes sheltered from tax by the above tax concessions (e.g. the CGT discount).
- Cracking down on discretionary trusts and private companies, which allow relatively well-off individuals to avoid tax by diverting and ‘sheltering’ their income or income producing assets.
- Abolishing the private health insurance rebate (which, less face it, is inflationary and hasn’t reduced pressure on public hospitals).
- Similar treatment for different types of savings.
To Scott Morrison’s credit, he at least appears to be interested in targeting some tax concessions (namely superannuation contribution concessions and negative gearing).
That said, his reform plan could hardly be considered “comprehensive”, and there are lots of other reforms that the government could undertake to improve the sustainability of the Budget whilst also improving equity.
Hopefully, Labor will grow a set of cajones and begin articulating a more ambitious plan for tax reform in the lead-up to this year’s federal election.
