Tax wealth to fund Australia’s ageing population

The Australia Institute (TAI) has released a new paper questioning the efficacy of Treasury’s Intergenerational Report (IGR) and why it ignored wealth and capital gains as a potential source of tax revenue to fund an ageing population:

Since September 198818 series net worth has been growing at 7.5 per cent per annum and, as mentioned above, is now (March 2021) $12,665 billion. At that rate in 40 years it would be $228,521 billion or roughly $89,160 billion in 2021 prices. Figure 1 plots household net worth over the period from March 1989 to March 2021 (the latest figure available as at the time of writing). These figures are shown in the solid blue line in Figure 1. Because of the volatility in the data a trend line has been included as the dotted line in Figure 1…

While household net worth at March 2021 stood at 6.37 times GDP, in March 1990 it was a more modest 3.58. That would seem to suggest Australia has experienced a very substantial shift in the structure of the economy. Wealth now looms so much larger than it did three decades ago…

The latest figures suggest that in 2017-18 the top 20 per cent of households had an average wealth of $3.4 million… While the IGR says GDP per capita will be some 84 per cent higher in 2060-61, trend capital gains will be some 600 per cent higher in real terms…

It is already inequitable that capital gains are taxed so lightly… The failure to adequately tax capital gains is an enormous advantage to the rich.

The average top 20 per cent of wealth holders enjoyed capital gains of 108 times the capital gains of the lowest 20 per cent of wealth holders. That suggests capital gains will continue to inflate the incomes of the wealthy and so worsen the distribution of income in Australia…

IGRs were designed to persuade Australians that they could not afford the level of government services they had traditionally enjoyed… Just like the 2021 IGR, wealth and capital gains were not mentioned in 2002. Almost everything was compared with GDP just like today. Over that time GDP increased by 173 per cent from $754.3 billion to an estimated $2,059 billion.64 Meanwhile household wealth increased by 302 per cent from $3.15 trillion to $12.7 trillion.65 The annual increment in household wealth, basically capital gains, increased by 402 per cent from $334 billion to $1,676 billion. These are set out in Table 3…

By the time of the fifth IGR in 2021 wealth had grown to $12.7 trillion and capital gains were $1.7 trillion and not far behind the $2 trillion size of the economy. The comparison between the increase in GDP and household wealth is illustrated in Figure 2:

Figure 2 dramatically illustrates the relative magnitudes of what the IGR chose to concentrate on, changes in GDP, compared with what the IGRs chose to ignore, the increase in household wealth.

One of the pressures on spending due to the ageing population is the health budget. That is being driven both by demographic factors as well as expensive new technologies. It is therefore interesting to compare the increase in the health budget projected for 2060-61 with the projections for capital gains income the IGR has failed to include for that year. Both projections are expressed as a share of GDP for 2060-61.

Figure 3 shows rather dramatically that the capital gains income that is excluded from the IGR towers over the apparent problem of the projected increase in the health budget in 2060-61. The impression of difficulties trying to finance government services in 2060-61 evaporate when we take account of what is missing in the IGR.

The onus should be on the government to justify confining its attention to GDP and ignoring the additional capacity to pay tax and finance government services as is suggested by data on wealth and increments in wealth. Why has the government ignored capital gains when the Ken Henry report into taxation made it clear that capital gains should be included in discussions about tax?…

People sometimes phrase the intergenerational problem in terms of the burden an ageing population will impose on future generations. But the data force us to think of another way of looking at this issue. The future generations are going to have to ensure that the rich and very rich old people assist the poor old people in their communities. We have misallocated our worries towards thinking that the problem is one of entitlements to government services when it is not.

Well said. Providing government services to the richest generation in history can easily be paid for by properly taxing the richest generation in history.

Unconventional Economist

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