Travelling by train through pre-dawn Melbourne a few years ago, I met a couple of Polynesian women going to work. One asked me which stop to use to get to a certain factory – her cousin, beside her, was starting a new job there at 6am.
When I asked the cousin where she was from, the first woman told me that cuz didn’t speak English. She was starting, it seemed to me, on one of the really low rungs of the workforce ladder. And nothing wrong with that. We all start somewhere.
However, if I’d had more presence of mind, I’d have remembered to ask her a favour: would she mind paying for some of my healthcare benefits, so I could have a bit more money to buy a fast car?
It’s a reasonable request. After all, our current tax system is set up to ensure that smart chaps like me can opt to push a bit more of the tax burden onto lower paid workers like her. Hurrah!
Okay, so I’m being facetious. But when the facts of the current tax system are examined, it’s clear that exactly that effect is achieved by many higher income Australians.
And in the present phase of political life, examining these inconsistencies should be a high priority for both the Coalition and Labor.
Why is that? Well, because as the BCA argued both before the election and in its recent budget submission, while cutting expenditure should be a priority for the federal government, it also needs to undertake “comprehensive tax reform in the longer term that improves the tax mix and reduces the volatility of Australia’s tax base” (BCA unveils budget wishlist, February 24).
Before the election it called for a company tax rate to move to 25 cents in the dollar as soon as possible, while noting that more revenue would have to be found to cover that tax cut.
The Abbott government is cutting tax for small businesses to 28.5 cents, but due to the 1.5 percentage point increase in tax on the nation’s largest 3,000 businesses to fund the paid parental leave scheme, big business will still pay 30 cents in the dollar.
There is no logic behind that arrangement. While many SMEs are struggling at present, highly profitable SMEs – and there are still plenty – will be subsidised by struggling big businesses such as SPC Ardmona or Qantas. Weird.
Getting company tax down to 25 per cent is an excellent idea, because of the flow-on effect it would have on investment and job creation. The trick is to replace it with efficient taxes (and a PPL levy ain’t one).
Tax-reform experts, such as Melbourne University's John Freebairn, model various kinds of tax to see which are most efficient – that is, which least distort the efficient use of resources to optimise wealth creation.
The best available, in theory, is a broad-based land tax. Not far behind that is a broad-based GST. And the BCA recommends both.
The left of politics hates the idea of broadening the GST to, say, 20 per cent, or lumping in the food and a few other essentials that are currently exempt. That’s because if no offsetting tax cuts are made to benefit the poor, such a change would be regressive.
But it’s not that simple. Because GST is a relatively efficient tax, it distorts economic activity less and allows the economy to function more efficiently, producing more wealth. And it also captures more revenue from tax-dodgers.
In theory, then, it gives a government more money to cut lower tax bracket rates, or provide better health and welfare for the less well off. It’s good policy, but extremely hard to sell politically – it is easily shouted down by the left, who tend not to believe that any government would actually hand the money back to provide better tax breaks or better services.
So where else can we raise more money?
Actually, there are major holes in the existing tax regime that serve no policy purpose and which, if plugged, would benefit the budget bottom line by billions of dollars. The three main offenders are: negative gearing, superannuation tax concessions, and the salary packaging of vehicles owned by people who do not use them for work purposes.
The first, negative gearing, was introduced to increase the housing stock and thus to keep rents and house prices down. It has comprehensively failed to do that, and is thus just a way to shift tax burden from those who choose to invest in dwellings, to those who invest in other assets such as shares, bonds or gold.
Yep, it’s an utterly pointless and unfair tax break that benefits some tax payers, and not others. And the last Labor government chose to ignore reform of this market-distorting tax because, well, it’s a political nightmare to correct.
The second, super tax concessions, has an economic purpose – but only up to a point. While in theory it encourages all taxpayers to invest more rather than consume more, in practice it shifts tax advantage to higher income earners – who have more surplus income – which counteracts the progressive income tax scale that both sides of parliament say they agree on.
More importantly, the bulk of income sheltered from normal marginal tax rates (super contributions are taxed at 15 per cent) is from older Australians nearing retirement, giving those investments little time to grow – which is supposed to be the purpose of long-term super saving.
Labor began to chip away at this discrepancy by proposing to tax retirement incomes from super funds above $100,000 a year, at a rate of 15 per cent – a move junked by the incoming Abbott government. (In fact, tweaking the tax rate on contributions would do more to shore up the budget, as relatively few super funds pay out more than $100,000).
The third tax break, the salary packaging of cars by people who do not use them for business, also serves no economic purpose.
As Alan Kohler wrote during a debate on this issue last May the “flat rate [fringe benefit tax] calculation introduced in 2011 meant that anyone who didn’t buy a car through the company was an idiot. As you would expect, the non-idiot portion of the population has been growing steadily... One in three cars bought are now salary packaged (or rather, were) and the non-idiot population would probably have risen towards 100 per cent over time”.
Kevin Rudd and Chris Bowen controversially moved to cancel this tax avoidance scheme, to save $1.8 billion in lost revenue over four years. The Abbott government tore up that reform when it won power.
In rough figures then, negative gearing costs taxpayers without property investments a bit over $2 billion a year; super tax concessions push about $30 billion in forgone revenue back onto predominantly younger tax payers; and income tax avoided through salary packaging cars is worth about $450 million a year.
So that's roughly a $33 billion hole punched in each budget, with no other function than shifting tax burden from one group of taxpayers to another group – from the non-idiots to idiots, perhaps, but really the older/richer to younger/poorer.
If it were only a moral issue, it would be bad enough – but economists also point out that such a system distorts patterns of consumption to the detriment of the entire economy.
Let me stress that I do not consider being in the 'non-idiots' camp to be immoral. Let's save that tag for legislators who misrepresent these inequitable tax structures, while pretending the progressive tax scale makes everything tickety-boo.
There are both moral and economic reasons to plug these massive holes in the tax system. If we don't then (hypothetically speaking) a smarty-pants journalist with a negatively geared investment property and a salary packaged car, who is salting away a few thousand each year in extra super, is in the last instance asking a struggling factory worker to pay more tax than necessary, or to lose services the forgone tax revenue could fund.
Yes, the budget needs cutting on the expenditure side. But one feels vaguely immoral asking the less well-off to endure service cuts to help one buy a faster car.