Time to shut down our oldest tax dodge

It's getting harder to figure out who's paying the bills in Australia. A study published in July showed the baby-boomer generation were giving $22 billion annually to their adult kids, to help them make ends meet.

Then comes an extraordinary report today in the Fairfax papers that the average retiree is hiding $50,000 about their households in $100 bills to allow them to fraudulently claim the state pension and access all the discounts associated with being a penniless pensioner.

So let's get this straight – working-age adults are paying additional taxes to fund pensions for oldies that don't qualify for the benefit, just so they can give it back to their adult offspring.

And then there's the call from investment banker Mark Carnegie (once part-owner of Business Spectator), repeated on the ABC's Q&A last night, for wealthier Australians to stop exploiting tax loopholes and cough up their fair share. The top 15 per cent of earners should, he reckons, pay 15 per cent more tax.

If they could be made to pay this sum, Carnegie would like it to go into a sovereign wealth fund.

When he first floated the idea at last year's tax summit, Carnegie told the ABC: "We are in very, very prosperous economic times comparative to the rest of the world at the moment, but over the next 30 years we are going to find the amount of pressure on the government as a result of the aging population going up and up and up, and what I am saying is that now is the time for action in terms of starting a sovereign wealth fund."

So the federal government just needs to close a few tax loopholes, collect the cash, and have something like the Future Fund Mark II (perhaps lead by Mark C?) invest the money abroad to help fund our collective dotage, and hedge against an eventual tumble in the Australian dollar.

It's important to note that Carnegie is not calling for higher income tax rates. Last night he said: "What you have to do is find a way to remove all of these loopholes. I don't think that what the world needs and Australia needs is a higher top income tax rate.

"What Labor is doing with the superannuation changes is important; changes to family trust arrangements are important; finding a way to get capital gains tax closer to income tax is important; negative gearing and abolishing that are all important components of how you're going to have a more successful and fairer tax [system]."

Somehow Australia has reached the ridiculous position of both sides of politics making unfunded spending promises that our tax base simply won't support. Some of those promises, as Carnegie rather passionately stressed last night, are not 'expenses', but investments.

Key among them are the Gonski school funding boost and the national disability insurance scheme – both of those 'expenses' will reap strong positive economic and social dividends in the long term.

The Coaltion's policy platform going into the next election will no doubt contain some, if smaller, social engineering measures – we've already seen Tony Abbott's much-criticised paid parental leave scheme that will be funded by a 'levy' (read, 'tax') on big business. And just as the Gillard government can't really afford Gonski or the NDIS, Abbott won't be able to afford the social investments Australia needs to prosper in the decades ahead.

The question that Carnegie was responding to last night came from a young man in the audience who wanted to know what it would take to start a 'mature debate' on tax. Who can answer that one? In the days when the Democrats held the balance of power, they'd have bargained with all their belligerence and wile to get the right outcome for Australia. "Get serious about tax reform," they'd have said, "or we'll block your other other sensible policies."

The Greens are less successful in this role, because they do want a higher top rate of income tax, a higher minerals resource rent tax – and even a higher revenue grab via carbon permits if at all possible. So just being satisfied with shutting down tax loopholes isn't enough.

Something has to give. It's childish and illusory to think we can keep investing to position Australia as a clever country, able to meet the needs of its ageing population, without reforming the tax base in more fundamental ways. Only bipartisan moves can achieve that – and if the Greens can't force that outcome, Australia's journalists must raise a clamour, and keep it up, until structural deficits are thing of the past. (Don't hold your breath on that one – headlines to the effect of 'The government is fleecing us!' sell more papers, even as the education and health systems gradually fall apart.)

In the meantime, the funds for a sovereign wealth fund might have to come from a different source. The Reserve Bank, according the Fairfax article, has a novel solution for unlocking all that wealth hidden under retirees' matresses – just stop issuing large denomination dollar bills. We all pay for things with EFTPOS, credit cards or via online transactions, so calling in the billions of dollars of $100 notes would not harm the day-to-day functioning of the economy.

It would, however, go a long way towards repairing the federal budget, and might even leave a bit to invest abroad.