Wanted: better tax mix to make the future work
The tax summit on Tuesday and Wednesday will at least place the government under pressure for reform by promoting issues such as funding the aged as their number grows, writes Peter Martin.
The tax summit on Tuesday and Wednesday will at least place the government under pressure for reform by promoting issues such as funding the aged as their number grows, writes Peter Martin. Penny Wong didn't tell the half of it. In an attempt to contain expectations at next week's tax summit, she released frightening projections this week showing the budget would be at least $80 billion short by the middle of the century unless something could be done to raise more tax.Much of the pending explosion in spending is unstoppable. Gough Whitlam set the ball rolling on his election as prime minister in 1972 in promising to lift pensions to 25 per cent of average weekly male earnings.John Howard's treasurer, Peter Costello, set the trajectory in stone when he legislated in 1997 to guarantee the single-pension rate would never fall below that benchmark, meaning in future it would rise by the escalator rather than the stairs.As a result, pension payments are set to climb from 2.7 per cent of gross domestic product to 3.9 per cent by mid-century. They are already the Commonwealth's second-largest cost after grants to the states. In today's dollars, the extra cost per year will exceed $46 billion.A decade later, Costello cut off at the knees one of the means of paying for the extra spending. In 2006, he exempted entirely from tax the superannuation benefits paid to the growing number of Australians aged 60 or over.During the "benefits phase", even earnings within the funds pay no tax. The Grattan Institute economist Saul Eslake describes this as one of the worst tax decisions of the past 20 years, an honour for which he says there is a fair bit of competition.Demographics make the generosity impossible to undo. By mid-century, one in every four Australians will be age 65 or over. One in every three voters will have a very keen interest in keeping payments and concessions high.Health and aged-care costs will more than double as a proportion of GDP. We can't stop the process and we wouldn't want to. The richer we get (and we'll earn twice as much in real terms by the middle of the century), the keener we will become on government health spending. The surveys show it.Business Council of Australia figures being released today show Wong understated the full, looming budget horror. Bundling state and federal obligations together, Access Economics told the council we are on track to need an extra 5 per cent of GDP in tax by mid-century.That's an extra $195 billion per year by then in today's dollars.The combined state and federal tax take will have to climb from 28.5 per cent of GDP to 33.5 per cent. We'll have to pay one-sixth as much again as a proportion of GDP.Tax cuts, in aggregate, are a pipe dream. Every delegate attending next Tuesday's summit has been asked to spell out ahead of time "how your proposals will be financed over the short and longer term".INCOME TAXThe best way to raise more tax would be to make it more pleasant. The then Treasury secretary, Ken Henry, and his tax review designed a simplified income-tax scale that looks a thing of beauty. Gone would be rebates, offsets and multiple rates that make the present scale look like a city skyline.For a second-earner with two teenage children considering returning to work, the effective marginal rate is 20 per cent on the first dollar earned, climbing to 70 per cent, then settling in at over 50 per cent at middle earnings before climbing briefly to nearly 100 per cent and slipping to 40 per cent.The ups and downs are worse than unsightly. Women with children are far more sensitive to net earnings than other people in deciding whether or not to take up paid work. The ugliness matters.Feeding it are a bewildering array of rules governing family allowances, the Newstart unemployment benefit, the Medicare levy, the low-income tax offset, the senior Australians tax offset and so on.Henry would sweep most of them away - he would abolish the Medicare levy - leaving the typical Australian with an essentially flat scale that would take out no tax from the first $25,000 earned, then 35 per cent from anything else earned and 45 per cent out of anything earned above $180,000.Calculations by the Melbourne Institute suggest the numbers would need to be tweaked so as not to advantage high-income earners too much. The institute suggests instead a top rate of 46.5 per cent and an extra health or disability levy set as a proportion of the total tax paid. Henry would fund the lower, simpler tax scale by abolishing just about every tax break applying to income.Fringe benefits would be taxed as income, even if they were in the form of cars. Income earned by employees of charities would also be taxed as income, a reasonable-sounding proposition opposed in papers prepared for the summit only by some charities and the Australian Salary Packaging Industry Association.Both the government and the Coalition have at various times said they are attracted to the Henry vision. It will attract support when it is discussed on day two of the summit.SUPERANNUATIONWhat won't get support from the government - it's not even listed for discussion at the summit in its own right - is Henry's related set of recommendations about superannuation. Super is a benefit provided by an employer. Henry wants it taxed as one, at the recipient's marginal tax rate, offset by a government contribution.The review had contempt for the government's determination to lift compulsory super contributions from 9 to 12 per cent. It found high-income earners would not need the increase to live well in retirement and low-income earners could not afford it because it would be taken from wage rises they would otherwise get and need.In speeches before the summit, Henry committee member Greg Smith derided the super guarantee as "lifestyle for 60 to 80-year-olds"."It's not the problem. The problem is super-late ageing - the experience of people aged over 80, and people of any age who need care," he says.By locking money away, directing it to funds on whose boards their union mates sit, the government has made it harder to raise taxes to fund the real needs it will have to meet. Smith suggests reworking super to make the funds themselves provide longevity and disability insurance.INVESTMENT TAXESHenry wanted income from investment taxed at a lower rate than income from labour. The theory - backed up by masses of international evidence - is that workers can't easily escape being taxed whereas investors can.Income from just about every form of investment would have been taxed at just 60 per cent the rate of tax from labour - a discount of 40 per cent.The Treasurer, Wayne Swan, baulked at the idea (it would have meant winding back the discount for income from capital gains from 50 per cent) and introduced a half-hearted measure that will cut by 50 per cent the tax on bank interest earnings, but only for the first $1000.Henry did not recommend an end to negative gearing. The review hoped its attempt to extend low tax to all investment classes would make the negative gearing of property less attractive. Others at the summit will push for the tax benefits of negative gearing to be quarantined to the asset being geared.The review was certain beyond a shadow of a doubt the company tax rate would have to fall. As Smith put it this month: "The evidence we had was that cutting the rate of company tax would be the most helpful thing we could do."The lower the rate, the more investment in infrastructure, the more capital per worker, the more produced per worker, the more wages can increase - or so the studies say.Oddly, one of Australia's peak business bodies does not get the argument. In its submission to the review, the Australian Chamber of Commerce and Industry argued not for a cut to the company tax rate, but for a cut to the top income tax rate instead.It is at it again, in a submission to the summit, saying while it "welcomes the proposed reduction in the company tax rate, it is considered necessary to further reduce the current high rates of personal income tax to better align with the company tax rate".The Australian Industry Group is more in sync with the Henry review (its chief, Heather Ridout, was a member), pushing in its submission for a cut in the company tax rate to 25 per cent as soon as possible.With fellow member Smith, Ridout wants the government to commit to cut the rate to 25 per cent as soon as needed as soon as Australia's fortunes flag.Swan has announced a cut from 30 to 29 per cent. Among business organisations, only the ACCI is not pushing for Swan to go further.There will be a push at the summit for the government to go further on its mining tax.The agreement with the big miners before the election last year to tax the resource rents of only petroleum, iron ore and coal looks odd when the gold price is so high.Much will be said about its approach to consultation in its failed mining super-profits tax and its successful, secretly negotiated mineral resource rent tax.THE GSTThe government tried to shut down discussion of the goods and services tax by restricting the terms of reference for the Henry review, and is trying again by not setting aside time for a session on consumption taxes at the summit.But it will be discussed anyway, if only because so many of the experts appearing at the summit agree that it is a pretty bad tax that would be improved if it was bigger.It costs the Tax Office $1.36 per $100 collected, far more than the average of all other taxes, and costs the businesses that collect it for the office much more again. It ties up the High Court in silly debates such as whether Italian mini-ciabatta is a "cracker" or "bread" and requires businesses to run two sets of accounts - one for the goods and services included in the tax and one for those arbitrarily exempted.The exemptions are silly. The Henry review points out the highest-earning households spend six times as much on GST-free food as the lowest earners. Removing the exemptions would free $6 billion, and the low-income households that were hit could be compensated.New Zealanders manage with a rate of 15 per cent and scarcely any exemptions. In Europe the rate usually exceeds 20 per cent.The higher the rate, the less the average cost of collection. The evidence is that, unlike most taxes, it does not change behaviour much. We will still shop, even if the rate is doubled.All of the GST goes to the states. Committing to remove exemptions and lift the rate over time would give the states the lifeline they will need to get them through to the middle of the century. Exemption-ridden payroll taxes, conveyancing and gambling taxes may not do it.ANNOUNCEABLESDon't expect any announcements about the GST. In fact don't expect many at all. There will be no communique when the summit ends on Wednesday, just a transcript. The Treasurer will announce a change to the treatment of company losses - he has already flagged it.He might also announce he is attracted to the idea of an ongoing tax reform commission, an idea that will be pushed very hard by the academics at the summit.The biggest outcome will be the process - two days in which all sorts of ideas can be aired in the near certainty they won't get introduced tomorrow, but they will help prepare us for the years to come.The delegates I've spoken to are optimistic. They think the process will be important.TWO DAYS OF CHATWhat to expect on Tuesday and WednesdayWHAT WILL BE PROPOSEDFlatter, leaner income taxAn end to tax offsetsFringe benefits taxed as incomeEarnings of trusts taxed as incomeSuper payouts taxed as incomeWider tax concessions for savingTighter negative gearing rulesCompany tax rate of 25%Broader mining taxWiden and boost the GSTVolumetric alcohol tax for wine'Robin Hood' financial transactions taxReplacing stamp duties with land taxRevamping state payroll taxesWHAT WILL BE ANNOUNCEDMore generous treatment of lossesA commitment to continue the processSource: Submissions to Future Tax Forum