Tax system needs a dose of equality
28 September 2011
Published in The Australian Financial Review
28 September, 2011
The Tax Forum next week must lift its sights to focus on reforms that matter, writes Cassandra Goldie.
Whilst Australia's community sector did not agree with everything in Australia's Future Tax System Report (Henry Report), it saw the review as a sound framework for tax reform in the medium to long term.
Tax reform is not an end in itself. It needs to deal with problems that matter to the community such as affordable housing, better health and aged care services, improved employment opportunities and poverty reduction.
Although Australian taxes on personal income are low by international standards, they are levied unfairly and inefficiently. The income tax system is riddled with loopholes and exemptions that enable people on high incomes to pay low levels of tax. This is resented by taxpayers who pay as they earn with little control. We agree with Henry that these poorly targeted tax shelters, like tax breaks on 'golden handshakes', and the use of private trusts and companies, should be removed.
If the income tax base is strengthened in these ways then the same revenue can be raised more efficiently with lower tax rates. We estimate that at least $20 billion in revenue is foregone every year from commonly used tax shelters (and this figure does not include superannuation).
The second problem is that the tax system encourages inefficient investment, contributing to our stratospheric housing costs. Australians have a habit of punting on real estate during economic booms in the hope that house prices will keep rising. When this speculative habit is combined with barriers to growth in new housing, the result is inflation in house prices.
The tax system encourages people to borrow and invest too much in property, especially at the top end of the market. The low rate of tax on capital gains and the ability of taxpayers to deduct their investment losses against their wages were rightly targeted by the Henry Report. Reforms in these areas could be linked to well-targeted incentives to invest in new affordable housing.
The third key area of reform is in superannuation and the taxation of retirement incomes. Many people approaching retirement fear that their incomes won't be high enough for a decent retirement and that public health and aged care services won't be available when they need them. As a community we need a frank and open discussion about how these things will be paid for.
User pays arrangements, if taken too far, leave those on the lowest incomes with second rate services. An increase in consumption taxes would indiscriminately penalise people on low and fixed incomes. It is only fair that people who can afford to do so contribute to the cost of these publicly funded services, for example by removing age-specific tax breaks for seniors regardless of income.
Superannuation contributions made through employers are taxed at a flat 15% instead of the 46% a taxpayer in the top tax bracket would pay on their wages. At the same time, this flat tax system penalise retirement saving by low income earners. If you are below the tax free threshold, you are in fact paying more tax if your employer contributes to your super. Hardly the right incentive!
We support the Henry Report's proposal to tax employer super contributions at marginal rates before they are transferred to the fund and replace existing tax breaks for super contributions with a simpler and more equitable capped annual rebate.
The fourth main area of reform we will be pursuing is reforming social security. We need to modernise our social security system to ensure that, on the one hand, it provides people out of the labour market with sufficient basic income support, and on the other hand, provides the right incentives and supports to get a job.
The most urgent problem now is the growing gap between pension payments such as Disability Support Pension and allowance payments such as Newstart Allowance, which leaves unemployed people $131 per week poorer than those on pensions. Newstart at $35 per day is simply inadequate to cover minimum 'decent' living costs. Those on pension payments such as DSP are penalised if they seek employment and later on end up on the lower payment.
Fear is often a stronger driver of labour market decisions than the promise of higher incomes through employment. We support the Henry Report's proposal to provide those on Allowance payments, including unemployed people and sole parents, the increases in payments they missed out on in 2009, now worth around $50 per week.
The Tax Forum is an opportunity to test the views of a broad cross-section of the community and begin a public discussion on the priorities and directions for further reform. Now is not the time to retreat. Far reaching tax and social security reform are much more likely to be achieved if we build on the foundations of the Henry Report and concentrate on reforms that improve efficiency and equity at the same time, that unite the community rather than dividing it.
Dr Cassandra Goldie, CEO, ACOSS