Launching its white paper review of the tax system last week, the Abbott government said it wanted lower taxes. However, the prospects for government spending growth — unless pegged back — suggest otherwise. The media is full of calls from certain think tanks and opinion leaders for higher taxes, particularly on one or more of superannuation, capital gains, investor housing, dividends and consumption (the GST).
The barrage of hostile commentary directed at so-called tax concessions and associated tax expenditures in these areas dominated public debate in the months leading up to release of the tax discussion paper. There are sound policy reasons for the concessions, but they have barely been heard above the din of one-sided criticism. It is important they be heard during the white paper review. Balance needs to be restored to a narrative that sees concessions as nothing but distortions and rorts favouring the rich and elderly, and as a source of easy and massive revenue gains.
The government's tax discussion paper provides a more balanced assessment than the public commentary, but goes far enough towards building a case against certain concessions to encourage the stampede of adverse opinion. The discussion paper leaves all options open, but hints at the desire for more revenue — particularly from superannuation, capital gains and the GST.
Estimates of revenue forgone published annually in Treasury's tax expenditure statement attract much attention but are seriously flawed and in themselves are not a guide to sensible policy. They do not represent the amounts of revenue available from removing concessions; and they are only as valid as the tax policy standards against which they are measured, which Treasury concedes are "arbitrary" and "contentious".
The claim that superannuation concessions, for example, are costing $30 billion a year to the favour of the rich has seeped into public opinion as incontrovertible fact. But this calculation rests on full taxation of super contributions and earnings as the standard — a treatment that would find no support in expert opinion. The generally accepted starting point — and the international norm — is that lower taxation of super relative to full marginal rates is optimal, and the structure most favoured by experts and other countries is for contributions and fund earnings to be exempt from tax and withdrawals subject to full tax rates. Against this standard, the loudly proclaimed $30bn cost of the current system withers away.
Australia's system differs from this standard in that the government takes out tax in the contribution and earnings phases rather than wait for the withdrawal phase. The absence of an exit tax does not mean super benefits are "tax free". The arrangements strike a balance between tax-free superannuation and full taxation. Whether they lean too far towards the former is a matter for review. However, arguments that current arrangements discriminate in favour of the rich are overblown. Moreover, any change should not increase complexity.
In the case of so-called negative gearing, which is not really a concession at all, objectors miss the basic point that interest on borrowings is a legitimate tax deduction as an expense incurred in generating income. Rational investors may borrow heavily and bear net rental losses for a time, but only in the expectation of an eventual taxable profit, including capital gain.
Critics of the capital gains tax discount appear to believe capital gains should be taxed at full marginal rates — again, a proposition that finds little expert support or practical application around the world. Capital gains were untaxed until 1985, taxed but discounted for inflation until 1999 (with relief provided by averaging) and then discounted by 50 per cent (without averaging). Some argue the optimal discount is 100 per cent, as is the case for owner-occupied housing, and no strong case has been put for reducing it below 50 per cent, which would damage saving and investment and generate little if any extra revenue. Further commentary on these and other tax concessions is the focus of the latest CIS research report "Right or Rort: Dissecting Australia's Tax Concessions".
The campaign against tax concessions is finding oxygen in a climate of public opinion that has little tolerance for spending cuts affecting low and middle income earners and believes the budget can be repaired at the expense of the "wealthy". A government desperate for budget savings and to establish its "fairness" credentials may go with such opinion and increase taxes by chopping concessions. However, the scope to do so within the bounds of principled tax policy is much narrower than commonly believed. It is not the solution to the government's deficit problem.
Robert Carling is a senior fellow at the Centre for Independent Studies. His latest paper Rights or Rorts? is now available.
Home > Commentary > Opinion > Hitting the ‘rich’ no solution to budget deficit problem
Hitting the ‘rich’ no solution to budget deficit problem
Launching its white paper review of the tax system last week, the Abbott government said it wanted lower taxes. However, the prospects for government spending growth — unless pegged back — suggest otherwise. The media is full of calls from certain think tanks and opinion leaders for higher taxes, particularly on one or more of superannuation, capital gains, investor housing, dividends and consumption (the GST).
The barrage of hostile commentary directed at so-called tax concessions and associated tax expenditures in these areas dominated public debate in the months leading up to release of the tax discussion paper. There are sound policy reasons for the concessions, but they have barely been heard above the din of one-sided criticism. It is important they be heard during the white paper review. Balance needs to be restored to a narrative that sees concessions as nothing but distortions and rorts favouring the rich and elderly, and as a source of easy and massive revenue gains.
The government's tax discussion paper provides a more balanced assessment than the public commentary, but goes far enough towards building a case against certain concessions to encourage the stampede of adverse opinion. The discussion paper leaves all options open, but hints at the desire for more revenue — particularly from superannuation, capital gains and the GST.
Estimates of revenue forgone published annually in Treasury's tax expenditure statement attract much attention but are seriously flawed and in themselves are not a guide to sensible policy. They do not represent the amounts of revenue available from removing concessions; and they are only as valid as the tax policy standards against which they are measured, which Treasury concedes are "arbitrary" and "contentious".
The claim that superannuation concessions, for example, are costing $30 billion a year to the favour of the rich has seeped into public opinion as incontrovertible fact. But this calculation rests on full taxation of super contributions and earnings as the standard — a treatment that would find no support in expert opinion. The generally accepted starting point — and the international norm — is that lower taxation of super relative to full marginal rates is optimal, and the structure most favoured by experts and other countries is for contributions and fund earnings to be exempt from tax and withdrawals subject to full tax rates. Against this standard, the loudly proclaimed $30bn cost of the current system withers away.
Australia's system differs from this standard in that the government takes out tax in the contribution and earnings phases rather than wait for the withdrawal phase. The absence of an exit tax does not mean super benefits are "tax free". The arrangements strike a balance between tax-free superannuation and full taxation. Whether they lean too far towards the former is a matter for review. However, arguments that current arrangements discriminate in favour of the rich are overblown. Moreover, any change should not increase complexity.
In the case of so-called negative gearing, which is not really a concession at all, objectors miss the basic point that interest on borrowings is a legitimate tax deduction as an expense incurred in generating income. Rational investors may borrow heavily and bear net rental losses for a time, but only in the expectation of an eventual taxable profit, including capital gain.
Critics of the capital gains tax discount appear to believe capital gains should be taxed at full marginal rates — again, a proposition that finds little expert support or practical application around the world. Capital gains were untaxed until 1985, taxed but discounted for inflation until 1999 (with relief provided by averaging) and then discounted by 50 per cent (without averaging). Some argue the optimal discount is 100 per cent, as is the case for owner-occupied housing, and no strong case has been put for reducing it below 50 per cent, which would damage saving and investment and generate little if any extra revenue. Further commentary on these and other tax concessions is the focus of the latest CIS research report "Right or Rort: Dissecting Australia's Tax Concessions".
The campaign against tax concessions is finding oxygen in a climate of public opinion that has little tolerance for spending cuts affecting low and middle income earners and believes the budget can be repaired at the expense of the "wealthy". A government desperate for budget savings and to establish its "fairness" credentials may go with such opinion and increase taxes by chopping concessions. However, the scope to do so within the bounds of principled tax policy is much narrower than commonly believed. It is not the solution to the government's deficit problem.
Robert Carling is a senior fellow at the Centre for Independent Studies. His latest paper Rights or Rorts? is now available.
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