Twists and turns in the not-so-great tax debate

Almost a year has passed since Joe Hockey launched the government’s tax reform project with the Re:think tax discussion paper. Many twists and turns later, the debate seems to have degenerated into arguments about distribution — who will gain or lose most from this or that change — at the expense of what is best for economic growth.

How many times has it been said in recent weeks that the top 20% of taxpayers gain the lion’s share from some policy such as the capital gains tax discount? Claims such as this are being presented as the clincher argument, as if distribution was everything. It is relevant, but it’s not everything.

It is hardly surprising that current tax policies on capital gains, superannuation and investment in rental housing, for example, are of most benefit to those with the largest capacity to save and invest. If there is good economic justification for those policies — and on the whole there is — then they should not be overturned solely on grounds of distribution.

Those with the largest capacity to save and invest also happen to pay an outsize share of income tax. You rarely hear it acknowledged that the top 20% already account for over 60% of net income tax paid, even after the benefits of negative gearing, the capital gains tax discount and so on. Their share of tax paid is around one-third larger than their share of taxable income. That is a measure of the progressive income tax system. A little more acknowledgement of just how progressive the system is already would not go astray.

People who complain about the ‘regressive’ distribution of tax concessions don’t say it directly, but the implication of their complaints is that the system should be more progressive than it already is. That should not go unchallenged as a presumption; it needs to be brought into the open and debated in light of the facts.