Friday, January 25, 2008

Tax breaks set to top 60 billion!

A rather depressing update to this story I wrote only a year ago.

The Commonwealth Treasury has warned that government spending on tax breaks is set to top $60 billion> unless it reins them in. The projections, contained in the Treasury’s Tax Expenditures Statement released late yesterday show that the cost of tax breaks is on track to jump from an estimated $51 billion this financial year to more than $61 billion by 2010-11.

By then the Australian Government will be giving away one dollar in tax concessions for every four that it actually collects.

More than half of the $61.7 billion total will be in the form of tax concessions for superannuation...

...which are projected to climb rapidly from $26.8 billion to $31.8 billion over the next three years.

Driving the growth will be the action of the last government in making all superannuation payouts tax free to all Australians aged 60 and over from July last year.

The most expensive of the superannuation tax concessions is the one that taxes contributions to funds and the earnings of funds at just 15 per cent instead of the taxpayer's marginal rate.

The projections come as the ‘razor gang’ chaired by the Finance Minister Lindsay Tanner begins work on finding savings worth $5 billion to $15 billion ahead of the May Budget.

In its statement the Treasury says that whereas direct government expenditures are annually “scrutinised by parliament, the media and the general public” tax expenditures are “generally not obvious” and are often examined only at the time they are introduced.

The biggest identified by the Treasury outside of superannuation is 50 per cent tax exemption for income from capital gains introduced by the Coalition in 1999.

By 2010-11 it is expected to cost $7.7 billion.

Other large tax expenditures identified by the Treasury include

. the Fringe Benefits Tax concessions for cars ($2.1 billion by 2010-11)

. exempting Family Tax Benefits from income tax ($2.4 billion)

. exempting the 30 per cent Private Health Insurance Rebate from income tax ($1.2 billion)

. exempting the Child Care Benefit from income tax (440 million), and

. exempting the Baby Bonus from income tax ($220 million)

The government could close many of these loopholes without breaking its election commitments. For instance, it has promised to retain the Private Health Insurance Rebate but it has not promised to tax it.

Closing other loopholes would involve taking on groups to whom it has given no commitments. It could for instance save almost $1 billion by closing the tax exemption enjoyed by local government, something that the previous government attempted to do after it took office in 1996.

Many of the tax breaks identified by the Treasury are attractive targets for Mr Tanner’s razor gang because they were introduced by the previous government and are either not means-tested or predominantly enjoyed by higher income Australians.

The Treasurer Wayne Swan last night played down expectations that the tax expenditures would be targets of the razor saying they should be thought of as concessions that benefit taxpayers rather than revenue forgone.

He stressed that the amount of money to be saved by removing each tax concession would generally be less that the Treasury’s estimate of its cost because when tax concessions were removed people tended to do less of the activity that became fully-taxed.