Tuesday, April 15, 2008

Tuesday Column: Budget night - when will find out what new leadership means

The Rudd government is either a good one or merely good-looking. We will know four weeks from tonight.

We don’t know yet partly because much of what it has announced to date are inquiries (or summits). It is easy to have good intentions while looking into things.

It is harder to make decisions that actually take things away from people. Until now the Rudd government has shown little stomach for it, last month buckling under pressure not to “take away” bonus payments for carers and pensioners that were not even promised by it nor by the Coalition.

The content of the first Rudd-Swan Budget will be important for another reason.

History suggests that it will be the best budget they give us...

The first Howard-Costello budget was its best, the second was its second-best, and after that they got pretty awful.

The Treasury took a macabre delight in chronicling the descent.

In an analysis published in the latest edition of its Economic Roundup it says that whereas around one third of all the measures in the second Howard-Costello budget were designed to save money, by the end of their term only 1.5 per cent were.

But tax breaks, otherwise known as tax expenditures, soared since that second Howard-Costello budget, climbing 51 per cent in real terms and are on a track to climb higher still.

So what might we expect on May 13, and what will indicate whether the government is good or just good-looking?

I have compiled a list of the sort of things a good government would do as a matter of course. Many are straight-forwardly good administrative decisions; not necessarily designed to save money now, but designed to prevent more money being wasted in the future. None should be widely unpopular and none would involve breaking an election commitment (as would the otherwise good idea of abandoning the $31 billion of promised tax cuts).

The first is doing something to stop the concessional Capital Gains Tax rort exploding. An extraordinary 1.3 million of us are now landlords. An extra 50,000 are piling in each year. And why not? We can deliberately lose money on rent and mortgage payments (in order to cut our income for tax purposes) and then sell the property later for a profit, paying tax on only half of the capital gain we make.

Rudd and Swan can turn the upcoming tax cuts to their advantage by using them to wind back the rort. Right now only half of each capital gain is taxed, meaning that for people on the top two rates of 45 per cent and 40 per cent the effective rates of capital gains tax are 22.5 per cent and 20 per cent.

Why not freeze the rate of tax for capital gains at either 22.5 or 20 per cent plus the Medicare levy so that as the top rates of tax come down over time capital gains, and negative gearing will become less attractive relative to earning income?

Why not end the exceptional free kick given to the drivers of company-provided cars? And I do mean drivers. Early last year Deloitte Indirect Tax put out a press release headed “Drive your benefits further – before it’s too late”.

As it advised those enjoying company-provided cars, “increasing the kilometres driven can significantly increase your savings”.

“For example, an employee who has a car valued at $35,000 and drove 24,000 kilometres during the Fringe Benefit Tax year would have a tax liability of $6,720. Increasing the number of kilometres driven to more than 25,000 kilometres would reduce that employee’s liability to just $3,696 – a saving of more than $3,000.”

That’s right. The more you drive your employer-provided car the LESS tax you pay (and the bigger your engine – above 2500cc is best - the less tax you pay).

Australians are literally driving their employer-provided cars up and down hills, round and round in circles and backwards and forwards merely in order to pay less tax.

The Fringe Benefit Tax concession for motor vehicles is on track to cost $2 billion a year and according to the Australian Conservation Foundation is responsible for as much extra greenhouse pollution as a medium-sized coal-fired power plant. The special fringe benefits treatment for cars has to go.

As does the special treatment for four-wheel drives. Ordinary cars face a 10 per cent import duty. Gas-guzzling Standard Utility Vehicles built to lower safety standards only face a 5 per cent duty, apparently because they were once predominantly used by farmers. No government concerned about carbon emissions (or the safety of our city roads) would allow the rort to stand.

And then there are the rorts that overtly favour the rich.

Not for nothing is Family Tax Benefit B known as “pin money for millionaires’ wives”. Labor has quite sensibly promised plan to cap the payments for families earning more than $250,000 a year.

It should do the same thing with the pension, removing access to it for pensioners owning houses worth more than, say, $2 million. Welfare was never meant to be for those people.

A “boarding allowance” of up to $8,694 per student is paid to well-off rural parents able to send their children to a city boarding school. The main requirement is to live more than 4.5 kilometres from a bus stop.

As the Canberra education researcher Barbara Preston puts it, “many recipients of boarding allowances have no difficulty attending primary school, but when they attain secondary school age they become ‘isolated’ and incapable of catching the bus they took to school from age five”.

Their less well off neighbours manage to get their children to school, keep them in the region and miss out on thousands of taxpayer-funded dollars.

And then there’s the milk tax. Introduced eight years ago to cover the cost of a $2 billion payment to help dairy farmers adjust to deregulation it adds 11 cents a litre to the price of every bottle of milk. Milk is unimportant in the budget of well-off Australians but very important in the budget of families who are struggling. That makes it a very regressive tax, one that would cost only $233 million to end.

There are many, many more good decisions that the government could include in the budget, but these are the type that I will be looking for – ones that show that it is serious about governing properly and fixing up the mistakes of those who have governed sloppily in budgets past.


And here are some other suggestions from comments received below (please add extra ones to to this comments stream):

. Reverse the Howard Government's caving in to big pharma and restore the integrity of the PBS.

. End to the Fuel Tax Credit Scheme and for the aviation industry to pay the full fuel tax where they are currently only paying 3 cents per litre.

. End to the tax advantages of Managed Investment Schemes.

. Reverse the recent removal of super withdrawal taxes

. End tax advantages of salary packaging (preferably for everyone, but if not, for public servants)

. End salary sacrifice arrangements for super

. End tax concessions for recipients of superannuation income (same tax rates as anyone else)

. Impose a wealth ceiling on those claiming the age pension that INCLUDES the family home.

. Make eligibility for the age pension more generous for those who don't own their own homes but have a moderate amount of investment assets. (Most people are over-capitalised in the family home and undercapitalised elsewhere. There is also the equity principal that people in $2m homes in Sydney deserve the age pension less than a renter with a quarter of that in investments)

. Extend capital gains tax to the family home.

. Reintroduce death duties

. Redirect sports funding from elite athletes/AIS to projects that promote mass activity (eg a major footpath/cycleway building program). Subject elite athletes to a HECS-style repayment program.

. Consider imposing a levy on art auctions or sales to fund artists. Like sport, art should be self-funding.

. Impose a vacancy tax on homes that are left vacant because the owners have not advertised for tenants (mainly holiday homes). This may ease rental shortages in some regional areas.

. Impose a vacancy tax on undeveloped land in urban areas, particuarly that near transport infrastructure such as railway stations.

. Examine concept of depreciation more widely with a view to reducing tax benefits investors and others derive from it.

. Abolish concept of tax deductions in favour of direct subsidies equivalent to about 30% of income. This establishes equity between low, middle and high income earners who pay the same dollars for work related expenses but get unequal amounts back.

. Remove special pensioner concessions for power, phone, rates etc and include these in basic pensions.

. How about not exempting Defence from budget cuts? There seems to be a lot of spending money at will (Sea sprite, AWD, JSF, pick your acronym) and much of it pork barrelling. While the closure of ADFA was suggested, there must be more than that available.

. How about abolishing the states? And yes, I'm serious. There is some serious duplication that must cost the country some serious dollars. Yes, it keeps people like Mike Wran and Morris Iemma in a job (what else would they do, do you wonder?), but I'm not sure the cost is worth it.

. Include an 'I claim no tax deductions' box where taxpayers who tick it get either $500 or $1000 back. This could possibly also replace the 'low income tax rebate' as it is more generous.

The above could be based on a model where most employees either don't need to fill in a tax return or can do so in 5 minutes via either the internet or a prepaid envelope.

Further, I would make the tax return a single A4 sheet of paper that folds into an envelope to enclose the group certificate/payment summary.

And we need to some plain-English guidance to guide people to the right decision, eg:

( ) I claim no tax deductions for 2007-2008. I understand that by making this choice I will receive $1000 (or equivalent credit if tax is owing) as a no-claim bonus within 7 days. I do not need to answer any more questions, will not need to see a tax professional and can lodge this return immediately.

( ) I wish to claim tax deductions for 2007-2008. I understand that by making this choice I am not eligible for the $1000 no-claim bonus and must enclose evidence of all expenses claimed. I will need to answer further questions and may wish to exercise my right to see an accountant. Any refunds due will be paid within 60 days.




12 comments:

Marek said...

Close adfa? i can't be that expensive to run can it? and it least there would be some sort of measurable return to society from adfa(having a better educated army can't be a bad thing can it?) unlike so many other defense projects

love the idea of the $1000 no claim rebate, though i am sure accountants would hate it.

Why not make capital gains tax a flat 30% like company tax, just formalise the rorting?

Anonymous said...

Peter,
At the RBA Governor's speech today at ANU there was a potentially big story, but it had nothing to do with the RBA.

Unless I misheard, ANU Vice Chancellor Ian Chubb announced that the ANU had lost tens of millions of dollars recently because of bad investments. Worth chasing up I reckon.

Peter said...

Yes.

Anonymous said...

Introduce a Tobin tax.

Why single out public servants over salary sacrifice? All in or All out I say. One might argue that since public servants don't get the perks the some in the private sector do(paid lunches and Friday drinks, bonus holidays etc) then they should have access to something like salary sacrifice.

Anonymous said...

Hi Peter Martin,
Nice to read your article and completely agree with your comments on CGT tax concession & negative gearing. They are the root reason of all evils in Australia:
1: Driven up house price & rents to the sky.
2: Bring down local birth rates.
3: Australia is losing many young talents since more & more people are moving overseas for a simple home.
4: Seriously distorted tax & welfare system.
5: Significantly increase business cost.
......
I don't know if Kevin Rudd is genuine in helping people to buy a simple home.

Thank you,
Charlie

Anonymous said...

I've been paying taxes all my life - are you saying I shouldn't get a pension? That's so wrong.

Peter said...

I have also been paying taxes all my working life, and I won't get a pension.

The pension is means-tested and assets tested right now.

An alternative, which I think I would support, is to give the pension to everyonebody and remove all the tax concessions and compulsion for super. Not a bad idea, actually.

Mmm...

Anonymous said...

widen CGT net to include all property ie own residence, not just investments
, reducing CGT to 10%
. making it separate tax ie not part of income.

Anonymous said...

Peter, will CGT tax concession & negative gearing be debated in the any form by anyone in the gov.? How can we start up this? I wrote a few letters to them and got no acknowlegement at all.

Peter said...

I think the Government is aware of it, and I wouldn't be surprised if they introduce the limited action I was describing in the May Budget.

But they are very unkeen to talk about it.

The agenda papers of their housing summit (in Opposition) and the 2020 summit (in Government) mention it not at all.

Anonymous said...

It seems to me the politicians are all property investors, and the struggling home buyers did not vote for the Democrats is a unfortunate thing. I do not know why the Democrats Party did not get anything in last election.

Anonymous said...

The first item on the list: "doing something to stop the concessional Capital Gains Tax rort exploding" did not get a mention in Budget.

Capital Gains Tax discount - too hard basket, subject taboo, honk, honk, make way, here comes the SS Titanic Speculative Economy. Iceberg of private debt, don't worry about the consequences, whatever. If it starts to get out of hand, just wave the magic wand of debt take-up or bailout.

It appears that Australia is now using the Swindle Economic Theory – increase debt, fall back on bailouts, inflate your problems away.

This economic model (SET) is actually the centrepiece of a recent report provided by Fairyland Audit Research Commission on Economics. FARCE, with its cutting edge shell-game sleight of hand approach, is set to revolutionize the way auditing is performed. Some are now saying that the Big Four are not the only farce in town any longer.

Jokes aside, here is another idea: index to CPI the base tax-free threshold that is stuck in a holding pattern at $6000.

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