Saturday, October 01, 2011

Your guide to Tuesday's Tax Summit

We're in trouble mate

Penny Wong didn’t tell the half of it. In an attempt to contain expectations at next week’s tax summit she this week released frightening projections showing the budget would be at least $80 billion short by the middle of the century unless something could be done to raise more tax.

Much of the pending explosion in spending is unstoppable. Prime Minister Gough Whitlam set the ball rolling on his election in 1972 when he promised to lift pensions to 25 per cent of average weekly male earnings. John Howard’s Treasurer Peter Costello set the trajectory in stone when he legislated in 1997 to guarantee the single pension rate would never fall below that benchmark, meaning in future it would rise by the escalator rather than the stairs.

As a result pension payments are set to climb from 2.7 per cent of GDP to 3.9 per cent by mid-century. They are already the Commonwealth’s second-largest cost after grants to the states. In today’s dollars the extra cost per year will exceed $46 billion.

A decade later Costello cut off at the knees one of the means of paying for the extra spending. In 2006 he exempted entirely from tax superannuation benefits paid to the growing number of Australians aged 60 and over. During the “benefits phase” even the earnings made within the funds pay no tax. Grattan Institute economist Saul Eslake describes this as the one of the worst tax decisions of the past 20 years, an honour for which he says there is a fair bit of competition.

Demographics make the generosity impossible to undo. By mid-century one in every four Australians will be aged 65 and over. One in every three voters will have a very keen interest in keeping payments and concessions high.

Health and aged care costs will more than double as a proportion of GDP. We can’t stop the process and we wouldn’t want to. The richer we get (and we’ll earn twice as much in real terms by the middle of the century) the keener we will become on government health spending. The surveys show it.

Business Council figures released this morning show Wong understated the full looming budget horror. Bundling state and Commonwealth obligations together Access Economics has told the Council we are on track to need an extra 5 per cent of GDP in tax by mid century. That’s an extra $195 billion per year by then in today’s dollars. The combined state and federal tax take will have to climb from 28.5 per cent of GDP to 33.5 per cent. We’ll have to pay one-sixth as much again as a proportion of GDP.

Tax cuts, in aggregate, are a pipe dream. Every delegate attending next Tuesday’s summit has been asked to spell out ahead of time “how your proposals will be financed over the short and longer term”...


The best way to raise more tax would be to make it more pleasant. Ken Henry and his tax review designed a simplified income tax scale that looks a thing of beauty. Gone would be rebates, offsets and multiple rates that make the present scale look like a city skyline. For a second-earner with two teenage children considering returning to work the effective marginal rate is 20 per cent on the first dollar earned climbing to 70 per cent, then settling in at over 50 per cent at middle earnings before climbing briefly to near 100 per cent and slipping to 40 per cent.
The ups and downs are worse than unsightly. Women with children are far more sensitive to net earnings than other Australians in deciding whether or not to take up paid work. The ugliness matters.

Feeding it are a bewildering array of rules governing family allowances, the NewStart unemployment benefit, the Medicare levy, the low income tax offset, the senior Australians tax offset and so on.

Henry would sweep most of them away - he would abolish the Medicare levy - leaving the typical Australian with an essentially flat scale that took out no tax from the first $25,000 earned, then 35 per cent from anything else earned, and 45 per cent out of anything earned above $180,000. Calculations by the Melbourne Institute suggest the numbers would need to be tweaked in order to not to too much advantage high income earners. The Institute suggests instead a top rate of 46.5 per cent and an extra health or disability levy set as a proportion of the total tax paid.
Henry would fund the lower simpler tax scale by abolishing just about every tax break applying to income. Fringe benefits would be taxed as income, even if they were in the form of cars. Income earned by employees of charities would also be taxed as income, a reasonable sounding proposition opposed in papers prepared for the summit only by some charities and the Australian Salary Packaging Industry Association.

Both the government and the Coalition have at various times said they attracted to the Henry vision. It’ll attract support when it’s discussed on day two of the summit.


What won’t get support from the government - it’s not even listed for discussion at the summit in its own right - is Henry’s related set of recommendations about superannuation. Super is a benefit provided by an employer. Henry wants it taxed as one, at the recipient’s marginal tax rate, offset by a government contribution.

The review had contempt for the government’s determination to lift compulsory super contributions from 9 to 12 per cent. It found high income earners wouldn’t need the increase to live well in retirement and low income earners couldn’t afford it, because it would be taken from wage rises they would otherwise get and need.

In speeches ahead of the summit Henry committee member Greg Smith has derided the super guarantee as “lifestyle for 60 to 80 year-olds”.

“It’s not the problem. The problem is super-late aging; the experience of people aged over 80, and people of any age who need care,” he says.

By locking money away, directing it to funds on whose boards their union mates sit, the government has made it harder to raise taxes to fund the real needs it will have to meet. Smith suggests reworking super to make the funds themselves provide longevity and disability insurance.


Henry wanted income from investment taxed at a lower rate than income from labour. The theory - backed up by masses of international evidence - is that workers can’t easily escape being taxed whereas investors can.

Income from just about every form of investment would have been taxed at just 60 per cent the rate of tax from labour - a discount of 40 per cent. Treasurer Wayne Swan balked at the idea (it would have meant winding back the discount for income from capital gains from 50 per cent) and introduced a half-hearted measure that will cut by 50 per cent the tax on bank interest earnings, but only for the first $1000.

Henry didn’t recommend an end to negative gearing. It hoped its attempt to extend low tax to all investment classes would make the negative gearing of property less attractive. Others at the summit will push for the tax benefits of negative gearing to be quarantined to the asset being geared.

The review was certain beyond a shadow of a doubt Australia’s company tax rate would have to fall. As Smith put it this month: “The evidence we had was that cutting the rate of company tax would be the most helpful thing we could do.”

The lower the rate the more investment in infrastructure, the more capital per worker, the more produced per worker, the more wages can increase, or so the studies say.

Oddly one of Australia’s peak business bodies doesn’t get the argument. In its submission to the review the Australian Chamber of Commerce and Industry argued not for a cut to the company tax rate, but for a cut to the top income tax rate instead. It is at it again in submission to the summit saying while it “welcomes the proposed reduction in the company tax rate, it is considered necessary to further reduce the current high rates of personal income tax to better align with the company tax rate”.

The Australian Industry group is more in sync with the Henry Review (its chief Heather Ridout was a member) pushing in its submission for a cut in the company tax rate to 25 per cent as soon as possible.

With fellow member Smith, Ridout wants the government to commit to cut the rate to 25 per cent as soon as is needed; as soon as Australia’s fortunes flag.

Swan has announced a cut from 30 to 29 per cent. Among business organisations only ACCI is not pushing for Swan to go further.

There will be a push at the summit for the government to go further on its mining tax. The agreement with the big miners ahead of the election to tax the resource rents of only petroleum, iron ore and coal looks odd when the gold price is so high. Much will be said about its approach to consultation in its failed mining super profits tax and its successful by secretly negotiated mineral resource rent tax.


The government tried to shut down discussion of the goods and services tax by restricting the terms of reference for the Henry Review and is trying again by not setting aside time for a session on consumption taxes at the summit. But it’ll be discussed anyway, if only because so many of the experts appearing at the summit agree that its a pretty bad tax that would be improved if it was bigger.

It costs the Tax Office $1.36 per $100 collected, far more than the average of all other taxes, and costs the businesses that collect it for the Office much more again. It ties up the High Court in silly debates such as whether Italian mini ciabatta is a “cracker” or “bread” and requires businesses to run two sets of accounts - one for the goods and services included in the tax and one for those arbitrarily exempted.

The exemptions are silly. The Henry Review points out the highest-earning Australian households spend six times as much on GST -free food as the lowest earners. Removing the exemptions would free up $6 billion, and the low-income households that were hit could be compensated.

New Zealanders manage with a rate of 15 per cent and scarcely any exemptions. In Europe the rate usually exceeds 20 per cent.

The higher the rate the less the average cost of collection. The evidence is that unlike most taxes it doesn’t much change behaviour. We’ll still shop, even if the rate was doubled.

All of the GST goes to the states. Committing to remove exemptions and lift the rate over time would give the states the lifeline they’ll need to get them through to the middle of the century. Exemption-ridden payroll taxes, conveyancing and gambling taxes may not do it.


Don’t expect any announcements about the GST. In fact don’t expect many at all. There will be no communique when the summit ends Wednesday, just a transcript. The Treasurer will announce a change to the treatment of company losses - he has already flagged it. He might also announce that he is attracted to the idea of an ongoing tax reform commission, an idea that will be pushed very hard by the academics at the summit. The biggest outcome will be the process - two days in which all sorts of ideas can be aired in the near certainty they won’t get introduced tomorrow, but they’ll help prepare us for the years to come.

The delegates I’ve spoken to are optimistic. They think the process will be important.

Published in today's SMH and Age

What'll be proposed:

. Flatter, leaner income tax
. An end to tax offsets
. Fringe benefits taxed as income
. Earnings of trusts taxed as income
. Super payouts taxed as income
. Wider tax concessions for saving
. Tighter negative gearing rules
. Company tax rate of 25%
. Broader mining tax
. Wider and booster the GST
. Volumetric alcohol tax for wine
. ‘Robin Hood’ financial transactions tax
. Replacing stamp duties with land tax
. Revamping state payroll taxes

What'll be announced:

. More generous treatment of losses
. A commitment to continue the process

Two days of reality, TV

A quarter of a century on from Australia’s first and most recent tax summit convened by Bob Hawke on the floor of the old House of Representatives in the old parliament house this one will be jazzed up. Whereas the 1985 event went on for the best part of a week and had the feel of an academic conference as the guests presented prepared papers, this one will feel more like a television show - a particular television show.

Insight with Jenny Brockie airs on SBS Tuesday nights. It begins as a structured discussion with invited experts which is then broadened to the studio audience. The audience in the Great Hall of the new parliament house Tuesday and Wednesday will number 187, all of them invited guests. Those who are “experts” for each particular session will be seated down the front. The discussion will start with the experts and then broaden to whoever wants to have a say. It’ll be guided by two former television presenters, Paul Clitheroe and Michael Pascoe, who will take turns hosting. The whole thing will in fact be a television program, available to any broadcaster who wants it and streamed on the internet.

The Prime Minister and Treasurer will open proceedings Tuesday morning and Wayne Swan will close the event Wednesday afternoon. There are three other set piece speeches; one from assistant treasurer Bill Shorten, one from independent MP Rob Oakeshott who pushed for the summit, and one from Ken Henry himself first thing Wednesday morning. Each has been limited to ten minutes, which in Ken Henry’s case will be a pity.

Published in today's SMH and Age

Australia’s budget position is far worse than has been acknowledged. Governments of all kinds will need to raise an extra 5 per cent of GDP in tax by the middle of the century, almost twice as much as conceded by finance minister Penny Wong, according to Business Council research released this morning.

The projection assumes business as usual plus projected demands for health, aged care, superannuation concessions and pensions.

Minister Wong has previously pointed to a shortfall of 2.75 per cent of gross domestic product, worth more than $80 billion per year by the middle of the century in today’s dollars.

The research conducted for the Business Council in the lead up to next week’s tax summit puts the nationwide shortfall across state, local and federal governments at $195 billion per year when expressed in today’s dollars. Combined state, federal and local tax revenue would have to climb from 28.5 per cent of GDP to 33.5 per cent meaning the tax take would have to increase by one-sixth as as a proportion of GDP.

As an illustration of what that would mean today given the present size of GDP the consultants, Deloitte Access say it would mean handing over an extra $70 billion per year.

It’s as much as could be made by lifting the goods and services tax rate from 10 per cent to 24 per cent, by lifting the company tax rate from 30 to 67 per cent, or by lifting the middle income tax rate from 30 to 43 per cent and the top rate from 45 to 65 per cent.

The states, barely mentioned in Minister Wong’s briefing paper for summit delegates, will bear the bunt of Australia’s increased health spending.

Access quotes the NSW Treasury as saying its spending on health will almost double from 30 per cent to 55 per cent of its budget in two decades.

States get the bulk of their money from a goods and services tax which is failing to keep pace with economic growth, from exemption-ridden payroll taxes and from duties on conveyancing and gambling.

The Business Council submission suggests giving the states a guaranteed share of Commonwealth income tax in return for a commitment to abolish inefficient state taxes including those on insurance.

Aware of the gravity of the financial situation the Business Council does not suggest Australia’s overall tax take be lowered, a position it shares with the Australian Industry Group.

Both call for the for the establishment of a Commission of Budget Integrity or on ongoing Tax Reform Commission to map out ways to deal with the challenges ahead.

The Council of Social Service says older Australians are worried governments may soon not be able to afford pensions and aged care. It wants the Senior Tax Offset and tax-free super for the over 60s abolished and the savings put aside for future spending on growing needs.

It says while only one in five people over 65 pay income tax the wealth held by that group will climb from 22 per cent of household wealth to 47 per cent in two decades.

Uniting Care says absurdly generous superannuation tax concessions give more than a third of the benefits to the top five per cent of earners. “Meanwhile many older Australians, including those whose responsibilities have excluded them from accumulating savings, struggle to meet basic costs in retirement,” the submission says.

Oxfam will be arguing at the summit for a tiny ‘Robin Hood’ tax on wholesale financial transactions of just 0.05 per cent at a time. The idea will be considered in Europe as Australia’s summit commences on Tuesday. The Australian Bankers Association has rejected the idea saying it would cut returns to “mum and dad” shareholders.

Published in today's SMH and Age

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