Are working-age Australians being ripped off by the tax system? || Insiders: On Background

Key Concepts

• Tax reform objectives: Fair go for working people (including intergenerational equity), incentivizing business investment, simplifying the tax system.
• Imbalance in the income tax system: Heavy reliance on wages and salaries, light taxation on passive income (superannuation, housing).
• Superannuation tax concessions: Tax-free earnings in the retirement phase.
• Capital Gains Tax (CGT) discount: 50% discount on investment asset sales.
• Horizontal equity: People in the same situation paying roughly the same amount of tax.
• Bracket creep: People paying higher tax rates than their equivalents in the past due to inflation pushing them into higher tax brackets.
• Corporate tax take: Australia has a relatively high corporate tax take compared to peers.
• Dividend imputation: Company tax is credited to shareholders' income tax.
• Economic rents/Super profits: Excess profits in sectors due to lack of competition or natural resources.
• Cash flow tax: Proposed by the Productivity Commission as a way to reduce corporate tax on most businesses while still taxing economic rents.
• Harmonization of state taxes: Opportunities to simplify the tax system by harmonizing state and territory taxes.
• Petroleum Resource Rent Tax (PRRT): Tax on profits from the extraction of petroleum resources.

Fair Go for Working People and Intergenerational Equity

• The current income tax system is imbalanced, relying heavily on wages and salaries while offering generous tax concessions on passive income sources like superannuation and housing.
• Example: Earnings from superannuation in the retirement phase are tax-free, which is unsustainable as more money flows through the superannuation system. This allows some retirees to effectively opt out of paying income tax, even with a comfortable income.
• Argument: While retirees have paid taxes throughout their lives, the current system allows some to avoid income tax based on age, which is not equitable.
• Proposed Solution: Tax retirement income from superannuation at a lower rate than standard income tax (e.g., 15%, the rate used during the accumulation phase).
• The 50% Capital Gains Tax (CGT) discount also contributes to inequity. Data shows that the top 5% of income earners exhibit significant dispersion in tax paid, with some paying far less due to the CGT discount.
• Data: Analysis by E61 shows that the CGT discount accounts for about half the difference in tax paid by people earning the same amount of income in the top 5% income bracket.
• Proposed Solution: Reduce the generosity of the CGT discount.
• Adjusting superannuation tax concessions and the CGT discount could free up enough revenue to afford decent income tax cuts for working-age Australians.
• Bracket creep has pushed people into higher tax brackets over the past couple of decades, making the system less balanced.

Incentivizing Business Investment

• Australia has a relatively high corporate tax take compared to other countries, partly due to dividend imputation.
• The challenge is to design a corporate tax system that incentivizes business investment while still capturing economic rents or super profits from sectors with limited competition or abundant natural resources.
• Productivity Commission Proposal: Lower the company tax rate for most firms (under $1 billion turnover) to 20%, introduce a 5% net turnover tax, and allow immediate deduction on capital investments.
• The proposed cash flow tax aims to capture economic rents while encouraging investment.
• The complexity of the Productivity Commission's proposal might not align with the objective of simplifying the tax system.

Simplifying the Tax System

• Simplification can be achieved by harmonizing state taxes and streamlining processes for businesses.
• The treasurer mentioned a single national economy as a priority.
• The process of filing income tax returns has become simpler for most individuals due to the ATO collecting more data.
• The focus should be on simplifying the process for businesses as well.

Tax Reform Process and Timeframe

• The government will handle tax reform internally, without an external review like the Henry Tax Review.
• A lot of work has already been done, and many ideas are well-known, so a fact-finding mission is not necessary.
• The focus should be on areas with the strongest consensus and then grappling with design choices.
• Some tax reforms are more urgent than others.
• Example: The opportunity to tax the highly profitable export of fossil fuels through the Petroleum Resource Rent Tax (PRRT) is time-sensitive. Delaying PRRT reform could result in missing the opportunity to tax excess profits as fossil fuel resources deplete.
• Rebalancing the personal income tax system requires building public understanding, which will take time.

Conclusion

The economic reform roundtable identified key objectives for tax reform: fairness for working people, incentivizing business investment, and simplification. Addressing imbalances in the income tax system, particularly regarding superannuation and capital gains, is crucial for achieving a fairer system. While the Productivity Commission's proposal for corporate tax reform offers a potential solution, its complexity raises concerns about simplification. The government's internal approach to tax reform should prioritize areas of consensus and consider the urgency of specific reforms, such as the Petroleum Resource Rent Tax. Building public understanding is essential for successful and sustainable tax reform.