Without radical tax reform, Australia faces an intractable public finance problem | Satyajit Das

AAustralia’s social contract, crafted in times of plenty and optimism, promises important government services and financial support to citizens. But an aging population means fewer taxpayers and greater pressure on public funds. Over the next decade, Australia’s old-age dependency ratio (the ratio of people aged 65 and over to the working-age population) will drop from around four workers to three workers for every pensioner.

Lower tax revenues and higher spending on pensions, health and elderly care can cost around $40 billion each year (around 8% of the budget).

Given concerns over debt levels and fiscal repair, government revenue needs to better align with spending if Australians want the expected benefits, cost-of-living relief and spending to improve rising costs of weather events induced by climate change continue.

Australia’s overall tax level, at 28% of GDP, is below the OECD average of 34% and at least 10% lower than Germany, France and Scandinavia.

Tackling tax levies and how they are levied is an urgent issue.

Australia’s tax base is narrow and dependent on personal income tax which, at 42% of all federal tax revenue, is also below the OECD average of 49%, after adjusting for payments social security which many countries levy to finance unemployment assistance, old-age and invalidity pensions.

Given Australia’s reasonably progressive tax schedule and a top marginal tax rate of 47% (including the Medicare tax), the scope for increases is limited if the country wishes to attract and retain skilled talent.

Corporate taxes (around 17% compared to an OECD average of 10%) are difficult to raise due to Australia’s industrial structure and high foreign ownership of companies (around 79%) whose revenues are generated overseas.

A side effect of globalization and Australia’s open economy is that personal and corporate income tax increases must remain globally competitive in what is increasingly a race down. This may make higher consumption and wealth taxes inevitable.

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Australia’s GST, which accounts for around 12% of total tax revenue, is below the OECD average of 20%. Rate and coverage increases are an alternative.

In March 2022, the total wealth of Australian households reached $14.9 billion ($574,807 per person). Since March 2020, it has increased by 35%, due to the increase in the value of residential properties (up 40%) and pension balances (up 22%). Since the abolition of inheritance tax in 1979, this heritage is largely exempt from tax, with the exception of preferential taxes on capital gains.

Where to levy more taxes?

Options include overhauling the capital gains tax regime and introducing inheritance tax – Australia is one of the few countries that does not tax bequests.

Ultimately, primary residences and superannuation balances will have to be taxed or applied to after-work care and health care expenses. Wealthier Australians cannot continue to use their homes and superannuation as a tax-advantaged savings vehicle with the capital retained on death for the beneficiaries.

Irregularities and anomalies must be reduced.

Government support must be targeted to ensure that the intended beneficiaries benefit.

Australia’s childcare grants, for example, are available to families with incomes up to $356,756. The often distorting, regressive and costly concessions for investment in equipment that would be purchased anyway, dividends, capital gains, pensions and ownership must be reconsidered.

Simplifying the complex Australian tax code of tens of thousands of pages is essential. It allows the legal structuring of business to minimize tax liabilities. A simpler principle rather than a system based on detailed rules and allowing retroactive penalties, when policy or legislative intent is ignored, would reduce opportunities for tax planning.

But significant tax changes in Australia are difficult.

Will Labor make the trip?

The GST, eventually introduced by stealth, took decades. The ALP attributes its loss in the 2019 election to modest proposed changes to dividend taxation and negative gearing, which have since been scrapped.

Unwilling to attempt serious tax reform, governments rely instead on bracket creep – the increase in tax revenue through rising nominal incomes due to inflation that places taxpayers in tax brackets. higher taxes. This has pushed the average personal income tax rate up from 24% in 2016-17 to around 27% today. Inflation indexation thresholds would force governments to be transparent about tax revenues. Naturally, he faces bipartisan opposition.

Complexity facilitates pork-barrel politics, with governments adjusting concessions and provisions to appease different constituencies.

A large tax consultancy industry of dubious productive value resists simplification as an existential threat. Voters are likely to reject proposals that affect them financially.

Without radical tax reform, Australia faces an intractable public finance problem – a demand for spending that cannot be met by taxes. The only other course of action is to restore the country’s precious social safety net.

As the old pre-metric adage goes, “You can’t get pints out of pint jars.”

Satyajit Das is the author of Fortune’s Fool: Australia’s Choices (March 2022) and A Banquet of Consequences – Reloaded (March 2021)

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