Australia’s social contract, framed in times of abundance and optimism, promises significant government services and financial support for citizens. But an ageing population means fewer taxpayers and greater demands on the public purse. Over the next decade, Australia’s old-age dependency ratio (the ratio of people aged 65 and over to the working-age population) will change from about four workers to three workers for every retiree.
Lower tax receipts and higher spending on pensions, health and aged care may cost around $40bn every year (about 8% of the budget).
Given concerns about debt levels and budget repair, government revenues must better align with outlays if Australians want continuation of expected benefits, cost-of-living relief and expenditure on ameliorating the rising costs of more frequent climate change induced weather events.
Australia’s overall taxation level at 28% of GDP is below the OECD average of 34% and at least 10%% less than that of Germany, France and Scandinavia.
Addressing the tax take and how it is raised is a pressing issue.
Australia’s tax base is narrow, dependent on personal income taxes which at 42% of all federal tax revenues is also below the OECD average of 49%, after adjustment for social security payments which many countries levy to fund unemployment support, age and disability pensions.
Given Australia’s reasonably progressive tax scale and a highest marginal tax rate of 47% (including the Medicare levy), scope for increases is limited if the country wishes to attract and retain skilled talent.
Corporate taxes (about 17% v the OECD average of 10%) are difficult to increase because of Australia’s industrial structure and high overseas ownership of businesses (about 79%) with earnings accruing overseas.
A side-effect of globalisation and Australia’s open economy is that personal and corporate income tax increases need to stay globally competitive in what is increasingly a race to the bottom. This may make increased consumption and wealth taxes unavoidable.
Australia’s GST, at about 12% of total tax revenue, is below the OECD average of 20%. Increases in the rate and coverage are one alternative.
As at March 2022, total Australian household wealth reached $14.9tn ($574,807 a person). Since March 2020, it has risen 35%, due to increases in residential property values (up 40%) and superannuation balances (up 22%). Since the abolition of death duties in 1979, this wealth accrues largely tax free except for concessional capital gains imposts.
Where to raise more taxes?
Options include revising the capital gains tax regime and introducing inheritance taxes – Australia is one of few countries that does not tax bequests.
Ultimately, primary residences and superannuation balances will need to be taxed or applied against post-work aged care and healthcare expenses. Wealthier Australians cannot continue to use their homes and superannuation as a tax-advantaged savings vehicle with the capital preserved at death for beneficiaries.
Irregularities and anomalies need to be reduced.
Government support must be targeted to ensure intended recipients benefit.
Australia’s childcare subsidies, for example, are available to families with income up to $356,756. Frequently distortionary, regressive and expensive concessions for investment in equipment that would be bought anyway, dividends, capital gains, superannuation and property must be reconsidered.
Simplification of Australia’s complex tax code of tens of thousands of pages is essential. It enables legal structuring of affairs to minimise tax liabilities. A simpler principle rather than detailed rule-based system and allowing retrospective penalties, where the legislative policy or intent is ignored, would reduce tax planning opportunities.
But significant tax changes in Australia are difficult.
Will Labor make the move?
The GST, ultimately introduced by stealth, took decades. The ALP attributes its loss at the 2019 election to modest proposed alterations to taxation of dividends and negative gearing, since abandoned.
Unwilling to attempt serious tax reform, governments rely instead on bracket creep – increased tax revenue from rising nominal incomes due to inflation which put taxpayers into higher tax categories. This has pushed up the average personal income tax rate from 24% in 2016-17 to about 27% now. Inflation indexing thresholds would force governments to be transparent about tax revenues. Understandably, it faces bipartisan opposition.
Complexity facilitates pork barrel politics with governments tweaking concessions and provisions to placate different constituencies.
A large tax advice industry of questionable productive value resists simplification as an existential threat. Voters are likely to reject proposals that adversely affect them financially.
Without radical tax reform, Australia faces an insoluble public finance problem – demand for spending which cannot be met by taxes. The only other course of action is to wind back the country’s cherished welfare net.
As the old pre-metric saying goes: “You can’t get quarts out of pint pots.”
• Satyajit Das is the author of Fortune’s Fool: Australia’s Choices (March 2022) and A Banquet of Consequences – Reloaded (March 2021)
