Opinion & Commentary
Tax overhaul long due
Despite repeated attempts by the Government to ignore it, the clamour for tax reform just won't go away.
Last week, the Treasurer hinted that his May budget would give extra help to families on $40,000 to $50,000 a year. Critics immediately pointed out that this group has already been showered with goodies by this Government while others have missed out.
Labor's Chris Evans released figures showing that a single wage-earner family with two children can now earn more than $50,000 a year before it pays more tax than it gets back in family payments. He contrasted this with a childless couple on the same income, who pay $13,000 in tax and get nothing back.
Evans's Labor colleague Craig Emerson complained that single people and childless couples on average incomes have gained very little in tax relief from this Government: just the $4 "sandwich and milkshake" tax cut in 2003. Taking bracket creep into account, he argued they have lost more than they have gained, and he forecast a tax revolt from childless taxpayers if nothing is done to reduce their growing burden.
One can't help but feel some sympathy for Peter Costello. Armed with huge budget surpluses, he has been splashing money around in all directions in recent years, but no sooner does he placate one section of the population than another pops up, making fresh demands. Even when he sprays cash directly at people, they seem ungrateful.
But the Government really has nobody to blame but itself. Our income tax system is riddled with distortions and disincentive effects that cry out for serious attention, but the Treasury has set its face against tax reform. Complaints and demands will keep surfacing from different sections of the electorate until these fundamental problems are addressed.
The income tax system is inefficient, hugely complex, unfair, destructive of incentives and corrosive of the spirit of self-reliance. The Government's preference for tinkering - tweaking a rate here, fiddling with a threshold there - does not begin to recognise the scale of what needs to be done.
Our top rate of almost 50c in every dollar is pernicious and is increasingly out of line with other Western countries. The wealthiest people in the country don't even pay it: they take advantage of the much lower 30per cent company rate, and they further reduce their tax liability by exploiting myriad loopholes and concessions scattered through 9000 pages of tax legislation. There are now so many special allowances and exemptions (another 100 have been added since 1996) that tax law has become almost indecipherable.
Another problem is tax on retirement savings. Australia is the only country in the world that taxes superannuation when money is put into a fund, when the fund earns profit, and when the money is withdrawn. By raiding people's super in this way, the Government is shooting itself in the foot, for retirees who could have been self-reliant will end up with inadequate savings and will then have to be supported with a government age pension.
Then there is bracket creep. Because tax brackets are not indexed to inflation, the total tax take increases year by year without anybody even realising it. The threshold at which people start to pay tax (an income of just $6000 per year) has gone up by just 50 per cent since 1980, yet wages have increased by more than 350 per cent in that time. The result is that people are now taxed long before they have earned enough to keep body and soul together.
This low tax-free threshold in turn contributes to a high level of "churning" of tax and welfare payments. Because tax liability starts at such a low income, millions of people pay tax to the Government only to have it handed back as income support.
This is one of the points Evans and Emerson were making this week when they pointed to families on average incomes who pay $13,000 in tax and receive $13,000 in benefits.
If we add health and education to social security spending, churning turns out to be even more extensive. The welfare state soaks up more than two-thirds of everything the Government spends, but more than half of this goes back to the same people who provide the money in the first place. Research by the National Centre for Social and Economic Modelling shows a couple in 2001-02 with two school-age children and an average weekly income of $1160 paid $394 per week into the welfare state kitty and took $508 out: a huge amount of churning to achieve a tiny net effect.
Churning is wasteful (think of all the bureaucrats employed to recycle our tax dollars). It also fosters a debilitating culture of dependency, for rather than living on our own earnings, we are stripped of tax and then have to rely on the Government to take care of us.
Furthermore, it creates dispiritingly high effective marginal tax rates (when people try to increase their take-home pay, they get hit with higher tax at the same time as they lose means-tested benefits), and it keeps tax rates higher than they need to be (because we have to pay so much tax to finance our benefits).
It is this latter point that Labor's tax twins were highlighting in their attacks this week. Neither Evans nor Emerson objects to childless people subsidising families with children. Every Western country does this, and Australian taxpayers have helped families with the cost of raising their children since the child endowment was introduced in 1941.
The real issue is churning. The Government hands out so much money (in cash and in services) that taxation has risen to crippling levels. Favoured groups - families with children, property investors, company proprietors - receive concessions to ease the pain, but this just pushes taxes even higher for everybody else. Everyone is being squeezed, but some people are getting relief while others are not.
The Treasury is therefore robbing Peter to pay Paul, and mugging Paul to pay back Peter, all the while hoping that neither Peter nor Paul twigs to what is going on. The next budget apparently promises more of the same.
But the events of this week indicate that Peter and Paul are starting to query what all this is costing them. Solving the churning problem is not easy, but we are nearing the point where the Government sticking its head in the sand will no longer be an option.
Professor Peter Saunders is social research director at The Centre for Independent Studies. His three Issue Analysis papers on restoring self-reliance in welfare can be downloaded from www.cis.org.au.
