Tax, Superannuation, Economic Reform and Productivity [S1-03]

Show Notes

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Music: “Insurrection”
Written by Pierre Chrétien
Performed by the Soul Jazz Orchestra
Courtesy of Do Right Music Inc.

Transcript

William Sinclair
Welcome to episode 4 of Why Can’t They Just, looking at policy, politics and getting stuff done.

My name is William Sinclair. I’m a member of the Labor Party, I’m a member of the Labor Environmental Action Network, and with me is Janaline.

Janaline Oh
Hi, I’m Janaline Oh. I’m a former diplomat, also a member of the Labor Party and the Labor Environment Action Network, and today I would like, before we start, to acknowledge that both Will and I are recording this on unceded Aboriginal land. I would like to pay our respects to all elders past and present from First Nations communities and acknowledge their custodianship of this beautiful country and also extend those respects to other First Nations peoples listening.

William Sinclair
So Janaline, we’re recording this on the 1st of July. We are a couple of months into a prolonged media campaign against the government’s new tax changes, which they announced a couple of years ago but are coming into effect now.

My first question is why can’t the Albanese Government just go harder, and make the writers of the Australian Financial Review even more annoyed?

Janaline Oh
They are already making those writers quite annoyed. We’ve got a rise in the minimum wage - an above inflation rise, which was supported by the government.

And, so the government proposed a couple of years ago changes to the way in which very high superannuation balances are taxed. Superannuation, since the era of John Howard has been taxed at a very, very concessional rate. So generally what happens is you get taxed 15% on money that you put into super and then when you take it out at the end at retirement, you don’t pay any tax on that.

What the government is proposing is that for people with balances of over $3,000,000, and to put that in context, the average super balance in Australia I think is about $150,000, maybe $200,000. So these are balances that are over 10 times the average super balance.

So if you, for example, have $4 million in super, the earnings on $1 million of your super will be taxed at a slightly less concessional rate. So that sounds a bit complicated, but essentially, I think the main conceptual things are: we’re talking about very, very high balances. We’re talking about the earnings on only that part of the balance that exceeds $3,000,000 and we’re talking about a concessional tax rate that is just a bit less concessional than the current one.

William Sinclair
The media appears to be completely incensed by the most modest of tax increases and revenue raising. I think that the media kind of gets that out and outgoing for austerity is not very popular, so their roundabout way of calling for austerity is just to say we’ve got a huge structural deficit issue and then to scream bloody murder at any kind of indication of the government’s signalling that they’re going to increase revenue. And obviously if you’re going to deal with structural deficits without raising revenue, you can only cut on things and do austerity.

So why can’t the Albanese government pull out the media’s obvious bias on an issue like tax?

Janaline Oh
Yeah, it’s interesting because Jim Chalmers kind of did when he spoke at the National Press Club, not in as direct terms as you did just now, but then he is the Treasurer and probably has to be slightly polite in the National Press Club. But what he said was that the media’s game of rule in, rule out where they go to politicians and they say, particularly in the context of an election campaign, will you rule out ever changing negative gearing? Will you rule out ever changing the Stage 3 tax cuts? And his argument was that this is really corrosive - he called it a cancer on tax reform. Because if you rule out every possible lever that you have to reform taxes, then you are left with no way of reforming taxes. And then, at the same time, I think one of the things that he actually said was the voices that allowed us in calling for tax reform also seem to be the voices that most virulently oppose any specific tax reform that you put in front of them. So he did actually call it out, and I’m really glad he did. And it’s about time, in my view, that some politicians actually did this.

The other thing about this particular tax reform is that the media is now full of stories, and this includes the ABC, which I am a little disappointed about, of people who - largely farmers - who are running their farms through their super funds and who are saying, oh, because we don’t have enough cash flow to pay this potential tax, we might have to sell our farm.

Now, if you’re running your business through your super fund, there can only be one reason you’re doing that, and that is to avoid paying normal taxes because super funds are obviously taxed at a very, very concessional rate.

The other thing is, a lot of these people, when it actually comes down to it, are just storing up a tax efficient way of creating massive inheritances. The other thing that everybody seems to be very upset about is this idea that when you are assessing the gains from your super fund, you are assessing what they call unrealized gains.

So basically your super fund is worth $3.2 million one year, the shares go up or whatever, it increases in value to $3.3 million and you get taxed on that extra $0.1 million, even though you haven’t actually sold those assets, so you haven’t actually realised those gains.

Now everyone’s saying, oh, this is, you know, the thin end of the wedge and you can’t do this because nobody ever taxes unrealized gains.

Land tax is a tax on unrealized gains. Land tax has been recognised by most economists as the most efficient tax that we have in Australia. It’s levied by state and territory governments, and when my property goes up in value, I pay more land tax, and I pay tax on the unrealized gains of that property. I haven’t sold my house in that time and I’m paying more tax. So your rates are usually calculated on unimproved land value. That is a tax on an unrealized gain.

So I find the whole argument a little bit ridiculous, and I can only conclude, as you have, that this is really about perpetuating this argument that we need to have balanced budgets, but we need to have balanced budgets without raising revenue, in other words, we need to cut expenditure.

I really feel that now is a good time for the government to start this conversation. So I’m really happy that the Treasurer has said that tax reform is on the table for his productivity summit and that he had an initial go at the media to say, can you stop making me rule stuff out before I’ve even considered it?

Because, you know, the Coalition is not strong at the moment, to say the least. Apart from the sort of the relative weakness of the political opposition, is that with the cost of living crisis and after COVID, everybody wants government services. You know, I think all of those things make it a good time to have this conversation.

William Sinclair
The Greens have come out and said they like the tax, but they wanted it $2 million and indexed, and the Teals have come out against the tax seemingly in its entirety. So first of all, what do you think about the Teals’ response? And then what do you think about the Greens’ idea of $2 million and indexed?

Janaline Oh
I find it a little ironic maybe that Allegra Spender, for example, the Member for Wentworth, one of the wealthiest electorates in the country, has put out a white paper on tax reform, has been a strong advocate for tax reform, but on this specific issue has opposed it. Maybe she was one of those people that Jim Chalmers was talking about.

But I think the Greens’ proposal to start at $2 million, I guess the political reality is that when you go to $2 million in a super balance, some of those people are actually suffering from, you know, the cost of living crisis.

What the Government has proposed is you set it at $3,000,000, but you don’t index it. And as time goes on and as the cost of living crisis eases, and as people’s incomes and, you know, earnings and super balances rise with inflation, then you start to capture more and more of those kind of upper middle income earners.

There’s also a blatant political issue here, where if you’re hitting only the top 87 richest people in the country, then you know you’re not going to be generating that much push back from most of the population.

So I think there is a sort of raw political calculation behind this as well. I’m not saying I endorse that. I think, you know, governments have to be cognizant of political realities. But I also think that governments that have been re-elected with increased and stonking majorities should consider also being a little bit brave politically. But I think that at this stage the important thing is the policy that they’re putting forward is the policy that they took to the parliament two and a half years ago, and it’s the policy that they took to the election and won a stonking majority on. So I think it should be uncontroversial to pass this policy.

And then down the track, as you look at broader tax reform issues, maybe then the question comes up of perhaps we should look at what the Greens are proposing, which is lowering the threshold and indexing it.

So I think those are all things that you can have a conversation about, but I think at this stage the Government has a mandate and it should seize and implement that mandate.

William Sinclair
Going on to your point about Australia doesn’t have an expenditure problem, we have a revenue problem and we want to build a tax system that’s more fair and equitable, including revenue increases. Where do you think of the big revenue raising areas to focus on?

Janaline Oh
Yeah. Look, I think there are a lot of options available. I think it’s really important to note that we still have to win the argument that we don’t have an expenditure problem, that we actually have a revenue problem.

And, I have to say, I think a lot of the Australian people are kind of with us on that, because I think a lot of people like social spending. They like Medicare, they’d like to see it strengthened and expanded. They like public education, they would like to see schools to be fully funded. They like the NDIS, the National Disability Insurance Scheme, even if they don’t use it. So I think these are all big expenditure items that the Australian people like.

Another thing that has become very clear in the last few months, is that we are going to have to increase our defence spending, because one of the absolute core responsibilities of any government is to keep its people safe from external threat. The world is very uncertain. The United States under the Trump administration is behaving in ways that really do, I think, call into question their willingness and capability to fulfil their obligations under the ANZUS treaty to defend Australia if we needed it. And so we are going to have to look at significant increases in defence spending.

I don’t think the Australian people are up for sacrificing social spending in order to do that and I don’t think any Labor government should impose that on its population.

You know, one of the things that conservative political parties and the conservative media constantly throw at the Labor Party as a kind of insult is that they are just a tax and spend government. I don’t think there is anything wrong with being a tax and spend government. I think we actually need to embrace that term and own it and say, yes, we are a tax and spend government. We believe in taxing to correct a more equal and a more prosperous society, and we believe in spending efficiently and effectively to deliver the services that people want and need.

And I think if you frame it in that way, most reasonable people are going to say, yeah, actually that sounds OK.

William Sinclair
The capital gains discount tax and the franking credit system, they help rich people. They help this kind of burgeoning aristocracy, if you will, and they’re not helping the average worker at all. We would like to see them repealed.

Why can’t the Albanese government repeal them or build a road map to repealing them in the foreseeable future?

Janaline Oh
Well, you know, I think they have a political issue here where they did kind of lose an election on these issues and they are very conscious of that. There is a danger of course that they have over-learned those lessons and also it was six years ago and maybe people have moved on.

So I would say that tax expenditures, which is what you’re talking about, this is like rebates from existing taxes. That is a really good place to start looking at tax reform because you’re talking about you’ve got this existing tax and these are loopholes that you’ve created in the tax system. So maybe closing some of those loopholes is a good way of getting some revenue back.

The Treasurer, interestingly last term introduced the Tax Expenditure Insights paper and what that is, is it provides a description of the distribution of each tax expenditure.

So for capital gains tax for example, 80% of the rebate from capital gains tax goes to the top 10% of income earners. If you look at franking credits, 70% of the rebate from franking credits goes to the top 10% of earners.

Compare that to the Medicare levy low income threshold, which is a tax rebate from the Medicare levy and almost 3/4 of that goes to the bottom 30% of income earners. Now, obviously that is the case because it is literally a low income tax rebate.

But I think what is interesting about publishing this paper is that I think the Treasurer is basically setting up a bit of transparency to help people who want to target bits of the tax system that are unfairly benefiting very rich people.

So I think tax expenditures is a good place to start.

There are also a whole lot of other taxes that I think, you know, governments should be looking at. I think like I’m in favour of Allegra Spender’s call for a global look at the whole tax system with a view to reform because, you know, I think it is worth looking at the system as a whole. The Henry Tax review did this. It is now 15 years ago that that was published and the government in the end didn’t implement most of it because it got scared off by political scare campaigns.

William Sinclair
I guess, I guess the argument is they, I mean, the argument might be they implemented the number one one, which was the mining tax and then they got knocked off by the mining industry. So they couldn’t implement the rest because they were kind of Kevin Rudd was knocked off, and then Julia Gillard signed an agreement which kind of bailed on the whole idea.

Janaline Oh
Arguably that is a reasonable analysis of what happens, but I think we should be looking at resource rent taxes. And when I’m talking about resource rent taxes, I’m talking about super profits taxes. So I understand the arguments for not having company taxes set too high because you can discourage investment by doing that. But I don’t see any problem, if a company, and particularly this is true of resource companies, if they get a windfall because, for example, Russia invades Ukraine and the global gas prices go through the roof, then I don’t see why the Australian taxpayer should not be getting a very substantial proportion of that windfall. So I think that is something that needs to be looked at.

The Treasurer has looked at the Petroleum Resource Rent Tax, which is basically the super profits tax. The option he’s chosen basically brought forward some of the payments by a few years, it had some modest increases. It is a pretty low ball reform in my view. I think there would be a very good argument for revisiting that, particularly given the way pretty much every other country in the world taxes their resources.

I think another thing that died in the 1970s or 80s was inheritance taxes. So, when I was a child, every state and territory had inheritance taxes. Joh Bjelke Peterson, who was then Premier of Queensland abolished them in Queensland and there was an exodus of retirees into Queensland because then they could die without their inheritance being taxed.

William Sinclair
It’s a classic game theory race to the bottom issue, where these sorts of taxes on a state by state basis just mean that everyone has to put it at zero, otherwise all the money will leave their state.

Janaline Oh
Exactly. So I think inheritance taxes are almost the definition of good taxes. Now, I don’t think they should be set very low. I think it is fair to let people pass on modest amounts to their children. But I think inheritance taxes set at $10 million, $20 million, $40 million - I think it is reasonable to set an inheritance tax at that kind of level. Now, you want to design it so that you don’t, for example, discourage people from passing on, say, profitable businesses to their children. But that is all possible.

Unfortunately, inheritance taxes are weirdly and unusually unpopular even with people who have literally no prospect ever of paying them or having their descendants pay them. And this has been the case in the US, in Europe, in the UK. In the UK there are literally inheritance taxes on the landed aristocracy. So a class of people that no normal person would ever be able to aspire to enter, and they’re still unpopular, so inheritances are uniquely bad for perpetuating inequality.

William Sinclair
To me, it flies in the face of any kind of values in any of the party platforms and either the Labor Party, Liberal Party or the Greens Party. No one is sitting there saying, oh, what I’d really like is for some people to be able to live off the hard work of other people because they were born in the right family. You know, where’s that in a party platform?

Janaline Oh
Yes, it absolutely flies in the face of meritocracy. It flies in the face of rewarding hard work. I don’t think the Labo r government is actually seriously going to consider this. I think that is a pity.

I think another thing that we should look at is consumption taxes. Now, consumption taxes are regressive because poorer people spend more of their income on consumption than richer people. But consumption taxes are also basically the only tax that rich people cannot avoid. Like, no accountant can get you out of paying the GST on your restaurant meal.

So I think if you have a consumption tax system that also compensates lower and middle income taxpayers and is coupled with a generous transfer and welfare system, then I think you start looking at a system that does distribute taxes more fairly.

Now Sweden has a very high value added tax, I think it’s something like 20%, but they also have very excellent government services which are disproportionately benefiting the poor because they’re the ones who need free healthcare, free education. They also have a moderately generous welfare system, unlike ours.

And so I think if you did something like a one off significant increase to the GST that didn’t aim to raise revenue in the first few years, that aimed to be revenue neutral in the first few years, and you paid that additional revenue back in the form of a lower and middle income tax offset, or some sort of earned income tax credit, which is what the US has, where your welfare benefits and your taxation kind of go up and down on a sliding scale so you don’t fall off some sort of welfare cliff when you reach a particular threshold, and combined with a substantial increase in social welfare payments, so the age pension, youth allowance and the job seeker allowance, I think this is the kind of idea that is worth considering.

Because the other thing about consumption tax is it is also very efficient. I think it’s the tax that, apart from land tax, it is the second least likely to affect investment decisions or economic activity. So it’s very efficient and it can, if you structure it in that kind of way where you have a lot of compensation and you have it as part of a bigger system, then I don’t think it should increase inequality. In fact, if you design it well, it should decrease inequality.

William Sinclair
I don’t think I’m against a consumption tax, but I think where my emphasis would be is on asset taxes. You take all the assets which can’t be physically moved, like shopping centres or big businesses, and you kind of tax the physical assets that can’t move. Because our issue with our current tax system is what happens if someone just takes all their money to Dubai? What happens if this rich person who we’re trying to tax just moves to Dubai? What happens if this company that we’re trying to tax just moves offshore? That’s an issue. But it doesn’t really matter what the individual who owns the shopping centre or the company that owns the shopping centre here does. The shopping centre is going to stay in Australia no matter what. So let’s focus on taxing the shopping centre and obviously you have an exemption for houses and small businesses and whatnot. But at my emphasis would be on focusing on taxing assets which can’t - which are immobile.

Janaline Oh
Yeah. And look, I think that’s what land taxes are about. And I think it’s a good idea to expand land taxes because as I said, they are the most efficient taxes that we currently have in Australia. They are run at state and territory level, but definitely state and territory governments moving from stamp duty, which is a tax on transactions, to land tax, which is a tax on assets, is something that would be more equitable and more efficient over time.

William Sinclair
Oh, absolutely. Particularly because if you think about super rich people tend to have inherit assets and then die and then pass their assets on to their children. People are kind of buying houses and then selling them at the end, a kind of people who are working class. So this sort of stamp duty issue hits middle class people who tend to buy assets and then sell them again, as opposed to rich people who tend to hold on to them in a generational fashion.

Janaline Oh
And the other thing is, it discourages people from selling those assets because they have to pay a tax on that transaction. So it’s actually a barrier to downsizing and to freeing up family homes for families, whereas empty nesters, you know, who would probably actually prefer to sell their big family home and buy a townhouse somewhere have a disincentive. So there’s all sorts of reasons that land taxes are a better idea.

I think the caution I would put on wealth taxes, I guess, which is not exactly what you’re talking about, right? I think you’re talking about taxes on fixed assets But I think the caution of wealth taxes is exactly what you say - there is a danger that they just take their wealth and take it elsewhere. And in fact, a number of European countries have repealed their wealth taxes because they just weren’t earning enough. So I think you want to be a little bit cautious about that, that at the end of the tax and transfer system, inequality should be less.

So people operate in the economy, they earn money, they do various things and that gives you a certain inequality profile. After the tax and transfer system, ideally that inequality profile should be a lot flatter, and in the process, you also generate revenue for government services.

And I think that is the point where you generate the political support for greater taxation. It is in the delivery of excellent government services because even though they disproportionately benefit poor people, they also benefit middle class and wealthier people. So there is a very broad range of the population that gets the benefit. So I think that is actually quite a good argument for them.

The last thing I’d say is that within the Labor Party, I’m actually quite keen to set up a little group. I’m calling it for working purposes, Labor for Tax Reform.

So if you are a Labor Party member out there and you are interested in seeing a more comprehensive conversation, and if you are interested in increasing the political space for the government to implement ambitious tax reform, please send us an email. Because I’m really keen to get together some like minded party members to just, as I said, increase the political space to make it easier for the government to do ambitious stuff.

William Sinclair
Thank you so much to Euca Lord and Callum Sinclair for editing. The song is called Insurrection, written by Pierre Chrétien, performed by the Soul Jazz Orchestra, courtesy of Do Right Music Inc. My name is William Sinclair.

Janaline Oh
My name is Janaline Oh, and this is Why Can’t They Just?