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

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Well, hundreds of submissions, 29 hours of talks, a whole lot of hoopla.

What did this week's economic reform roundtable achieve?

The treasurer emerged on Thursday night with a long list of achievements.

Some of them, to be frank, are things the government was already going to do, like cutting red tape and moving towards a road user charge to eventually replace fuel excise.

But there was broad agreement on some principles that should underpin changes to the tax system.

And this is important.

It may not sound like much, but it's more than we heard from either side of politics at the election.

This could mark the start of a tax reform process.

Now, whether this leads to reforms that improve the system or whether it leads to an overall rise in the tax take, well, we're yet to see, but I am keen to get a sense of what needs to happen now and whether these are the right three objectives from one of those who was part of the roundtable making the case for tax reform.

I'm David Spears on Lunawall Country at Parliament House in Canberra.

Welcome to Insiders on Background.

Aruna Sathanapalli is the head of the Grattan Institute and delivered the keynote address to the roundtable on tax.

Aruna, welcome.

Thank you.

So the Treasurer emerged from the meeting Thursday night to announce there'd been agreement on these three broad objectives when it comes to tax reform.

A fair go for working people, including intergenerational equity terms, he said.

Incentivising business investment was number two, and then simplifying the tax system.

Are these the right objectives?

Look, I think yes, and they did reflect broadly the conversation that was being had over the course of what was actually quite a few hours.

So, no mean feat to actually distill that down into just those three principles.

That isn't comprehensive of all the areas that we could look at tax reform, but it does cover two of the really big buckets: being what are we doing with business taxation and what are we doing with the personal income tax system.

So let's start with that first one, the fair go for working people, intergenerational inequity.

What needs to happen to give working age Australians a fairer go?

Yeah, so this is a topic that I covered

quite a bit in the opening address

because

it's worth sort of bringing some data to bear on exactly how our income tax system is working.

It's a really important one to get right because it affects so many people, but also it's our biggest tax source.

And when you look at it, there's a couple of things that you notice.

It's not that there's a particular issue if you look at other countries with how much income tax Australia collects, but the way in which we do it is quite imbalanced.

So we lean quite heavily on wages and salaries, but very lightly on forms of income that people gain pretty much any other way, almost any other way.

So in particular, if you're you're making your income from a passive source, by which I mean

returns on

your super or from housing, then we've got a whole lot of very generous tax concessions.

But people who are making their money through their wage don't have the benefit of those concessions.

So to take one of those examples you raised there, superannuation, in the retirement phase,

your earnings from superannuation, your income in the the retirement phase are tax-free.

Is that sustainable?

No, and I think that's the big issue.

That's where you can see really clearly in the way that our tax system is operating is as more and more money is coming through the superannuation system,

you can have quite a healthy income in retirement and that is a fantastic thing, right?

That's a really good feature of the superannuation system.

But we've got these tax settings that effectively enable people to opt out of paying income tax once they move into the super phase.

There's not any clear principled reason for that.

There's absolutely reasons why you would tax income from savings at a lower rate because

there's a way in which the savings build up over time.

But

the level of generosity where people are just not paying any tax is playing out in a way where

there is a growing group in society and they will get bigger over the coming decades who aren't paying income tax.

And it's the same group that are responsible for

our highest service system costs in terms of health care and such things.

I'm sure plenty of retirees, though, would say, well, we paid taxes our whole life.

We deserve this tax-free status in retirement.

I know, and it's a really appealing argument.

But actually, the way our tax system is structured, which most people agree with, is that you pay income tax based on your income and how much you're able to pay.

But we have this system at the moment where someone can be on quite a comfortable income, but by virtue of their age,

they're not putting in the same amount as someone who's making that money a different way.

And I think that that strikes people as just not the way a system ought to work.

And in tax theory, that's not the way a system ought to work.

And to be clear, I mean, you're not saying tax that retirement income at the same rate as you would pay your income tax, but something more than zero.

That's exactly exactly right.

So absolutely not, you know, tax it at the income tax scales, but something lower than that.

And people have floated different numbers.

The one I often gravitate to is 15%.

That's, you know, that's a tax rate we use during the contributions phase or the accumulation phase.

And then we just continue that in terms of earnings in the drawdown or the retirement phase.

And then the other one, capital gains tax, there's currently a 50% discount on when you sell an investment asset.

Is that sustainable?

Well, one of the things that's come out really clearly in the data, and there was a great piece of analysis that was done by a research institute, E61, in the lead-up to this process that had a look at the tax data.

And what it shows you is that

for 95%

of income taxpayers pay about the same amount of tax

with other people who make the same amount of income.

So, what's called horizontal equity, right?

Like two people in the same situation pay roughly the same amount of tax.

But when you get to the top 5% of incomes, you see this massive dispersion, a sort of difference between some people who are paying kind of, you know, what in a progressive sense we think they ought to be paying, and then a number of people who are paying far less,

and then some taxpayers who are paying less as a rate than people on far lower incomes.

And what really drives that is the capital tax, the capital gains tax discount.

That

accounts for about half of that difference in what people who are earning the same amount of income are paying in tax.

So if you could fix that,

you know, and again, there presumably still be some sort of discount, but not quite the 50% discount,

and make the change on superannuation that you're suggesting there, would that free up enough money to afford a decent income tax cut for working-age Australians?

Yeah, so I think that both of those things are,

they're not straightforward in the sense that, you know, we've talked about super, but equally with the capital gains tax discount there's a reason for some discount it's just that our discount is very generous so it's a matter of just pulling back on some of that generosity and what that creates the space for is for us to rely less heavily on wage and salary

income tax and I think that again, it's not that today our system of income tax is particularly onerous relative to other countries.

In fact, if you take into account the fact we don't levy Social Security contributions like many other advanced countries do, we're actually quite, you know, we're at the lower end.

But one of the things that is unusual is that our top tax rate, 45%, that rate is not particularly unusual, but it kicks in quite early.

So this creates capacity for us to

sort of reduce the load on working people.

And in particular,

one of the things we notice is that bracket creep over the past couple of decades has meant that people are paying

higher rates than their equivalents would have been 10 or 20 years ago.

So, this gives us a chance to start relying less on that bracket creep and getting the system again just to a better sense of balance because I think there's a broad recognition, and there was yesterday, that there are people who might seem like they're on quite good incomes.

They've gone to university, they've gotten a good job, and they're still finding it really tough.

Aaron Powell, so that's the first objective, the fair go for the working age people.

The second one is incentivising business investment.

The Productivity Commission put forward an idea leading into this roundtable to completely change the company tax system, lowering it for most firms to 20%,

introducing a net turnover tax

of 5%,

and then an immediate deduction on capital investments.

A little bit complicated, but what do you think of the idea?

Is this the right approach when it comes to trying to incentivise business investment?

Yeah, I mean, I think that the Productivity Commission has put an idea on the table.

They've actually grappled with a difficult problem and they've put forward a potential solution.

I'll just talk about why the problem is genuinely difficult.

So we have a relatively high corporate tax take in Australia compared to many of our peers.

That is artificially high in one sense because we have this system of dividend imputation, which means that you the company pays the tax, but then the shareholder gets that tax back in their income tax.

So it looks a little bit, as I said, artificially high.

But another part of it is that we have an economy where there are some big sectors that attract what, you know, in economic speak is called economic rents.

But what that means is that there are sectors where either because of competition or a lack of competition rather or because of you know their natural resources, they make profits that are super profits, particularly if say commodity prices are high.

So what you want to design is a corporate tax system that doesn't

disincentivise people from making investments that, you know, grow the economy, good business investment that grows jobs and innovation.

But at the same time, you want to be making sure that you're

getting at those excess profits or those super profits that are one of the most efficient ways to raise tax for the services that we all use.

So that's the puzzle.

How do you do less of one and more of the other?

What the Productivity Commission have proposed, you know, is it might seem a little bit complicated, but what they're trying to get to is this, you know, the ability to reduce the corporate tax on most businesses who are under that billion dollar mark.

And the way to pay for it is through this new cash flow tax, which is designed to get people to invest, but then to sort of better get at those economic rents.

I'm not sure, though, if it helps simplify the tax system, which gets us to the third objective, which was try to have a more simple tax system.

I mean, depending on who you talk to, the complexity in the tax system is, you know, different states having their stamp duties and payroll taxes and so on, or it's the GST and what food is in and what food is out, and so on.

When it comes to simplifying the tax system, what should be the priorities there?

Yeah,

it's a really good question.

I think that there are a few dimensions of that.

One is, you know, one of the priorities the Treasurer mentioned was a single national economy.

We've got multiple jurisdictions in Australia.

We're a pretty small country population-wise, but we have a lot of different state and territory systems as well as the national system.

So, any opportunities there are to kind of harmonise the various state taxes

can really yield benefits in terms of simplicity.

I mean, I will say that one of the things that's happened over recent years is the process of putting in an income tax return for most people has become much simpler and much quicker because the ATO collects a whole lot of data.

And that means that for most people, you know, if you've got a fairly simple, you know, you've got a job and not much kind of particularly creative going on, it's pretty quick to do your tax return.

The opportunity is how can we make it quicker for business as well?

Are there opportunities to simplify the process at their end?

So they're the objectives and interesting to hear all of your ideas about where that should go.

The process from here I'm interested in your thoughts on.

The Treasurer has said no external tax review, no sort of Henry review approach.

This will all be done internally.

The government will check in with people like your good self who are sitting around the roundtable, but this will be a cabinet process.

Was that approach something the roundtable broadly agreed on, or do you think there should be some sort of review now?

Yeah, so I personally don't think that a review is the best step forward.

So I was very pleased to see that we're not going into a big long review process.

Often the reality of reviews is that they sort of kick the can down the road and sometimes that's necessary because there's a, you know, you've genuinely got to work out what the ideas are.

But here, a lot of work went into the process before the three days at the roundtable.

A lot of these ideas are well known.

Many of them were in the Henry Tax review.

So I don't think it's the case that there's a kind of a fact-finding mission that's needed at this point.

I think it's more about working out where are those areas where there's, you know, the strongest consensus around where the problems are.

And I think those principles help to distil that.

And then

to grapple with

the next level down in design choices and

for government to then think about what sort of, I don't know, a potential set of measures that might be pieces, that might be a package

that could be built up from here.

Now, in terms of the timeframe, just finally, you told the Roundtable that the longer we wait, the more ill-fitting our tax system is going to be and the harder this task gets.

Can tax reform wait until the next election?

Yeah, I think that there's

not everything is the same.

So some things are more urgent than others.

So one of the things I pointed to was we have an opportunity to

tax the highly profitable export of fossil fuels now.

That opportunity is not going to be around forever.

So the longer we delay redesigning our petroleum resource rent tax so that we actually raise some tax,

the greater the likelihood we're just going to miss the boat

and fossil fuels will dry up as they should,

but we will have lost the opportunity to tax those excess profits.

In other areas, I think that we need to think about this as something we're doing to prepare for the future we're going to reach in the next five, ten, fifteen years.

I think there is an opportunity to spend a little bit of time to build that public understanding around why we need to rebalance the personal income tax system.

I think that

we've all got a role to play in that.

I feel like Grattan has a role to play in that in terms of getting people to understand exactly what we really value about our services in this country and being realistic about what it's going to take to pay for them.

The journey, as the Prime Minister has called it, has certainly begun.

Aruna Sathanapalli, good to talk to you and I'm sure we'll come back to this conversation at various points along this journey.

Thanks so much.

My pleasure.

And if you have any thoughts for this podcast, drop us a line: insiders at abc.net.au.

We'll be back in your feed same time next week.

Politics now with PK back on Monday.

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Bye for now.

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