Tax
Sep 24th 2003, 12:00 pm
#1
Thread Starter
Joined: Aug 2003
Posts: 11,149
Tax
It's time to get serious about tax reform
September 25, 2003
Restructuring of tax rates was always considered an important part of the GST, writes Gregory Hywood.
John Stone never liked goods and services taxes. It was not that the rambunctious head of the Treasury during the Fraser and Hawke years was opposed to shifting the tax burden from income to spending. In theory it was sound policy.
Rather, Stone's view was that a GST would become so lucrative that it would be to the detriment of good government. Replete with revenue, governments would do what they always do - spend it, often wastefully.
Last week's report in The Age showing that the Commonwealth-state tax take soared last year merely underlined the point Stone was making 20 years ago when consumption tax proposals first entered the public policy debate.
Taxes in 2002-03 were up 8.8 per cent on the previous year - a massive $19 billion. The Commonwealth's GST take was up just over 8 per cent while personal income tax rose 8.6 per cent .
Take the fact that household incomes rose 3.5 per cent, not even half the growth in personal taxes, and it is clear that government is taking an ever-increasing chunk of people's pay packets.
Peter Costello rightfully pointed to huge state tax increases - on land, property, motor vehicles, financial transactions.
But with the Commonwealth enjoying a similar windfall, the question is where to now.
There was immediate speculation of a pre-election tax cut, and the suggestion that the heat could come off cost control to fund some new programs. But it is time the Government was put under pressure to deliver something more than handing back money it should not have taken. The best way of doing so is not just a tax cut but a new round of tax reform, including, as the Tax Office signalled this week, renewed attention to cracking down on the cash economy.
While it took risks with the GST . . . the Government's third-term agenda has been shy on reform.
While it took risks with the GST in its second term, the Government's third-term agenda has been shy on reform. Now the coalition has a unique opportunity to enact what was always integral to the introduction of a consumption tax but has never been delivered - the reduction of the top marginal tax rate to a competitive international level.
The Prime Minister wants it. "Our top marginal rate is much too high and it cuts in at too low a level," he said earlier this year.
The Australian personal income tax system is based on relatively high tax-free thresholds and high marginal rates. It is equitable but builds in strong disincentives at higher incomes. The top marginal rate cuts in at $62,500, at 1.3 times average income. Even if the Government had not been prevented from raising the threshold to $75,000 by the Senate, the top rate would begin at a mere 1.6 times average income.
This compares with a 39.1 per cent top rate in the US, beginning at around $400,000. And while most Americans have state and local incomes taxes that can push the top rate as high as Australia's, these imposts cut in at much higher incomes and are deductible from their federal taxes. Moreover, interest on home mortgages is tax deductible.
In Britain, the highest marginal rate of 40 per cent starts just below $80,000, and again there is mortgage relief built into the tax system.
Equate Australia's superannuation guarantee contribution with the US and British social security levies, and the 20 per cent of Australians paying the top rate are significantly more heavily taxed.
The benefits of lower marginal rates are straightforward. Individually, they provide incentive for strong performance in the workplace.
Nationally, they help in the international competition for talent.
But the politics are fraught.
Just lowering the rate to 39 per cent would cost around $5 billion. But that would give higher income earners massive tax cuts and those on lower incomes nothing.
Incentive is a dirty word in politics these days. High-profile corporate collapses, with failed managements enjoying generous options and bonuses, have not played well.
Any reduction in the top rate would have to be rolled into significant benefits accruing to lower and middle earners. That's expensive.
And with military spending surging, the costs of an ageing population growing, and the revenue hole caused by removing the indexation of fuel excise, the Government will likely beg off.
It can preach caution about the latest tax figures. The GST is surging because people are borrowing more. That won't continue indefinitely. The crackdown on avoidance partially explains why income taxes are up. Again, that is not forever.
The irony is that the economy is only able to deliver the Government its windfall because of the economic changes of the past 20 years. Can the Government claim it is working as hard now to deliver efficiencies that can be translated into a lower tax burden?
The Howard Government is not profligate as governments go. It can point to federal expenses falling as a proportion of the total economy. It has retired government debt . But strong economic growth and asset sales have helped.
Like all governments, it has been more effective at raising revenue than reining in spending. Which is why since 1967 the proportion of the economy made up of taxes has increased from 23 per cent to 31 per cent. This Government has not substantially reversed that trend.
John Stone made an important point about consumption taxes and the lack of focus that easy revenue can produce. Having introduced the GST, it is up to this Government to prove him wrong.
September 25, 2003
Restructuring of tax rates was always considered an important part of the GST, writes Gregory Hywood.
John Stone never liked goods and services taxes. It was not that the rambunctious head of the Treasury during the Fraser and Hawke years was opposed to shifting the tax burden from income to spending. In theory it was sound policy.
Rather, Stone's view was that a GST would become so lucrative that it would be to the detriment of good government. Replete with revenue, governments would do what they always do - spend it, often wastefully.
Last week's report in The Age showing that the Commonwealth-state tax take soared last year merely underlined the point Stone was making 20 years ago when consumption tax proposals first entered the public policy debate.
Taxes in 2002-03 were up 8.8 per cent on the previous year - a massive $19 billion. The Commonwealth's GST take was up just over 8 per cent while personal income tax rose 8.6 per cent .
Take the fact that household incomes rose 3.5 per cent, not even half the growth in personal taxes, and it is clear that government is taking an ever-increasing chunk of people's pay packets.
Peter Costello rightfully pointed to huge state tax increases - on land, property, motor vehicles, financial transactions.
But with the Commonwealth enjoying a similar windfall, the question is where to now.
There was immediate speculation of a pre-election tax cut, and the suggestion that the heat could come off cost control to fund some new programs. But it is time the Government was put under pressure to deliver something more than handing back money it should not have taken. The best way of doing so is not just a tax cut but a new round of tax reform, including, as the Tax Office signalled this week, renewed attention to cracking down on the cash economy.
While it took risks with the GST . . . the Government's third-term agenda has been shy on reform.
While it took risks with the GST in its second term, the Government's third-term agenda has been shy on reform. Now the coalition has a unique opportunity to enact what was always integral to the introduction of a consumption tax but has never been delivered - the reduction of the top marginal tax rate to a competitive international level.
The Prime Minister wants it. "Our top marginal rate is much too high and it cuts in at too low a level," he said earlier this year.
The Australian personal income tax system is based on relatively high tax-free thresholds and high marginal rates. It is equitable but builds in strong disincentives at higher incomes. The top marginal rate cuts in at $62,500, at 1.3 times average income. Even if the Government had not been prevented from raising the threshold to $75,000 by the Senate, the top rate would begin at a mere 1.6 times average income.
This compares with a 39.1 per cent top rate in the US, beginning at around $400,000. And while most Americans have state and local incomes taxes that can push the top rate as high as Australia's, these imposts cut in at much higher incomes and are deductible from their federal taxes. Moreover, interest on home mortgages is tax deductible.
In Britain, the highest marginal rate of 40 per cent starts just below $80,000, and again there is mortgage relief built into the tax system.
Equate Australia's superannuation guarantee contribution with the US and British social security levies, and the 20 per cent of Australians paying the top rate are significantly more heavily taxed.
The benefits of lower marginal rates are straightforward. Individually, they provide incentive for strong performance in the workplace.
Nationally, they help in the international competition for talent.
But the politics are fraught.
Just lowering the rate to 39 per cent would cost around $5 billion. But that would give higher income earners massive tax cuts and those on lower incomes nothing.
Incentive is a dirty word in politics these days. High-profile corporate collapses, with failed managements enjoying generous options and bonuses, have not played well.
Any reduction in the top rate would have to be rolled into significant benefits accruing to lower and middle earners. That's expensive.
And with military spending surging, the costs of an ageing population growing, and the revenue hole caused by removing the indexation of fuel excise, the Government will likely beg off.
It can preach caution about the latest tax figures. The GST is surging because people are borrowing more. That won't continue indefinitely. The crackdown on avoidance partially explains why income taxes are up. Again, that is not forever.
The irony is that the economy is only able to deliver the Government its windfall because of the economic changes of the past 20 years. Can the Government claim it is working as hard now to deliver efficiencies that can be translated into a lower tax burden?
The Howard Government is not profligate as governments go. It can point to federal expenses falling as a proportion of the total economy. It has retired government debt . But strong economic growth and asset sales have helped.
Like all governments, it has been more effective at raising revenue than reining in spending. Which is why since 1967 the proportion of the economy made up of taxes has increased from 23 per cent to 31 per cent. This Government has not substantially reversed that trend.
John Stone made an important point about consumption taxes and the lack of focus that easy revenue can produce. Having introduced the GST, it is up to this Government to prove him wrong.
Sep 24th 2003, 12:36 pm
#2
Joined: Aug 2003
Posts: 8,147
couldnt be arsed to read that lot!!
can yougive us a summary/abridged version of the salient points bondipom?
ta
sue:scared:
can yougive us a summary/abridged version of the salient points bondipom?
ta
sue:scared:
Sep 24th 2003, 12:41 pm
#3
Thread Starter
Joined: Aug 2003
Posts: 11,149
Originally posted by tiredwithtwins
couldnt be arsed to read that lot!!
can yougive us a summary/abridged version of the salient points bondipom?
ta
sue:scared:
couldnt be arsed to read that lot!!
can yougive us a summary/abridged version of the salient points bondipom?
ta
sue:scared:
The Australian personal income tax system is based on relatively high tax-free thresholds and high marginal rates. It is equitable but builds in strong disincentives at higher incomes. The top marginal rate cuts in at $62,500, at 1.3 times average income. Even if the Government had not been prevented from raising the threshold to $75,000 by the Senate, the top rate would begin at a mere 1.6 times average income.
This compares with a 39.1 per cent top rate in the US, beginning at around $400,000. And while most Americans have state and local incomes taxes that can push the top rate as high as Australia's, these imposts cut in at much higher incomes and are deductible from their federal taxes. Moreover, interest on home mortgages is tax deductible.
In Britain, the highest marginal rate of 40 per cent starts just below $80,000, and again there is mortgage relief built into the tax system.
Equate Australia's superannuation guarantee contribution with the US and British social security levies, and the 20 per cent of Australians paying the top rate are significantly more heavily taxed.
Sep 24th 2003, 12:44 pm
#4
Joined: Aug 2003
Posts: 8,147
Originally posted by bondipom
Here is a comparison of Oz/UK. I can't believe the tax thresholds aren't indexed with inflation. That means an effective tax increase very year.
The Australian personal income tax system is based on relatively high tax-free thresholds and high marginal rates. It is equitable but builds in strong disincentives at higher incomes. The top marginal rate cuts in at $62,500, at 1.3 times average income. Even if the Government had not been prevented from raising the threshold to $75,000 by the Senate, the top rate would begin at a mere 1.6 times average income.
This compares with a 39.1 per cent top rate in the US, beginning at around $400,000. And while most Americans have state and local incomes taxes that can push the top rate as high as Australia's, these imposts cut in at much higher incomes and are deductible from their federal taxes. Moreover, interest on home mortgages is tax deductible.
In Britain, the highest marginal rate of 40 per cent starts just below $80,000, and again there is mortgage relief built into the tax system.
Equate Australia's superannuation guarantee contribution with the US and British social security levies, and the 20 per cent of Australians paying the top rate are significantly more heavily taxed.
Here is a comparison of Oz/UK. I can't believe the tax thresholds aren't indexed with inflation. That means an effective tax increase very year.
The Australian personal income tax system is based on relatively high tax-free thresholds and high marginal rates. It is equitable but builds in strong disincentives at higher incomes. The top marginal rate cuts in at $62,500, at 1.3 times average income. Even if the Government had not been prevented from raising the threshold to $75,000 by the Senate, the top rate would begin at a mere 1.6 times average income.
This compares with a 39.1 per cent top rate in the US, beginning at around $400,000. And while most Americans have state and local incomes taxes that can push the top rate as high as Australia's, these imposts cut in at much higher incomes and are deductible from their federal taxes. Moreover, interest on home mortgages is tax deductible.
In Britain, the highest marginal rate of 40 per cent starts just below $80,000, and again there is mortgage relief built into the tax system.
Equate Australia's superannuation guarantee contribution with the US and British social security levies, and the 20 per cent of Australians paying the top rate are significantly more heavily taxed.
so if I was a higher rate tax payer I would be better off in Oz?
Sep 24th 2003, 12:48 pm
#5
Thread Starter
Joined: Aug 2003
Posts: 11,149
Originally posted by tiredwithtwins
so if I was a higher rate tax payer I would be better off in Oz?
so if I was a higher rate tax payer I would be better off in Oz?
Sep 24th 2003, 12:49 pm
#6
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Joined: Feb 2003
Location: Brisvegas
Posts: 3,506
Australia is a very heavy taxing nation, especially for those on 'high' incomes who end up paying 48% plus Medicare Levy bringing it to almost half of marginal income. And where do the taxes go? Well many UK based on here say they can see where it goes (by which I think they mean the streets are cleaner). Usual big spends for governments are education (lot of private here and at State lots of parents paying for all sorts including stationery); defence (v. small force compared to say UK), socail security benefits (presume similar spending here to UK) and healthcare (we all know how much that costs us). So where is all this high taxation going?
Sep 24th 2003, 12:53 pm
#7
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Joined: Aug 2003
Posts: 11,149
A lot of people here use investment properties to reduce their taxable income. They borrow against the investment property and write the interest off against tax.
Sep 24th 2003, 2:18 pm
#9
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Joined: Sep 2003
Location: Maroubra
Posts: 753
the tax burden was listed in the paper last week at being 60c in the dollar, taking into account direct/indirect taxation. Its one of the highest in the world.
These folk with their tax lowering investment properties are also in a awy deluding themselves. the scheme is calle dnegative gearing and its whole ethos is to run a property at a loss, claiming back the tax in doing so. Of course this is fine whilst the property market is on the up, but now unit prices are falling it looks a dodgy premise
These folk with their tax lowering investment properties are also in a awy deluding themselves. the scheme is calle dnegative gearing and its whole ethos is to run a property at a loss, claiming back the tax in doing so. Of course this is fine whilst the property market is on the up, but now unit prices are falling it looks a dodgy premise
Sep 24th 2003, 2:30 pm
#10
Thread Starter
Joined: Aug 2003
Posts: 11,149
Originally posted by RichS
the tax burden was listed in the paper last week at being 60c in the dollar, taking into account direct/indirect taxation. Its one of the highest in the world.
These folk with their tax lowering investment properties are also in a awy deluding themselves. the scheme is calle dnegative gearing and its whole ethos is to run a property at a loss, claiming back the tax in doing so. Of course this is fine whilst the property market is on the up, but now unit prices are falling it looks a dodgy premise
the tax burden was listed in the paper last week at being 60c in the dollar, taking into account direct/indirect taxation. Its one of the highest in the world.
These folk with their tax lowering investment properties are also in a awy deluding themselves. the scheme is calle dnegative gearing and its whole ethos is to run a property at a loss, claiming back the tax in doing so. Of course this is fine whilst the property market is on the up, but now unit prices are falling it looks a dodgy premise
Sep 24th 2003, 2:42 pm
#11
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Joined: Jan 2003
Location: Brisbane
Posts: 1,576
Originally posted by bondipom
Even if the market was rising and they sold out the investor will get hit with CGT. The bubble is so bloated now that a gentle release is almost impossible. There will be a large impact on the economy if the bubble bursts. The government is placing pressure on the Reserve Bank of Australia not to raise rates and is placing the RBA's independence at risk.
Even if the market was rising and they sold out the investor will get hit with CGT. The bubble is so bloated now that a gentle release is almost impossible. There will be a large impact on the economy if the bubble bursts. The government is placing pressure on the Reserve Bank of Australia not to raise rates and is placing the RBA's independence at risk.
This is the best way to make money down here if you can swing it.
Sep 25th 2003, 3:20 am
#12
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Joined: May 2003
Posts: 33
Originally posted by jayr
Australia is a very heavy taxing nation, especially for those on 'high' incomes who end up paying 48% plus Medicare Levy bringing it to almost half of marginal income. And where do the taxes go? Well many UK based on here say they can see where it goes (by which I think they mean the streets are cleaner). Usual big spends for governments are education (lot of private here and at State lots of parents paying for all sorts including stationery); defence (v. small force compared to say UK), socail security benefits (presume similar spending here to UK) and healthcare (we all know how much that costs us). So where is all this high taxation going?
Australia is a very heavy taxing nation, especially for those on 'high' incomes who end up paying 48% plus Medicare Levy bringing it to almost half of marginal income. And where do the taxes go? Well many UK based on here say they can see where it goes (by which I think they mean the streets are cleaner). Usual big spends for governments are education (lot of private here and at State lots of parents paying for all sorts including stationery); defence (v. small force compared to say UK), socail security benefits (presume similar spending here to UK) and healthcare (we all know how much that costs us). So where is all this high taxation going?
Sep 25th 2003, 4:38 am
#13
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Joined: Aug 2003
Location: Hot sunny Cairns !
Posts: 1,012
Small point - no mortgage tax relief here in the Uk anymore as far as I'm aware
