Why common-sense tax reform is vital to Australia’s future

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Are you ready to unravel the complexities of tax reform and its potential impact on Australia's fiscal landscape? Together with my co-hosts of Investopoly Podcast, we're set to examine the advantages of GST reform as a fiscal policy tool for economic management and debt reduction, rather than relying solely on monetary policy. We'll discuss the potential benefits of increasing the GST rate for non-essential goods and services as well as shedding light on how this could result in a more balanced wealth distribution across the nation. 

As we venture further into the topic, we'll cast a lens on the economic disparities within Australia, and how these might be addressed through GST reform. We'll scrutinize the current economic landscape, the rising cost of living, and how a revised GST structure might alleviate the income tax burden for many Aussies. While the probability of such a reform is low, it's certainly worth discussing and could be a step towards a stronger Australian economy. So, join us as we compare, contrast, and consider the role of tax reform in redefining the future economy of Australia.

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Transcript

Speaker 0: 0:00

Hi, this is Stuart Weems and welcome to the Investopoly Podcast. My goal is to give you simple, easy to understand strategies, insights and tips to help you master the game of building wealth, and in this episode I'd like to talk about potential tax reform that the Australian Government can make. A few weeks ago, I recorded an episode where I talked about the limitations of monetary policy, that is, increasing interest rates as a means of tackling inflation, and I highlighted that only 37% of Australians have mortgages, so they're the only ones that are directly impacted by higher interest rates. Conversely, around 30% of Australians own their home without a mortgage and therefore benefit from higher interest rates because they enjoy more interest on their savings, which is kind of counterproductive in curtailing inflation. Whereas fiscal policy can be a more effective tool in not only managing the economy but also managing inflation, and fiscal policy refers to how the government spends taxation revenue to influence the economy. The strength really lies in its ability to specifically target different segments of the economy and various demographics through adjustment of either taxation or government spending, and this targeted approach can be more precise and more effective than the blunt instrument of monetary policy that is changing interest rates. So not only can fiscal policy be a really good tool to sort of manage those things and maybe in concert with the RBA, maybe both monetary and fiscal policy could work together. But not only will it be good for managing the economy, but of course we've also got to keep in the back of our mind that we've got a lot of debt to repay, and the federal government debt is on track to hit almost $1 trillion in the coming years, which is roughly about 40% of annual GDP. So it's on a small amount and to repay this debt. Obviously future governments will need to achieve significant surpluses in terms of government surpluses to be able to make those debt repayments.

Speaker 0: 2:08

So I thought it would be interesting to sort of explore what tax reform could the Australian government consider to certainly help with these two matters? And arguably the current tax system is outdated. It doesn't suit necessarily the current economy in 2023 2024. And we really want to have a tax system that is appropriate to the modern economy but also empowers government to manage the economy better, therefore not just left leaving it in the RBA's lap to deal with. As I said, they've only got one thing the RBA can change and that's interest rates and, as we've certainly experienced, it is a pretty blunt instrument.

Speaker 0: 2:47

The first idea that I wanted to discuss is to reform GST. Many developed economies have shifted from relying heavily on income tax to embracing a consumption tax like GST. However, australia currently receives about 12% of total tax revenue from GST and still 30% 9% from personal income taxes, and that's just too high. Consumption taxes offer various advantages over an income tax regime. Firstly, a consumption tax broadens the tax base because it taxes spending rather than income. So it minimizes taxpayers opportunities to either minimize or evade paying tax on their income, because ultimately, the only way they can avoid paying GST is not to spend any money, and of course, that's kind of counterproductive the whole point or one of the main drivers of people avoiding paying taxes so they've got more money to spend. It also enables governments to reduce or charge different rates of tax for essential goods while imposing higher rates on luxury items as well, so you can be a little bit more targeted on who is paying the tax and how much tax they're paying. Of course, the administering and consumption tax is relatively straightforward, especially given most Australians now pay for expenses using electronic payments and most businesses use cloud-based accounting systems that don't need a lot of sort of manual input and so forth, and there's a lot of software and apps and so forth to certainly help businesses implement a consumption tax regime, and so about 87% of all payments in Australia are now made electronically. So a consumption tax is relatively easy for business and also government to implement and manage. And finally, the other advantage of a consumption tax is by taxing incomes to a lesser extent, you allow more money to flow into the economy, and that's good for the economy. People can either spend that money, and that will stimulate the economy, or they can save and invest those monies, which again helps make a very robust economy and community.

Speaker 0: 4:58

So I think it's interesting to compare Australia's rate of GST to other developed economies, and Australia's sort of a little bit behind the eight ball in this. So in the UK their consumption tax rate is around 20%. In Europe it ranges between 19 and 21%. In Canada it ranges from 12 to 20%. However, the US doesn't have a federal consumption tax, although most states and other jurisdictions have levies and sales tax and they're normally around less than 10%. So US is the outlier, but certainly UK, canada and Europe certainly charge around about twice as much in terms of GST than Australia does, and so I think that there's two things that the government could consider to reform GST.

Speaker 0: 5:41

The first one is that for non-essential goods and services, to increase the rate of GST, and the benefit of that would be to tax those people that have capacity to spend money on luxury items, and so that's gonna raise tax revenue, but it's also gonna help ease consumer demand. Again, some people with mortgages are impacted by interest rates, but if they have a very high income also, they just keep spending, whereas the people with lower incomes, higher interest rates hurt them the most and they actually then have to start cutting back. So another way of sort of monitoring that part of the economy, or massaging that part of the economy, is to have a different GST rate depending on whether the good is an essential or non-essential good or service. The second idea could be just raise the GST rate across the board, so you could go from, say, 10% and increase it to maybe 12.5% or something like that, and that's going to obviously increase total GST revenue by 25%. I think I like the idea of having a different rate for non-essential goods. It certainly would help wealth equality, so equalize or enhance wealth equality, and that's kind of a big issue at the moment. I think you've got a cohort that is very sensitive to interest rates and in a bit of a world of pain, given such significant hikes by the RBA over the last year or so, and then there's a cohort that's completely unaffected by that. And I think wealth inequality is an issue most developed economies are dealing with, and having a different consumption tax regime could certainly help.

Speaker 0: 7:14

Which leads me nicely into the next idea, which is cutting income tax further. Now, from one July next year, one July 2024, the income tax rates in Australia will be flattened out and we will only have three marginal tax rates. So those earning between 18 and 45,000 will pay 21%, including Medicare. For earnings between 45,000 and 200,000, you'll pay 32%, including Medicare. And earnings over 200,000, you'll pay 47%, including Medicare. So that means the average rate of tax for someone on $200,000 is just under 28%. You know, on average that's what someone's gonna pay, I reckon, about $55,000 in income tax. So that's great. That will certainly ease the income tax burden.

Speaker 0: 8:03

But I would argue that the government needs to replace that tax with something else and something that might be a little bit fairer to taxpayers and also help them manage the economy. And so if they decide to, or embrace the idea to change or reform GST. One way that they could kind of sell that to the Australian communities to say we're going to do this to GST, but we're also going to make some changes to income tax. And one of the things that they could do is the highest marginal tax rate kicks in at 200,000. At the moment it's 180,000. So at least there's a small increase there. But I would argue that maybe they could flatten tax rates further. So that is slightly reduced, the rate of taxpayer will between 45 and 200,000. And then also increase the top marginal threshold as well. So maybe 200 to 50 to 300 and so forth. Again, flatting out what that's going to mean is you're going to entice people on high incomes to either save, invest or spend more, which is going to be good for the economy. If they do spend more, it's most likely going to be on luxury goods and then they will pay a higher rate of GST for those luxury goods. So hand in handsome reform GST as well as maybe find further income tax cuts might be worthwhile.

Speaker 0: 9:21

I've got a couple of other ideas I wanted to throw in there. I mean they're the main two. I think that need to occur. I think GST at 10% is a little bit outdated. But the next one I want to talk about was capping the main resume exemption.

Speaker 0: 9:34

Obviously, we know that on your family home you don't pay capital gains tax, so you've got a main residence exemption. You can nominate one property that you own that is your main residence and then, while you're occupying that property, if there's any change in value, that's tax free. We're all familiar with that. Perhaps that exemption should be capped. So my idea is that you know a very wealthy person that makes a $20 million gain on selling their home surely can afford to pay some tax, right? So maybe what the government could consider is introducing a really generous main residence exemption cap. Now, maybe it's two or $3 million, but what that will mean is that if you generate a gain in excess of that, that you can pay some level of tax and you still might be able to take advantage of the 50% CJT discount. So you still might be able to you know, not necessarily pay a lot of tax, but at least some, I think. And the other option you could consider is having a lifetime cap. So maybe you give people a $3 million lifetime cap on capital gains that they can make on their buying and selling their family home, and so for most Australians that would be enough to buy and sell a couple of properties through their lifetime. But if someone's using it as a way of tax effective way of building their own wealth, then at some point they might have to pay some tax.

Speaker 0: 10:51

And lastly, an inheritance tax is something to consider. Baby boomers are expected to pass on around about $220 billion a year of inheritance by 2050, which isn't too far away. So 30 years away, that's a fourfold increase over the next 30 years. A lot of countries that have an inheritance tax including the US, uk, japan and lots of Western European countries as well and I think Australia could consider bringing in some sort of inheritance tax and take a clip on the ticket of that wealth through transferring from generation to generation. And that's going to do a couple of things. It's going to raise some taxes, of course, and we need to do that to be able to repay government debt, but also it might help wealth equality as well.

Speaker 0: 11:37

If wealth is trapped in generations and untaxed, that can over many years. That can accentuate wealth inequality. It's not a good thing for the economy. I'm not a socialist, but just really thinking about making sure we've got an economy that's easily to manage in terms of managing inflation and the overall health of the economy. An inheritance tax could be brought in by establishing a high tax-free threshold. So, again, what you're not trying to do is tax the average Australian. But again, if I'm lucky enough to inherit $20 million from my parents, I won't. But if I was surely certainly in that situation, I'd be happy to pay a little bit of tax. Essentially it's a win-for-gain. Anyway, I'm sure my parents have worked hard for the money, but a lot of other developed countries have an inheritance tax Doesn't make it right, but what it does mean is that it's obviously got some merit and some common sense.

Speaker 0: 12:26

So what's the chances of these tax reforms even being considered or debated? Well, politicians in Australia have faced a lot of challenges when suggesting ambitious tax reform. For those that are old enough, they will remember John Husson's interview struggling to explain whether a birthday cake would attract GST in the early 90s, which ultimately led to his defeat in the 1993 federal election. Similarly, more recently, bill Shorten's proposal to increase Capricorn's tax and abolish negative gearing, I think greatly contributed to his election loss in the federal election in 2019. If we look to an example where a politician did it successfully John Howard that is. He capitalised on his political advantage he was popular at the time, called an early election in 1998, and was successfully introduced to the GST which was implemented in the year 2000. And so his success really came from really clear communications, so the voters understood why the reform was necessary and had the support for the public to sort of embrace that idea.

Speaker 0: 13:36

Unfortunately, you know, the tendency for politics these days tends to be focus on short term gains, and that makes it really difficult to have any sort of conversation around long term planning. A lot of this tax reform really needs to look on a time horizon of 10 plus years. Then it needs to be managed as a country. We need to be thinking very much longer term rather than even just months ahead. Sometimes that's how it feels like that's all politicians really think about, rather than even just full election terms. So what we really need is a political party with a really strong mandate that will then have the popularity and the influence to be able to set out a timeline like this and then really start a conversation around what sort of tax reform is meaningful to Australia and do we need in a modern economy.

Speaker 0: 14:24

Of course, that probably doesn't look like happening very soon, does it? So, just to wrap up, I think that there's some real great benefits on making sure we have a tax system that allows fiscal policy to manage the economy in concert with the RBA. So at the moment, all the heavy lifting is on the RBA's shoulders and they've only got one tool, which is interest rates to change in order to achieve that. And I think if we look at what's happened over the last year or so and where we are today, I think most of us will agree that it's a relatively ineffective tool. That is changing interest rates.

Speaker 0: 14:59

There's a large cohort in Australia that at the moment are hurting a lot because of those higher rates and also cost of living pressures, and then there's a cohort that just continue to go out and spend and enjoy cafes and entertainment and all those sorts of things, and that's not necessarily an effective outcome for Australia as a whole. So I thought it'd be good just to sort of talk about some of that tax reform. As I said, I think the chances of it happening are really low, but reforming GST and dangling the carot of reducing income tax further, I think is a really good step in that direction. Okay, that's it for me for this week, until next week. Bye for now.