To pay now, or pay later? Given the choice, many of us would choose the latter.
It’s easy to forget that all of us – if we’re lucky enough to live a long life – go through the same life stages.
We’re all former children, we were (and some younger readers might currently be) anxious about landing first jobs, we work our way up the career ladder and might raise families, and most of us end up retired at some point.
When we talk about intergenerational fairness, it’s common to pit one generation against another and focus on our immediate personal needs, wants and experiences. If we’re early in our careers and yet to get a foot into the housing market, we might be especially interested in policies that reduce income tax for lower-to-middle income earners and which bring house prices within reach. By contrast, many (often older) homeowners might believe they’ve worked hard to get to where they are and shouldn’t be “punished” for doing well with what they were given.
But what if we thought about tax across our own lifetimes? Would you prefer to pay more tax when you’re younger and trying to set yourself up? Or would you rather begin paying more once you’ve put in the hard yards and are relatively well set up?
Most people would agree that they’d prefer to be taxed more when they’re more comfortable financially. For most of us, that’s when we’re older.
Teal MP for Wentworth Allegra Spender points out that right now, a young worker earning $100,000 a year, all through wages, tends to pay far more tax compared to someone who earns the same amount of money through activities such as selling investment properties (which tends to require wealth to begin with and is more common among older Australians, many of whom have had more time to build up their investments).
A big chunk of what Spender will be proposing is based on the idea that we should lower the burden on young workers.
The young worker might pay about $20,788 in income tax while the older investor, who sells their property for a $100,000 profit after holding onto it for a year, might pay only $5788 in tax. That’s because the 50 per cent capital gains tax discount means the investor has to pay tax on only half of the profit they’ve pocketed.
It’s a similar story when it comes to superannuation: a retired Australian earning and withdrawing $100,000 a year from their super can end up paying less than half of the tax paid by a working Australian with identical income.
Of course, many people earn money through a combination of wages and investments. But there’s clearly a big difference between taxes on wages – which tend to disproportionately hit younger workers – and taxes on wealth and investments which tend to be concentrated among those who are relatively well-off and often older.
As Spender says, wealth is not a bad thing – and we shouldn’t necessarily punish those who have gone down the path of accumulating wealth to the point that they’re paying significantly more in tax than wage-earners.
But given Australia is more reliant on personal income tax to raise government revenue than most OECD countries, at least levelling the playing field is a sensible thing to do.
Grattan Institute chief executive Aruna Sathanapally last year argued there were several fixes.
The roughly 12 per cent of income we contribute to super is taxed at a discount rate of 15 per cent – and it’s tax-free to withdraw money from your nest egg once you hit retirement age. That’s meant to help Australians save for a decent retirement, but as Sathanapally points out, it has ended up turning our superannuation system into a bit of a “tax shelter”. One solution? Introducing at least a low tax rate on earnings from superannuation in retirement.
Reducing tax concessions such as the capital gains tax discount is also a clear area of reform. We know most of the benefits of this discount flow to the wealthiest (and generally older) Australians. By winding it back a bit, we can even the playing field between taxing wealth and income.
With an ageing population, it also makes sense to redirect where – or who – most of our tax is being collected from.
As pressure on health and aged care – which are disproportionately used by older Australians – grows, there’s an obvious need for us to spend more on these services and to make sure they’re properly staffed. How do we do this? By collecting more money from the people who are not only more likely to use these services and more likely to be in a position to be able to pay, but who are also less likely to be making the decision between whether they want to work.
There’s some debate about how effective lower income taxes are in encouraging people to work more hours, but it does have some impact on people’s willingness to work – and especially in keeping groups such as women in the workforce. Having more people willing to work, especially in areas such as health and aged care is crucial to avoid shortages in these essential services as demand increases from a rapidly ageing population.
Reducing income taxes is also a crucial part of bold tax reform. As Spender notes, the winning formula, historically, for big and successful tax changes, is to “give back” some of the increase in certain taxes – or introduction of new taxes – through lowering income taxes.
When former federal treasurer Peter Costello introduced the 10 per cent goods and services tax (GST) back in 2000, for example, he also ushered in significant personal income tax cuts.
Politically, it helps sweeten the deal for voters, many of whom benefit from a drop in income tax – even if, for some, it comes alongside an increase in other taxes.
Spender is gearing (not negatively) to release a white paper next month outlining concrete and fully costed changes to the tax system based on input from academics, businesses and everyday voters.
She doesn’t expect the government or opposition to just accept all the ideas, but she will be pushing them to respond with alternative ideas if not.
The main priorities of this white paper, Spender says, will be putting forward policies that don’t worsen the budget (that could mean sets of policies, some of which will reduce government revenue such as lower income taxes and some which will increase it such as lower tax concessions) and which can improve fairness and Australia’s productivity.
A big chunk of what Spender will be proposing is based on the idea that we should lower the burden on young workers and make sure things such as wealth are taxed more fairly.
As house prices drift further out of reach for many Australians, pressure grows to accommodate an ageing population and wealth becomes increasingly concentrated, it makes a lot of sense to make decisive changes to our tax system.
Delaying the stage in our lives when we pay the bulk of our taxes is a smart move. But actually making these tax changes? That’s something that should come sooner, not later.
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Millie Muroi is the economics writer at The Sydney Morning Herald and The Age. She was formerly an economics correspondent based in Canberra’s Press Gallery and the banking writer based in Sydney.Connect via X or email.
