A Real Robin Hood Budget
Labor’s Budget Stole From the Young and Gave to the Rich. Here’s How to Really Fix Generational Inequality.
The Federal Government claimed that its controversial recent budget would tackle intergenerational inequity. Few would disagree that wealth inequality is a massive problem. Most people under the age of 35 struggle to purchase a home and if they do, are burdened with a crippling mortgage debt.
While the Government may have been well-intentioned, the budget completely failed in its claimed goals. A survey by millennial podcast, What the Flux, found that only 4% of respondents expect to be personally better off as a result of the budget, while 60% of millennials said older people were the big winners.
Young people aren’t fools. They know when they’re being played. And played they were.
Virtually all the tax benefits older Australians enjoy remain intact. Superannuation, a stealth transfer of $50b from young to old was untouched. The primary residence, regardless of its value, is never taxed. Older people can continue to negatively gear their investment properties. Young Aussie tradies trying their luck on crypto or someone quitting their corporate job to have a crack at a startup? That will be up to 47% tax, thanks.
The kicker? A complete unwillingness to rein in spending (especially on public servants and healthcare) means that the gross debt, according to the IPA, has already hit $1.6 trillion – that is a debt bomb being passed on from wealthy older people to younger people who have to pay the massive interest bill or have their standard of living further eroded by inflation. Even with all these great new taxes, the budget deficit is still forecast to be around $30b this year.
If the Labor Government wanted to bridge the intergenerational gap they’d be running a balanced budget as well as properly fixing the tax system, not fiddling with a few irrelevant cases like CGT which disproportionately impact younger people (due to grandfathering of existing assets).
So what could be done to fix the inequity? There needs to be serious (and some unpopular) changes.
Let’s go.
Income Tax – Australia is one of the highest income taxing countries in the world, our top tax rate of 47% kicks in at $190,000. In 1983, the top tax rate (of 60%) applied at $35,000 – but back then the median house price was $60,000. So the top tax rate was 58% of the median capital city house price.
The current median house price is $1m, if we kept the top tax level consistent in real terms, the top tax rate wouldn’t kick in until $580,000.
But there’s a better way to solve this. This is reducing the top tax bracket for income tax to 30%. Make no mistake, this is a massive policy shift to take the burden away from middle class income earners and it would cost up to $30b annually in forgone tax revenue. However, the real number would almost certainly be less because companies and individuals would now be aligned and there would be no need to use tax structures and trusts to split and divert income.
CGT - Reducing capital gains tax to 20% on business sales (which is roughly average by international standards) would notionally cost around $2b (this is compared to the 30-47% rate being applied from next year). However, the lower rate would also increase the willingness of investors to sell business assets rather than hoard them, so the actual net budget cost is likely far less. The higher, indexed CGT rate on properties would remain.
Reducing CGT on businesses would increase investment and employment, likely leading to higher income tax receipts. There’s a reason why almost every country in the world taxes capital at a far lower rate than income – it encourages investment in productive assets that grow the economy and employment. Otherwise, that capital will simply create jobs in other countries that don’t punitively punish investment.
These two major structural tax changes will cost up to $32b annually (albeit less in reality). But we also want to start repaying our massive debts, so we really need to find $70b in savings. Sounds like a lot.
How can we do it?
Superannuation – The greatest rort of them all. Paul Keating introduced superannuation to purportedly ease the burden of the aged pension. It has been a total failure.
Back in 1992, around 77% of retired people drew a pension, now 67% of older Australians receive the pension. This is not a big change. As a result the pension savings are only around $10b annually.
(The Labor Party however benefits from the side effect of booming industry super funds pumping money back into its coffers, but I digress.)
While superannuation saves $10b annually, the cost of forgone tax revenue from superannuation is more than $50b. Economically speaking, superannuation has been a massive disaster, saving rich people money while diverting billions of dollars into index hugging fund managers and super funds.
Super contributions are currently taxed at only 15% when paid by employers or individuals. If we increased that rate to 25% (still below the new 30% income tax level) this would lead to around $15b in savings, less higher amounts needed for the Low Income Super Tax Offset, so let’s say $12b.
If we then increased the tax rate for earnings within super from 15% to 25% (still below income tax level) this would save another $7b. It makes absolutely no sense that wealthier retirees pay a far lower tax rate than 30 year olds who can’t afford to buy a house. The notion that older people should pay less tax simply because they are old, even though they’re also rich, is completely baffling.
These equitable changes save $19b annually while still allowing superannuation to remain slightly concessionary to the (highly reduced) income tax rate.
GST – The Howard Government introduced the GST in 2000 at a rate of 10% but excluded fresh food and education. This was a political folly which still inflicts significant economic pain. A small increase to the GST to 12.5% and finally applying 5% GST on fresh food and education would raise around $20b. This change would mostly be funded by wealthier people who spend more, while the lower income tax rates benefit all Australians. This would also bring Australia more into line with most western countries which run higher VATs and lower income tax levels.
SRL – The absurd train line in Victoria that no one wants is being funded to the tune of $3.8b by the Federal Government this year (and this cash furnace will continue to increase). The SRL, like the rest of the disgraced Victorian Government’s Big Build, is a money laundering scheme for the CFMEU. Easiest. Saving. Ever.
Primary Residence – The primary residence is, strangely, never taxed. Even if you paid $10m for a Point Piper mansion and sold it a decade later for $75m you’d pay nothing (and this does actually happen). This is the greatest uber rich tax break ever. If you imposed a tax of say 5% on homes selling for more than $2m and 10% on homes above $5m you’d raise around $12b in revenue annually. Less than 10% of houses would be taxed under this policy.
This relatively low impost would help fund the reduction in CGT (it’s completely nonsensical that productive assets which employ people are taxed at 47% but unproductive mansions are taxed at 0%).
Public Service – The public service costs Australia $250b a year – a large chunk of this cost is essential workers, but not all of it. There’s also a bunch of less critical workers. There is roughly 7% churn each year across the public service – let’s say we didn’t replace (non essential) any workers for two years that would reduce the public service by around 10% and save around $12.5b annually.
Note, we’re not firing anyone but instead, just not replacing people who choose to retire or move to the private sector.
NDIS – The $42b NDIS is one of the biggest areas of taxpayer expenditure, ranging from helping genuinely disabled people to being a cesspit of fraud, waste and corruption. It’s basically impossible to fix and needs to be torn down so we can direct funds to those who really need it. Conservatively $10b in savings, but likely far more.
Fixing the Pension Means Test – Another great rort of the tax system is ignoring the value of a home when determining pension eligibility. You can live in a $20m house and qualify for the pension (and cream from hardworking taxpayers $45,000 annually). Around 15% of people receiving the pension fall within the wealthiest 20% of Australians – if we capped the residence exclusion to homes worth less than $750,000, we’d save upwards of $2b.
Offshore Resources – The Federal Government, courtesy of some highly effective lobbying, levies the Petroleum Resource Rent Tax (PRRT) based on profits generated by natural gas producers. The States require mining companies to pay royalties based on revenue (or volume) for their schemes. As a result, the States (mostly WA and Queensland) collect around $20b annually and the Federal Government only $2b from (mostly US owned) offshore gas producers.
If the Federal Government taxed based on revenue it would (very roughly) raise around $5b annually (albeit this amount fluctuates significantly based on gas prices). While PRRT advocates have argued for years that the high upfront capital costs mean that a revenue based tax isn’t workable, that didn’t seem to stop the US from charging a revenue-based tax for offshore gas producers.
First Home Owner Grants – Technically these are paid for by the States, but given the States are mostly funded by the Feds this is fair game. Let’s remove these horrific policies which bid up the cost of housing and act as a payment to home sellers (rather than home buyers) and save another $2b.
AUKUS – A bilateral disgrace, Australia spends upwards of $6b annually (and this massively increases over the next decade) buying nuclear-powered Virginia-class and SSN-AUKUS submarines from the US. We could instead purchase Japanese Taigei-class submarines (equipped with lithium-ion batteries). While not as optimal as nuclear subs (which can stay submerged indefinitely), they are fit for purpose and would be delivered far quicker, saving at least $5b annually.
That’s $72b in savings/higher revenue and $32b in reduced taxes for a net improvement of $40b annually. The current budget deficit is $28.5b based on recent data, so these changes would likely lead to strong surplus of at least $12b.
My numbers are rough but directionally correct with a decent margin of safety. It’s clear that we could massively reduce income tax and capital gains tax on business sales by removing the ingrained rorts and wasteful spending which have become rusted to the core of the Australian economy.
Reducing income and capital gains taxes also abrogates the need to create exotic tax structures, while imposing a small tax on primary residences and slightly increasing the CGT allows for a far broader tax base.
How would this impact house prices? Well the primary residence tax would slightly dampen values, but this would likely be counteracted by the reduction in CGT.
Overnight, the Australian economy, which coincidentally is one of the worst performing globally despite the commodity boom, would be revitalised. We’d go from one of the most unfair tax systems to one which shifts the burden to the richest Australians. Instead of massively taxing regular wages, we’d tax wealth and consumption.
We’d no longer punish young people’s sweat and aspiration, but instead, reduce the tax offsets handed to people who can most afford it.
The Federal Government tried to be Robin Hood but ended up the Sheriff of Nottingham. This is how we can really improve it.