Young Aussies Don’t Own Shares Because Chalmers Takes Their Wages!
Stop the Steal
There can be no better example of how our tax system damages young people’s financial future than the argument this week between Treasurer Jim Chalmers and The Daily Aus podcast.
That argument centred on the percentage of young Aussies who currently own shares. Chalmers’ quoted Treasury numbers that report 10%, The Daily Aus used survey numbers that are closer to 20%.
To be fair, Chalmers is probably right. But the debate is a sideshow because the real question is this: why are aren’t all young Aussies able to invest in shares or other assets to grow their wealth?
And the answer is very simple. They have no money left to invest after the government extortionately taxes their wages. The tax rates on income in this country leave young people, and older middle-class earners, without any spare money to invest.
It is our ridiculously high income tax rates that cause the most damage to wage earners in Australia.
The top tax rate in Australia is 47 cents in every dollar once the Medicare tax is included, and it kicks in at $190,000. That may sound high to many Australian wage earners, especially younger ones. But it is less than twice the average full-time adult salary. Not that long ago, the top bracket started at three times the average.
Let’s compare it to some other countries. In the UK the top rate is 45c and it starts at more than three-times the average wage. In the US it’s 37c (although there can be some state taxes) and it starts at over US$600,000 which is over ten times the average. In Singapore it’s a maximum of 24c but you need to be making one million Singapore dollars! Even in NZ caps their rate at 39c and while it commences in at NZ$180,000 that’s still 2.6-times the average salary.
So, Australia has a higher top income tax rate that starts at a lower relative salary. As a result, Australia is much more reliant on income taxes than the average across the Organisation for Economic Cooperation and Development (OECD). In fact, Australia is close to twice as reliant! It feels confiscatory to work so hard and keep so little.
Consider that around ten percent of all workers are sitting at the 39c or more bracket, which is about 1.5 million Australians. That is far too many and most are certainly not wealthy.
Even worse, a person earning $60,000 is deep into a tax bracket taking 32 percent of every dollar they earn. This wage is significantly below the average, and in other countries people earning this relative equivalent would be in much lower brackets: UK at 20%, NZ at 17.5%, US at 12% (federal taxes), and Singapore at 7%.
The CGT debate is a huge straw man because the fundamental problem crushing young and middle class wage earners in Australia today is not the capital gains benefits. It is not even the negative gearing benefits that are distorting and elevating Australian house prices.
It is the inordinately high income tax rates that have been exacerbated by a lack of inflation indexing. And this in turn is further worsened by the increasing government spending that drives inflation even higher.
Inflation is a global problem, but the combo of excessive government spending and high income tax is a major cause of the current cost-of-living crisis amongst wage earners right now.
Increasing the quality of life of young Australians whilst also increasing productivity can both be simultaneously achieved via a significant reduction in income tax. Leave more money in the average wage earner’s pocket.
Of course, there will also need to be spending cuts to facilitate an income tax reduction. Other parts of the tax system will also need to be modified. Our GST is about half the average of the OECD, which is also why state-based payroll taxes still exist. But that is a discussion for another time.
Reducing income tax rates will leave young Australians with enough money to buy capital assets, hopefully including a primary residence as well as shares and other investments.
We should not be debating capital gains tax by arguing about whether 10% or 20% of young Australians will be impacted by it.
Rather, we want that debate to include the vast majority of young people, who will have the funds available to invest more purposefully for their own financial future. That requires income tax reform.
I am in total agreement that both income tax and capital gains tax (CGT) rules—both the current and proposed ones—need an urgent rethink. Income is overtaxed, and capital taxation as it stands leaves a lot of room for tax avoidance. Furthermore, the proposed new rules, as we all agree, will not lead to good systemic outcomes in either the short or long term. We are a country that needs to heavily invest in technology, infrastructure, and innovation to become more competitive and finally start capitalising (see what I did there?) on the opportunities in front of, or below, us—opportunities that go way beyond extracting and selling unprocessed resources or trading scarce, overpriced properties.
As a side note, the overly simplistic comparisons of income tax levels by country without comparing respective GST/VAT levels are not quite clean. For example, the GST is 20% in the UK and 15% in NZ. I am sure there is a large range of other topics to consider as well; in Germany, for instance, there is a rather high health insurance levy and compulsory unemployment risk contributions, which are not a thing in Australia, or at least the Medicare levy is very low in comparison.
Tax reform must be done holistically. This includes a shift from income to consumption tax and a significant reduction of carve-outs—in other words, gateways to tax rorts—while considering, through honest discussion, which services we want to provide efficiently to our nation's citizens and non-citizens to achieve budget surpluses again.