AFR, GENERIC, ATO Australian Taxation Office, tax, taxpayers, money, Government revenue, budget. Wednesday 18th December 2002S photo Louie Douvis / ldz ***AFR FIRST USE ONLY*** Photo: Louie DouvisIf it wasn’t for the massively disproportionate coverage of the “Big New Bank Tax”, early indications are that the nation would barely notice it and we could move on to pursuing genuine tax reform.
As Jacob Greber has reported, the market has reacted to the budget by reducing the banks’ cost of funds, apparently assuming the tax makes explicit the long implicit “too big to fail” guarantee. Wholesale funding costs for the big banks have fallen by between one and three basis points since the budget. [ A basis point is equivalent to 0.01 per cent.]
Let’s call it two points – that’s a third of the new 0.06 per cent tax. If shareholders have to absorb a third, they’ll barely notice – it would dint profits by about 1 per cent. Even subdued system growth should make up for it. If dividends are frozen at their present high level for a year, no harm will be done and we could all move on. (Disclosure: the Pascoe family super fund is overweight bank stocks.)
Customers wouldn’t feel the remaining third. Remember the tax is not on all the banks’ funding. What would an extra point or two do to loans compared with the banks’ much bigger regular rate movements? Stuff all.
Real estate investors have just worn increases of between 30 and 50 basis points. The banks thought nothing of withholding five points and more when the RBA has cut the cash rate.
And aside from all that, wholesale rates regularly move a few points in one direction or another for their own sweet reasons and capitalism doesn’t crash.
There is much more important business we should be concentrating on instead of being distracted by the government’s piecemeal filling of revenue potholes and the back-and-forth name calling.
Last week this space challenged the Big Five to offer an alternative better, fairer and politically possible way of raising a quick $1.6 billion or so. “Politically possible” is the hard bit, given the way the coalition as wedged itself on reform.
The banks failed to take up that challenge, too busy wiping away crocodile tears about passing on costs to customers. So here’s my answer, a step towards broader necessary reform that would solve the immediate problem and then some: Targeting inequality
Trim the capital gains tax discount a little from the present 50 per cent to a still very handsome 40 per cent.
Yes, some people would whinge, especially in the Liberal heartland, and particularly all those politicians with multiple investment properties. But: 40 per cent is still a very nice discount.It was one of the well-considered Henry Review recommendations.It could be sold as a measure that would reduce growing inequality, or even billed as a superior replacement for the deficit reduction levy.There’s no rational explanation for why it is 50 per cent, especially in such a low inflation environment. (Tell me again why a brickie pays twice as much tax on what he earns breaking his back as he does lazily speculating on the investment unit he’s building. No, don’t bother.)And, perhaps most importantly, it could be part of selling the “fairness” of and paying for further tax reform by broadening the GST.
Cutting to the chase, trimming the CGT discount would raise more money. Working off the budget revenue statement, the 50 per cent CGT discount will save individuals and trusts about $11.1 billion next financial year.
Simplifying things by assuming all CGT payers are in the top tax bracket (they’re not), make that a 40 per cent discount and the ATO would collect about $2.2 billion more. Over the four years of the budget papers, it would be an extra $9.5 billion, about 50 per cent more than the bank tax.
Too bad the coalition wasn’t game to try that change – it looks like the real estate investors/core Liberal voters still call the shots.
According to an Australia Institute study, Liberal electorates gain the most from the capital gains tax discount.
That’s hardly a surprise. Liberal electorates tend to be the wealthiest, the wealthy are much more likely to have the means to make capital gains, which in turn makes them wealthier again while paying lower tax rates on their investment income and so on in the cycle that is steadily increasing inequality.
Remember that for all the IPA/CIS/Murdoch emphasis on the high proportion of total income tax paid by the top decile, there’s little attention to the increasing proportion of wealth nonetheless held by that group. Wentworth benefits
The Australia Institute found that for the 2014-15 year, the electorate that gained the most from the CGT discount was none other than Malcolm Turnbull’s – Wentworth in Sydney’s Eastern suburbs. On average, every Wentworth tax payer received a benefit of $5,387 from the discount.
But of course not every Wentworth citizen had capital gains and paid CGT. Of those who did, the average benefit was $66,798. If the discount was reduced to 40 per cent, the average CGT-paying Wentworth elector would still have received a $53,438 benefit, but would have paid $13,360 more tax. Little wonder the Prime Minister likes the CGT discount just the way it is.
As for real estate, not trimming the CGT discount is one of the budget failures fingered by Professor Miranda Stewart. (Hers was the single highly rational voice on Monday’s Q&A). The ANU Crawford School for Public Policy professor thinks the budget’s many tweaks in the name of housing tax policy are unlikely to have much effect.
“It would be better to reform our income tax base along the lines of the Henry Review,” she writes. “It proposed a lower CGT discount of 40 per cent for investment income and gains (instead of increasing it to 60 per cent for some affordable housing!) and quarantining losses and expenses. This would put a ceiling on negative gearing and provide more consistent tax treatment of savings.”
If we had talented leadership with communication skills and credibility (an extremely big “if”), the way would be open to package a reduced CGT discount as part of making broader tax reform “fair”. And with more CGT, it would be easier to afford the necessary compensation for the poorest Australians when broadening the GST. Cleaning up rorts
At the same time, clean up some of our more obvious rorts, such as the salary packaging industry’s infamous novated lease lurk, and we’d be well on the way.
The CGT discount is one of our many “tax expenditures” – the money the Commonwealth foregoes by giving tax breaks and making exceptions. Excluding food from the GST, for example, will cost $7.2 billion next year. We are neither the highest or lowest taxing developed country, but we are the champions of tax expenditures.
The budget papers’ summary of the larger tax expenditures is lifted from the annual tax expenditures statement published in January. Just the biggest tax expenditure items, those worth more than $1 billion a year, totalled $150 billion for 2017-18, compared with the government’s expectation of actually raising $444 billion.
And by far the biggest “revenue foregone” item? The exemption for the main residence from CGT and the CGT discount are worth a total $63 billion. Ah, the politically sacred family home – also known as a tax haven.