By Greg Jericho Wednesday 06 May 2015
Photo: Next Tuesday we get to see if Joe Hockey's abilities as a trustworthy economic guide have improved. (AAP: Daniel Munoz)
With the budget less than a week away, here's how the Government could reap billions in new revenue each year without targeting the poorest among us, writes Greg Jericho.
Oddly, in the week before the budget the talk about the Government's main economic policy document of the year has generally ignored the economy.
Whether the budget is in surplus or deficit and by how much is certainly important, but it rather gets overplayed. As Joe Hockey found to his detriment last year, the politics of the budget is often more about how that deficit or surplus is to be reached, rather than its overall size.
Last year Hockey's budget clearly hit the poorer harder than it did the wealthy, and the pressure for almost the past 12 months has been for the Government to redress that situation.
One significant reason the budget was viewed as unfair is that as more government welfare spending must axiomatically go to poorer households than wealthier ones, a Government that focuses only (or in the main) on broad spending cuts will invariably hit poorer households more than wealthier ones.
Subscribe to get The Drum delivered to your email twice a day, plus top news headlines and alerts on major breaking stories.It's why this year when talk comes to welfare and pensions it is more about targeting specific groups on welfare, rather than general cuts to everyone.
But as I have often noted, there is another side to the budget - that involving revenue.
One problem is that tax increases can hurt economic growth as much as spending cuts do.
In its paper "It's the revenue, stupid", the progressive think tank Australia Institute has looked at a number of ways in which revenue can be raised that will have minimal impact on growth. Crucially as well they are measures that pass the fairness test.
The Australia Institute's paper lists four main areas in which they believe revenue could be increased - superannuation, negative gearing, capital gains tax and a "Buffett rule" tax.
The big topic of discussion on tax this year has certainly been superannuation concessions. Currently the system is such that everyone pays 15 per cent tax on their superannuation contributions, except for those earning more than $300,000, who pay 30 per cent:
Income and superannuation tax rates
This means someone earning between $180,000 to $300,000 a year gets a taxation concession of 30 per cent for their super contributions (excluding Medicare levy and the deficit levy), compared to a concession of 17.5 per cent for someone earning between $37,000 and $80,000
For a bit of context, in the most recent taxation statistics released by the ATO last week, only 2.7 per cent of taxpayers in 2012-13 had a taxable income of more than $180,000.
The Australia Institute argues that as superannuation concessions should be targeted so that they encourage lower to median income earners, it suggests lowering the tax on superannuation contribution to 0 per cent for those earning less than $37,000; for those on $37,001 to $80,000 it would be 10 per cent; for $80,001 to $180,000 it would be 22 per cent; and for those earning more than $180,000 a tax of 45 per cent would apply.
In effect this would remove all concessions for superannuation for those in the top income tax bracket.
The Australia Institute estimates this could raise about $9.6 billion a year in extra revenue, and 60 per cent of households would actually be better off:
Impact of proposed superannuation changes by household income decile
With respect to negative gearing - another issue that has been hotly debated in the run up to the budget - the Australia Institute notes that more than a third of the negative gearing rebates go to households in the richest 10 per cent, and more than half go to the richest 20 per cent:
The distribution of benefits from the discount on capital gains tax is even more weighted to the wealthy.
Since 1999, a 50 per cent discount on CGT is available if the asset was held for more than 12 months. This meant that only half the capital gain on an investment property was subject to tax.
According to the Australia Institute, nearly three quarters of the total of all CGT discounts goes to households in the richest 10 per cent. Those in the bottom 50 per cent account for only 7.4 per cent.
The Australia Institute proposes to end the CGT discount, and allow negative gearing only for newly built housing, for it to only be deductible for 10 years after purchase of new housing, and to grandfather existing negative gearing for five years.
It estimates these changes would raise about $7.5 billion a year.
The last of The Australia Institute's four major proposals is to enact a "Buffet rule" of income tax. This would place a floor on the amount of tax a high income earner (in this case someone on $300,000 or more) would have to pay.
The Institute noted that the minimum average income tax someone earning $300,000 per year with no deductions would pay is 36 per cent. They thus propose setting the Buffet rule tax rate just below this rate - at 35 per cent.
In effect this would stop those high income earners from being able to reduce their income to such a point that they would actually pay little or no tax - such as the 55 millionaires who in 2012-13 paid no income tax.
The Institute estimates the Buffet rule could raise an extra $2.5 billion a year.
All up these proposals would raise $19.5 billion a year - almost half the projected deficit for 2014-15 of $40.4 billion.
Those hit hardest would be the wealthiest - with $14.1 billion of the total (72.5 per cent) coming from households in the top 10 per cent, and 86 per cent of the revenue from households in the richest 20 per cent:
Income distribution of budget savings of four modelled policies
So next Tuesday will bring talk of surplus and deficits. The key question will be what impact it has on people's lives. After two decades of being told a budget surplus is a good and necessary thing, voters are generally predisposed towards a government attempting to either keep a budget in surplus, or move to it from deficit.
But last year Hockey was unable to convince voters his path back to a surplus was one they wished to walk. Next Tuesday we get to see if Hockey's abilities as a trustworthy economic guide have improved.
Greg Jericho writes weekly for The Drum.
