Taxing Your Children’s Future

How will you advise your children? Is staying in Australia their best option?

The top marginal rate of income tax plus Medicare levy in Australia is 47 per cent. That’s nearly half your earnings. And if you’re a service provider, that’s after GST comes off the top. Of course, for service providers input tax credits are typically low—say 2 to 3 per cent—and the GST component of your revenue, like the rest of it, is a function of your personal ability to command your fee in the market place. In functional economic reality, it’s a tax “off the top” of your gross earnings. That means that, as a service provider, you’re paying more than half your earnings in tax.

In the 2023 Intergenerational Report, at section 8.1, Australia’s Treasury reported (emphasis added):

Personal income tax receipts were forecast to be 11.7 per cent of GDP in 2022-23. This is projected to increase to 13.5 per cent by 2033-34 … personal income taxes are projected to grow as a share of GDP due to the progressive nature of personal income taxes and ongoing income and wages growth to be 14.3 per cent of GDP at the end of the projection period in 2062-63.

Increases in nominal wages result in increasing average personal tax rates over time as a higher proportion of an individual taxpayer’s income is paid at the highest marginal tax bracket applicable to them … often referred to as “bracket creep” …

In the absence of policy change, projections show increasing reliance on personal income tax. However, taxpayers have declined as a share of the total population since peaking in 2005-06 despite a similar employment-to-population ratio … This is the result of an increase in the effective tax-free threshold, driven by policy decisions to raise the threshold itself and associated increases to low income and age-related tax offsets, coupled with population ageing over the period.

As the population ages, the personal income tax base is projected to continue to narrow in line with the projected decline in workforce participation. Only 12 per cent of Australians aged 70 and over pay income tax and this age group now makes up 12.2 per cent of the total population. This age group is expected to increase to 18.1 per cent of the total population in 2062-63.

In other words, your children as income-tax payers will be a smaller proportion of the population. Their tax burden as workers is projected to increase (to 2063—which is as far as the projections go) to fund the incomes and care of an increasing proportion of the population who do not work and pay taxes. It’s only going to become more and more unsustainable, and more oppressive to those doing the work.

This does not take account of emigration. Australia’s income tax regime is uncompetitive in its region. High taxation motivates capable people to leave. Their potential contributions to tax revenue are thereby lost. Who will pay the taxes required to continue government spending at the present rate?

Top marginal income tax rates in a selection of countries in South-East Asia and Australasia are as follows:

Australia 47 per cent (including Medicare levy)

Indonesia 35 per cent

Malaysia 30 per cent

New Zealand 39 per cent

Philippines 35 per cent

Singapore 24 per cent

Thailand 35 per cent

Vietnam 35 per cent

If you look further afield, similarly more favourable regimes abound.

So, if you are young and capable, if you have been advised of the alternatives, and you are at a time of life when you are not committed by family ties to remain in Australia, why would you stay?

If you are a parent of a university student, what advice will you give? Assume your child is bright, capable and likely to become a successful professional. Will you fail to advise him or her of the opportunities that abound internationally? Will housing in Australia be within reach for your children? Will your children be able to afford to have children of their own? Continuing the past rates of taxation where the cost of living, and especially housing, has risen out of all proportion to what it was in the past, is a significant disincentive to couples wishing to start or enlarge a family. Most postpone it. Some never start. Where will they live? Where will they put the second child? The days of the suburban backyard have receded.

What is the moral basis for taking half of somebody’s hard-earned money? What is the difference between taxation and robbery? The difference—and the constitutional basis for taxation—is consent: the consent of the taxpayers, given through their representatives in Parliament. Without that consent, taxation is no better than extortion.

Consent, at least on a representative basis, elevates taxation above such cynicism. It allows those who contribute to determine, through representative government, the use to which their contributions will be put. Conversely, it makes those who elect governments responsible for the financial consequences of their decisions. The concept that taxation may only be exacted by consent through our representatives in Parliament is still essential to the theory of responsible government.

But the consent must be real. The consent theory was all very well when taxpayers made up the preponderance of voters. What happens as they diminish as a proportion of voters? I suggest that the effect is corrosive on our institutions. Voters cease to be personally responsible for financial consequences. This is a source of waste, extravagance and foolishness. In the ancient world, democracy died as plutocratic demagogues promised “bread and circuses” to the plebeian electorate. In the modern world, politicians are not often plutocrats. For their pork barrel they resort to the funds of the taxpayers.

What real consent is there to taxation when taxpayers are submerged in a sea of beneficiaries of the proverbial pork barrel? This problem will only increase as the proportion of income tax payers diminishes relative to the rest of the population, who do not experience the exhaustion of earning substantial incomes through long hours of exertion, nor the demoralising impact of being set back by large tax bills every time they get close to clearing their debts.

Taking half of somebody’s hard-earned money is immoral. Taking half of somebody’s income to give it away to people who did not work for it, in the hope that they will vote for the politicians delivering the largesse, is even more immoral.

I propose that nobody should have to pay more than 24 per cent income tax. A touch under one-quarter ought to be enough. Governments should be confined to that level of income tax revenue, and should learn to live within those means. The waste and the profligate spending of other people’s money—without genuine consent—must end.

If it does not end, there are alternatives. Capable people will increasingly get the message that they are being abused. We already know the phenomenon of the expat professional. They will leave this country in increasing numbers. The burden will fall on the ever-diminishing minority who remain.

Furthermore, a great deal of talent and enterprise will increasingly be lost to this country, diminishing the pool of outstanding performers in the professions, industry, government administration and, not least, political life. Are we going to be the clever country or the tall-poppy-cutting country?

It’s already getting too late for gradualism. An urgent sense of the problem is needed. The waste and the immoral largesse should stop now—because they are immoral, but also because they are making our country a land where effort is punished and laziness is rewarded, where people are paid not to work, and discouraged from trying to get ahead by their own energy and enterprise. The land of the tall poppy syndrome. The land of 47 per cent.

We should start from a position of principle: people should work for their own bread. Effort should retain its due return. Income tax should not exceed 24 per cent. We need a commitment to some limit of this kind.

Governments should learn to live within their means within that limit. They should learn under this discipline to set priorities. Many good things can be funded by governments—but we can have them all only at the price of stifling individual initiative and energy, only by binding our working population in chains and resentment.

Governments should be lean and efficient. They must learn to shed luxuries—things that might be desirable but that we cannot realistically afford. To preserve the incentive to work, we must flatten income tax rates and reverse the process of developing mendicant classes. To preserve the vitality of responsible government we must maintain the social and economic link between voting and taxpaying. That requires that we pay attention to the social consequences of government largesse and wind back the wholesale appropriation and redistribution of incomes that is now going on.

David Smallbone lives in Sydney