Home Truths About Taxes

Perhaps I missed the fireworks, but apparently the new year will see a spirited debate on taxes — mostly about increasing them, of course.  Nothing, according to Malcolm Turnbull, PM, is off the table (although he did  seem coy about lower weekend penalty rates when quizzed while sipping what was undoubtedly a low-fat soy latte at a cafe in his Wentworth electorate). Are any of the current “reforms” things we could, should or are brave enough to do?

First, accept that we are a high-taxing country — primarily to support our welfare state, but also because of the immense cost of managing our vast continent, compared to costs in say Hong Kong, Singapore or Switzerland. Driving from Moscow to Madrid is only 200km more than Perth to Sydney.

Since the 1960s we have forgotten to have enough children to fill up this vast land. Now we are large, growing ever older, under-employed, over-educated and lazy to boot.  Our welfare state — replacing what our family or neighbours might once have done for each other — is here to stay.  There is no stronger proof of its permanence than the insistence of Turnbull and Treasurer Morrison that, no matter what tax reform occurs, no one will be worse off. Remember, when Malcolm Turnbull, PM, convened his economic summit, a key participant was the representative of the Australian Council of Social Services (ACOSS), strongly suggesting he sees compassion-industrial complex as being every bit as integral to the economy as labour, manufacturing and productive sectors of the economy.

The only true way no one can be worse off is if the pie (our economy) grows enough to enlarge everyone’s piece. For now, we just hope to sell more iron, coal, meat, milk and land (and lease our ports and power poles) to China, in exchange for a few mouthfuls of pie.  Were Australia playing chess, we would be exchanging our queen for a pawn and counting that as a winning coup.

When it comes to national expenditure, Malcolm Turnbull, PM, is the barber with the bald man for a customer: he needs to sound as if his is busy snipping away, but sees little expenditure that is obvious to cut.

So let’s see where three major suggested tax changes might take us:

1. Increase GST to 15%

Sounds good.  Those well-known companies that get around corporate taxes would have to pay GST.  Or would they?  If their sales here are all listed against home offices in Ireland, Singapore or Calathumpia, can we actually and practically collect GST in those locations? Can the accountants’ skills and talents for putting potential tax revenues beyond government’s reach ever be rendered impotent? History and human nature strongly argue that it cannot.

Meanwhile, a 15% GST would be a terrible blow to many small business.  That increase — a whopping 50% — will not be available for ploughing back into growing businesses. If, as NSW Premier Mike Baird proposes, we increase GST from 10% to 15%, we will hobble or bankrupt many small businesses and disable the engine both major political parties acknowledge drives our fragile economy.

2. Put capital-gains tax (CGT) on the family home

This seems a no-brainer.  The US does it (albeit with hefty deductions for renovations and improvements performed during the course of ownership).  It only affects families whose homes rise in value faster than inflation, and whose hasn’t recently?  Low-income earners who rent their homes are unaffected, unlike with a GST rise. And since investment properties already attract CGT, adding CGT to family homes shouldn’t decrease the stock of rental properties available. Indeed, it might actually increase it.

But wait!  A CGT on the family home would add insult to the injury that Mr Keating imposed on Australia’s residential property market in 1983, when he imposed CGT on investment properties. Whenever you tax housing more, you make it harder for first-home buyers to enter the market.  As anyone who has attended an auction knows, vendors only take prices they are prepared to accept.  If investor-vendors fail to achieve the selling prices, well, they seek they won’t sell.  And they factor into that price any CGT they will have to pay. In the longer term, adding CGT to family homes would likely raise the cost of getting on the property ladder.  Over time, more Australians would be forced to remain lifelong renters.

If equality, civility, workplace productivity and national prosperity all depend to some degree on home ownership, do we really want to go from a nation of owners to a nation of renters?

3. Tax superannuation more

Compulsory superannuation has, apparently, so far failed in its objective, that being to wean older Australians off the teat of the pension.  Yet, some of us — older politicians and public servants and private executives in schemes linked to their salaries — have done very well out of it and sit on piles of cash.

But over-generous superannuation schemes are mostly a thing of the past.  Future Aussie generations will retire with more modest chests of money, especially if share portfolios continue to show uneven growth or government’s fingers slip back into the lolly jar. With so many Baby Boomers now retired or retiring, the pot of superannuation they hold is an irrestible temptation for the state and its revenuers.  Taking this money from its owners would be no more difficult than kicking away the Zimmer frame and mugging its frail owner.

And why not? If you follow the logic of the would-be tax gatherers, older Australians cost us through the nose.  Unhappy in their latter years with the degenerating state of what God provided 70 years earlier, our grey battalions get new hips, knees, lenses, stents and valves.  They must have things cut off that weren’t there last time they checked.  And they almost-continuously swallow expensive pills to keep blood pressure and acid from rising, arteries open,  growths at bay, and their minds from wandering.   Surely, it is time for these people to “give back”?

Well, perhaps not.  Successful societies on Earth seem to keep much wealth in private hands.  Why? Because governments tend to spend — dare I say waste!  — whatever they take.  By contrast, private capital prudently invested underpins modern industrial economies.  Wealth accumulated by the elderly passes on — alas, too soon — to the next generation, which may also use it in countless different ways, from funding new ventures to supporting charities.

If government snatches this wealth by means taxes on super, or via punitive death duties, we shatter an important motivational link between hard work today and our family’s prosperity down the road.  We also reduce the availability of philanthropy to support charities, education, the arts and research.

In a society that taxes all we earn by the time we die, perhaps only pop stars, famous actors, sporting stars, gambling and entertainment entrepreneurs and those with Cayman Islands accounts will earn fast enough to accumulate wealth. And society will be poorer for that.