Australia’s taxes are too low, but these reforms could help patch our revenue hole

While the Australian media were focused on Queen Elizabeth II’s passing, some potentially significant comments by Treasurer Jim Chalmers went underreported.

Chalmers told ABC Radio last week he intends to focus his first budget in October on delivering election promises before then tackling the economy’s “structural challenges” in his second budget next year. And because he views most fast-growing budget items — such as healthcare, aged care and the NDIS — as “untouchable”, some “politically sensitive tax and revenue measures might need to be confronted”.

It’s the biggest indication yet that federal Labor might cautiously pivot from its “small target” election agenda and seriously consider raising taxes.

And while many Australians might not want to hear the harsh truth, it’s about time.

Australian taxes are simply too low

Australia remains one of the lowest-taxing countries in the OECD. Our federal and state revenues are 5.8% lower as a share of GDP than the developed country average.

Despite this, Australians have enjoyed increased social spending in recent years, putting the balance on the national credit card. The resulting debt is manageable for now, but it will shackle our ambitions long-term.

Even centre-right stalwart Paul Kelly and a slew of high-profile economists argued this weekend that “Australia is heading down the path of bigger government sanctioned by public demand”, which necessitates “an overall increase in the taxation burden”.

Pressure to rectify this imbalance will only increase, with a national revenue summit planned by the Australia Institute for early October.

Put a cap on it

So, which taxes should Labor raise or broaden? It’s a shame that in opposition Anthony Albanese killed some of Labor’s best tax proposals — and assented to the Coalition’s worst one — for fear of spooking the electorate.

This is where Chalmers must get creative. I’ve previously argued he could partially offset the highly unequal stage three tax cuts by hiking the top tax bracket. Similarly, on egregious tax deductions like negative gearing and the capital gains tax discount, there are less-than-perfect but politically palatable workarounds.

For instance, instead of removing these deductions altogether, Labor could impose caps on their use.

Back in 2015, Albanese himself passed a successful motion at Labor’s National Conference, calling for a “Buffet tax” — a 35% minimum rate on the total incomes of those earning more than $300,000 per year, then costed to raise approximately $2.5 billion per year. He foolishly ruled out reviving it in a January interview, but its scant attention could render it a “non-core promise”, Howard-style.

Conversely, Labor could impose individual caps on how much one can deduct for each tax item, or cap the number of assets to which one can apply write-offs. For instance, one could set a maximum number of houses one can negatively gear. To err on the generous side, let’s say four properties — to keep beneficiaries outside the top bracket of federal MPs in Crikey’s Landlords List.

This would allow politicians to keep pandering to people with investment properties while also hitting those with obscene portfolios.

It’s not optimal, but at least property hoarders, like this recent talkback radio caller who owns 238 houses, would pay their fair share.

Super-charging inequality

Another item ripe for capping is superannuation accounts. Super remains, despite recent reforms, generously undertaxed, allowing the wealthy few to supercharge their earnings — most of which they’ll leave to their inheritors. As Crikey’s Cam Wilson recently reported, the top 32 self-managed super funds in 2020 were worth more than $100 million each.

Putting a cap on the total amount one can hold in super would force excess funds into higher-taxed accounts or assets. The proposal is so uncontroversial that even the super lobby supports a cap of $5 million.

This capping approach isn’t ideal. The revenue gained will be much smaller than that garnered by simply ditching tax loopholes altogether. And housing concessions will continue inflating prices even in a market of smaller property portfolios.

But since its shock election loss in 2019, Labor has shown a profound fear of alienating the relatively but not obscenely well off. Some of this was an overreaction, but Australia’s bloated asset markets do pose tricky electoral dynamics.

Capping concessions would allow Chalmers to recoup some much-needed revenue from overdue targets, reduce wealth inequality and assure voters that only the very richest will pay. Targeting the richest is the lowest-hanging fruit. It would also allow Albanese to save face by not backflipping on major promises.

Labor will need to consider such reforms sooner or later, lest the only cap be on the quality of Australian hospitals and aged care homes.

This article was first published by Crikey.