Lower SME company tax, limit negative gearing and ditch franking credits: How to pay for our ballooning debt

By the end of this financial year, our federal debt, including RBA emergency stimulus, is expected to be more than $320 billion.

We may need even more debt in the coming years to nurse us through a prolonged recovery.

If we have any interest in intergenerational equity, we will need to retire ideology and engage in massive tax reform.

This will require an unprecedented level of political bipartisanship or we will spend the next decade arguing about unpopular, but essential, reform.

Speaking on ABC News, Crawford School of Public Policy tax expert Professor Robert Breunig said the economic crisis is a unique opportunity for courageous tax reform that drives equity, removes generous exemptions to asset owners and helps us pay down debt so we do not burden future generations.

He asserts that younger Australians, without property or share inheritances, are disadvantaged through our current tax system in favour of asset owning older Australians.

In unprecedented times, we need to keep everything on the table to deliver real tax reform that helps us reduce our ballooning debt levels.

These are six options.

1. Higher, broader GST

The GST receipts accounted for 13.7% of last financial year’s federal revenues at $68 billion.

We could progressively increase our GST level from 10% towards the OECD average at approximately 20%.

Further, we could also increase the range of goods to include private education and food to generate higher levels of GST receipts.

2. Limit negative gearing

With negative gearing, property investors can reduce their tax bill when they make a loss as a result of interest repayments and expenses exceeding the rental income.

We could eliminate or limit negative gearing to new houses, which could save $30 billion over 10 years.

3. Remove franking credits

Franking credits or imputation credits entitle the security holder to receive a credit for any tax the company invested in has paid.

If the top tax rate is less than the company’s tax rate, the Australian Tax Office will refund the security holder the difference as a credit.

We could end cash refunds on these franking credits, impacting over 800 thousand self-funded retirees, saving the budget $50 billion over 10 years.

4. Tighter pension means test 

We invested approximately $50 billion in age pensions and income support for seniors last financial year making it our largest social security expenditure. With a slowly aging population and lower tax receipts, we will require some difficult choices.

We could include the value of the family home in the aged pension asset test, requiring asset-rich pensioners to take out reverse mortgages on the equity of their home to fund living expenses, significantly reducing the reliance on the aged pension.

With the appreciation of residential property prices over the last decade, we have pensioners living in multimillion-dollar properties who are receiving pensions.

They are asset-rich but cash-poor, so we could help pensioners access their equity in life rather than pass it on in inheritance after death.

5. Company tax on global companies

We could tighten up the loopholes that see global technology companies generate significant revenues in Australia while paying little tax in this country.

We could even see tax applied on revenue rather than on profits to more effectively tax the global digital economy.

6. Lower small and medium business company tax

We could unleash the power of small and medium business across our nation with lower company tax rates to help us reemploy, reinvest and drive our recovery.

What else?

As part of the other tax reforms, we could better align the states, eliminating payroll tax (tax on jobs) and we could remove stamp duty, which could be partly offset by a higher land tax.

All of these options will be unpopular and meet incredible personal-interest driven resistance.

It will take selfless and courageous debate to design our next tax system to support a more equitable, productive and sustainable economy and society.

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