Why tax reform is the national debate we can no longer afford to avoid

Independent MP Allegra Spender made a piece of history last week – one that, hopefully, will wake up the government and Coalition to deal with one of this nation’s biggest problems.

In a small committee room in the sprawling morass that is the federal parliament, Spender released a green paper into the Australian tax system.

Our tax system consistently favours older Australians over younger Australians. Credit: Simon Letch

Of the more than 1200 MPs to have sat in parliament since federation, Spender is the first non-government representative to have waded so deep into the issue and published something so consequential, considered and ground-breaking.

This paper wasn’t a three-word slogan or something for a TV soundbite. It wasn’t arguing that returning bracket creep to the nation’s 16 million taxpayers is groundbreaking reform. It wasn’t a piece of spin to tide her over to the next news cycle or boost popularity ahead of next year’s federal election.

For the best part of 18 months, the member for Wentworth has held meetings with experts, business groups, academics, trade unions and ordinary punters to talk about tax.

What this research and these conversations revealed, and what is laid out clearly in the green paper is a simple, but deeply troubling rationale – our tax system is utterly broken.

As it stands, it’s hurting young Australians the most. We have a situation where older households with an income of $100,000 pay, on average, less than half the tax of a working-age household that earns the same amount.

Between the mid-1990s and today, housing affordability, especially among younger Australians (but also among some older people, too), has simply evaporated. For instance, the rate of homeownership among those aged 35 to 44 and within the bottom 20 per cent of incomes has declined by almost 20 per cent. Even among better-off young people ownership rates have tumbled.

And among those who are now lucky enough to find themselves with a mortgage, the size of that loan – and its demands on household income – has climbed. The average mortgage, now $636,000, has increased by 54 per cent over the past decade, while wages have lifted by 23 per cent.

As Spender noted, this combination has contributed to a free-fall in national fertility rates as younger Australians are forced to decide between babies or a mortgage.

Over the past three decades, things shifted substantially for older people as well, but not entirely for the worse. In the 1990s, about 27 per cent of households over 65 paid tax compared to 17 per cent today. Over that same period, the number of people aged 65 or older has climbed from 2.1 million in the 1990s to 4.6 million today (from 12 per cent of the population to more than 17 per cent).

Spender is not just worried about what taxes are doing to the property market. Her green paper also examines failures in business investment and in the environment, and poor productivity.

As the paper noted, “Our personal tax system should reward effort and ingenuity. It should allow people to create a prosperous life for themselves, regardless of the wealth of their families … But instead, it provides bigger rewards for passive income and property investment.”

To deal with those problems, the paper argues for change in six priority areas: lowering income taxes on working-age people, reshaping the tax system so that the revenue base remains stable as the population ages or consumption patterns change, incentivising businesses to innovate and lift investment, rebalancing tax settings to favour homeownership, favouring renewable energy over fossil-fuel-sourced energy, and creating a tax reform commission to maintain oversight and offer its own research long-term.

Unsurprisingly, the two major parties are patently scared of real tax reform.

It took the Albanese government the best part of two years to find the gumption to tackle changes to the stage 3 personal income tax cuts. But imagine if those changes, which delivered nothing to millions of people, had operated as envisaged by Scott Morrison – you’d have rioting on the streets.

The Coalition talks much about income tax, but has offered nothing since the stage 3 debate. It knows, just as the government does, that to fix the many problems in the broken system will require upsetting some of the most vested of vested interests going around.

That’s why we often only see genuine honesty from politicians as they exit parliament.

Allegra Spender’s tax reform green paper called for lower income taxes and rebalancing the system to promote homeownership.Credit: Alex Ellinghausen

Bill Shorten, who lost the 2019 election in part due to his aggressive tax reform plans (which would have increased taxes), used his final parliamentary speech last week to note the intergenerational problems caused by the current system.

“I still remain convinced our system still taxes property preferentially and lightly, and income heavily,” Shorten noted.

“As a result, young Australians carry a disproportionate share of the tax burden. Not only do they pay more tax now than others did a generation ago; they pay more for their education than ever before.”

His words echoed those from former Liberal treasurer Joe Hockey, who used his parting speech in 2015 to argue for major tax reform, backing a broader GST, a much lower top tax rate of 40 per cent, and “wiser and more consistent” concessions that would help pay for tax reductions.

“Negative gearing should be skewed towards new housing so that there is an incentive to add to the housing stock rather than an incentive to speculate on existing property,” he said at the time.

If only Hockey, a treasurer in the Abbott and Turnbull governments, had been in a position to do something.

Despite how much reform is needed, and the very real and immediate changes reform would have on voters’ lives, neither the Coalition nor Labor seem to have any interest in touching the issue, especially before an election. For now, Spender remains, fighting the right fight.

Shane Wright is a senior economics correspondent.