Wrong way: go back on tax

A WEALTH tax, or an Australian version that brands just about everyone as “wealthy”, appears to be on the way.

Tax rates 2013-14.

A WEALTH tax, or at least a uniquely Australian version of the same notion that brands just about everyone as “wealthy”, appears to be on the way.

Two things are clear. The government is determined to return the country to surplus and it is going to do so primarily by raising taxes and cutting benefits.

How to raise more tax, and specifically how to raise more tax from the richest, is now a ­primary agenda item across the “developed world”. In Australia, a less acute version of the problem stands before us, where there is much visible wealth, but a shrinking tax base. The government says “pain must be shared by everyone” but in reality it means that the worst thing to be is “an average investor”, neither very rich nor poor.

You need only be aware of two points from this week’s preview of the “income tax levy” and the commission of audit pre-budget report to see the pattern.

First, the income tax levy will “cut in” at $80,000 ... that’s only a sliver above the average annual wage, which is $72,000. Meanwhile, the audit commission is suggesting family homes get included for pension assets tests and it wants to ­include homes with a value of $500,000 or higher for singles. The average house price in capital cities is about $540,000. In other words, these tax changes — if they go ahead as planned — will hit “Middle Australia” square in the eye.

For “ordinary investors”, a constituency imperfectly represented by almost two million people who are members of DIY super funds, the budget changes as previewed present a remarkable picture of a distorted system where you get additionally taxed in the years you really must “make your money” but once you are over 65 you reach the uplands of a tax- free existence.

What’s more, applying another “catch all” tax levy just now directly risks choking off a wider recovery, which may be signalled by the recent uplift in share ­prices, but is by no means confirmed by it. Indeed, investors know better than most just how slow our real economic growth is right now. They know investment property is being chased not because it ­offers strong yields and a healthy outlook, but rather it stands as one of the few credible alternatives to cash — with deposit rates now at the lowest levels seen in a generation.

Investors also know that the best performing stocks in the market — banks and property trusts — are running hard not because they are “growing their business” but because they pay out an ever escalating proportion of profits in dividends.

In theory, investing is all about asset allocation and finding value ideally against the backdrop of a healthy growing economy. In practice, every seasoned investor in Australia will know that these days it is just as much about understanding and exploiting our tax system.

Placing another tax levy on top of this conflicted investment system will magnify the distortions we have in place such as house prices growing at three times the pace of the broader economy. It is the wrong direction. If structural changes must be made to get the budget back into surplus they cannot exasperate this level of distortion.

We often look to the US as a successful investment environment and, yes, it has lower tax rates, but it makes a better effort at capturing the very rich in the tax net. In Australia the bottom rung on the tax ladder is $18,000. The top rate is above $180,000. In the US, the bottom rung is $33,000, but the highest is $380,000.

The outstanding takeaway from the debate is that we must increase the tax base. The global move is to tax those at the very top, not the middle, and we’re going in the opposite direction. We don’t need to tax Middle Australia harder, and we should not threaten the national recovery. But it is time to end some of the glaring distortions.

If you own a $3 million house, your pension is not affected, if you are retired and you earn $200,000 a year, you don’t pay a penny of tax and if you are a salary earner on $500,000 you are in the same tax band as someone on $180,000. There are surely opportunities across these areas to raise revenues. And, if you must introduce an income tax “levy” do so in a fair manner: it should “cut in” a lot higher up the salary scale than proposed.

James Kirby is managing editor of Eureka Report.

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