Tackling growing wealth inequality is the key to Australia’s future prosperity

Wealth inequality is a growing concern and presents alarming side effects most Australians would be keen to avoid.

In Australia, we are blessed with probably the best census in the world.

Treasury, in the form of the Centre for Population, employs quite a few very good demographers. We also get good data out of the Australian Taxation Office, and have many strong think tanks providing independent research into demographics and economics too.

As a demographer, I use all these numerical data sources to analyse Australian population daily. Occasionally, I like to vary my analytical diet with more esoteric sources. I’m not talking about crystals or homoeopathy, here. I simply like to read policy suggestions of people who I roughly estimate to be aged between 35 and 45.

I am making three assumptions here. First, in this age bracket, you are not yet in positions of real power and influence. Second, within a decade you will be in a position of power and influence. Third, your world view will be roughly the same in a decade, when you are in power.

So, what are these youngish policy analysts writing about?

It turns out the hot topic is the worsening wealth inequality in Australia.

Hard data backs their writing. The Australia Institute data shows that since the pandemic, 93 per cent of economic growth has ended up in the pockets of the top 10 per cent of society. This means a mere 7 per cent of growth went to the bottom 90 per cent. All the while, the costs of living went up dramatically. A lot has already been written about how our very expensive housing market disadvantages people with lower incomes and people whose families don’t operate a bank of mum and dad. For now, we take it as fact, that over the last 25 years, the rich have gotten richer while the poorer very much haven’t.

Is wealth inequality a problem?

As wealth inequality intensifies, countries tend to experience uncomfortable side effects. Social unrest increases as more people feel disenfranchised. We see slower economic growth as the spending power of the nation goes down. Political polarisation is all but guaranteed, and in the worst case, leads to a loss of trust in democracy itself – considering the alternatives, this is a particularly bleak outlook.

Social upswings in highly unequal societies are usually limited largely to sports and crime. Violence and crime, as well as a loss of social cohesion in society, are also common side effects when swallowing the pill of high wealth inequality. Look to Brazil or South Africa to see that inequality drives the rich to invest in bulletproof cars, razor-wired fences, guns, and properties in gated communities.

In Australia, we still believe deeply that we should give everyone a fair go. However, we don’t want to fall for any socialist fantasy of everyone getting the same piece of the pie, regardless of their input. We want efforts to go rewarded. The idea of giving what you can, the concept of progressive taxation, makes sense to most Australians.

Policy and tax interventions to decrease wealth inequality

The taxation of wealth is suggested as the tool to decrease wealth inequality and give people a chance to work their way to the top. Any serious taxation of wealth must go hand-in-hand with big income tax cuts, and must not be a money grab on top of the existing tax regime.

The current way we remunerate work is intuitively fair to most people.

We reward education (the more highly educated you are, the more money you make – at least on average); risk (more money for more dangerous jobs); and discomfort (high wages for fly in, fly out workers) with higher wages. These wages aren’t a perfect reflection of our contribution to society, though – just ask any early childhood educator, aged care worker, or nurse.

The way we tax your income is also broadly considered to be fair (at least in theory) as our progressive tax system ensures that high-income earners pay more than low-income earners.

The problem with taxing income and consumption (GST, excise duties, customs duties) is that the accumulation of wealth goes largely untaxed. In our expensive housing market, low-income earners and increasingly members of the middle class, spend a huge share of their wage on rent. This minimises the wealth they could possibly accumulate.

Low and middle-income earners are spending a huge proportion of their wage on housing, which in turn minimises their wealth.

This is where the young-gun policy writers intervene. Let’s tax your wealth, rather than your income. Australia wouldn’t completely give up on consumption and income taxes, but we would allow you to keep a much larger share of your income while also taxing your wealth.

What would the taxation of wealth look like in practice?

Any wealth tax would be progressive in nature. The national goal would be for residents to accumulate a base level of wealth. Beneath a certain threshold, your wealth wouldn’t be taxed at all. Above that threshold, your wealth would be taxed progressively.

Remember that the goal of a wealth tax is to take a bit from the richest 10 per cent, a lot from the top 1 per cent, and an awful lot of the top 0.1 per cent. As long your individual net worth is below, let’s say $2m, you would probably be a net beneficiary of such a tax system.

The obvious problem with a wealth tax is that wealth can be relatively easily hidden in the form of art, artificial debt, or complex business ownership structures.

What would be the low-hanging fruit when taxing wealth?

A lot of wealth takes the shape of property. There is an easy way to tax this: stamp duty out, land tax in. A land tax is easy to calculate and collect. Again, such a tax would be progressive in nature and your family home would likely be exempt up to a generous threshold. Politically, introducing a land tax is difficult, since people who already paid stamp duty on their home would feel like they were being charged twice. In theory, once a land tax gained bipartisan support, it could be implemented quickly. For now, this is a political impossibility, as two-thirds of all households own their place of residence. At some point in the future, the balance might shift.

Holiday homes and investment properties would be taxed higher, too. That’s politically much more palatable.

A blanket tax on your net wealth is also an opportunity, but hard to police. Hiding wealth is just too easy. I don’t see this as a likely option. Rather, I think your wealth that sits there in an obvious way would be tackled first.

Expect changes to superannuation in the future as a way of tackling wealth inequality.

A superannuation reform is all but certain. Remember what superannuation was meant to do – it’s a rather ingenious forced saving scheme to ensure that you and I pay for our own retirement instead of relying on a public pension. This means that every cent that we put into our super accounts above a specific number that essentially guarantees we won’t ever use the public pension scheme, is money that the state just gives away.

Superannuation at the extreme end of the wealth spectrum is intensifying wealth inequality. Expect every dollar in your super account above a certain threshold (maybe about $1.5m) to be taxed at a high rate.

Tools that allow you to earn a passive income will also be on the radar of the tax man. Big changes to capital gains tax, negative gearing, and franking credits are likely. Maybe we might even see a humble financial transaction tax. Family trusts and foundations would also be under more scrutiny, as they are currently excellent tax avoidance vehicles.

The last wealth tax would literally be your last tax. A death tax, or inheritance tax, would minimise the wealth accumulation within a family unit over generations. This tax is a controversial one, because older people fear their financial legacy will be destroyed, and younger people fear they are going to miss out on their old folks’ money. A death tax would, of course, be targeted at the extreme end of wealth. If you aren’t in the top 10 per cent of the richest households, you only stand to gain from such a reform. If you are part of the top 10 per cent, you will have figured out by now that a wealth tax would be against your immediate financial interest.

The only thing the top 10 per cent stand to gain from a wealth tax is that they won’t need to live in a country that experiences all these terrible negative side effects of ever-increasing wealth inequality.

Simon Kuestenmacher is co-founder and director at The Demographics Group.