Younger workers will face crippling income taxes and governments will be forced to slash spending if baby boomers and Gen X voters continue to put tax reform in the too-hard basket.
Incoming Productivity Commission chief Danielle Wood has sounded the alarm in a major speech that delivers a grim warning to the Albanese Government over the urgent need to address “intergenerational equality”.
“As I and others have long argued, the degree of age segregation in the current tax system, where a retiree household on $100,000 pays half the income tax of a younger household on the same income, is neither defensible nor sustainable,’’ she said.
“A slow burning platform is still on fire, and over the coming decade, the gap between our spending needs and our tax system’s capacity to meet them without ever higher taxes on employment income will be stretched to breaking point.
“More and more, questions of sustainability and intergenerational fairness are raised about our current tax mix.
“Expect them to get louder and louder over the coming decade without action.”
The economist who is set to take control of the Productivity Commission this month, has suggested a range of reform options including replacing state stamp duty on property transactions with a tax on the unimproved value of land, replacing fuel excise with road user charges and increasing tax on “very lightly taxed” superannuation.
Another option would be a cut to the 30 per cent company tax rate could be funded by higher taxes on mining profits. Warning that the ageing population and the fallout from climate change will only see this fiscal challenge grow over the next 40 years, she warned that fewer workers meant the burden would fall on the young to pay more.
“The implications of not taking policy action are clear: we are asking future generations to bear the costs of today’s inaction,’’ she said.
“If we do nothing, we may end up on the path of least resistance: collecting ever more revenue through ever creeping taxes on wage and salary earners. Bracket creep may be the most politically painless way to raise revenues but it is far from the best.”
Ms Wood argues there are three levers that governments can pull to address long-term budget challenges: they can make economic reforms to ‘grow the pie’, they can increase taxes, and they can reduce spending.
“Given the scale of the challenge, governments will also need to find ways to reduce spending and/or boost revenue. After a decade of looking at this challenge I have come to the view that we will need to do both,’’ she said.
“Deep cuts to services would be harmful to equity and our longer-term capacity to thrive as a nation. Of course, others might have different value judgments, and argue that taxes should not grow as a share of the economy. But – g
And she warned “the usual election ‘go-tos’, such as ‘cutting the public service’, or ‘cracking down on welfare cheats’, are largely illusory” and will never deliver the savings required.
Why stamp duty taxes suck
The speech argues that stamp duties are a good example of inefficient taxes because they discourage people from moving to housing that better suits their needs, and sometimes they discourage people from moving to better jobs.
“Stamp duties are among the most inefficient taxes available,’’ Dr Wood said.
“Treasury estimates suggest that every dollar collected may reduce economic activity by up to 72 cents.
“In contrast, property taxes – which are levied on the value of property holdings – are highly efficient. If they are designed well and applied broadly, they do little to change people’s incentives to work, save, and invest.
“Property taxes are also a more stable revenue source than stamp duties and so make state budget management a much
easier task.
“None of this is to say that a decision to replace stamp duties with land taxes would be easy either practically or politically: the transition issues are thorny and the politics is notoriously challenging.
“Nonetheless, I want to highlight the land tax/stamp duty swap as an example of a case where there is a broad consensus on efficiency benefits. Indeed, it may be the only policy where you could find the full spectrum of academic experts and think
tanks in furious agreement.”
Ms Wood said she remained optimistic that a future government will move beyond the scare campaigns on tax reform because “I don’t think we have much choice”.
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