Australia’s bloated tax system is making us all poorer, while the arguments for reform are making us stupider because they continue to deal exclusively with the symptoms while ignoring the underlying cause of reckless government spending.
In the last four years, real wages have fallen to levels not seen since Labor reintroduced centralised wage fixing in 2008. The purchasing power of a worker on $90,000 has been shrinking by more than $2700 a year since 2020, and the Reserve Bank of Australia predicts it will keep falling.
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Australia’s GDP per person has declined in nine out of 11 quarters, putting us on the verge of a four-year per capita recession.
Our tax system hurts those on low incomes by trying to punish people on high incomes. It discourages innovation, makes failure permanent and rewards lazy capital.
It relies on a dangerously narrow band of high-income earners, large corporates and some multinationals to pay net tax.
Marginal tax rates are some of the highest in the world, cutting in at the lowest levels. As Sir James Mirrlees pointed out, this disproportionately hurts those trying to move out of low incomes.
On the bright side, our tax system does produce a lot of jobs. As one of the most complicated in the world, it requires an impressive phalanx of highly paid tax professionals in what amounts to a misallocation of human capital.
Why do we continue to endure this? Because high spending governments rely on programs designed to harvest votes not deliver services. The waste, fraud and abuse is not a bug; it is a feature.
Federal spending is on track to reach 28.5 per cent of GDP next financial year, up from 21 per cent a decade ago.
Between June 2022 and 2024, growth in government spending accounted for 55 per cent of all GDP growth, a share higher than under any other government on record.
The public sector accounted for 82 per cent of new jobs. Backing out this number puts our unemployment rate at one of the highest in the OECD. Low unemployment is not a dividend of good management; it is an artefact of spending.
That is why the number of lobbying firms has more than doubled.
Allegra Spender’s proposal starts from the fashionable assumption that reform must be “revenue neutral”. That assumes today’s level of government spending is about right. It bakes in inefficient spending.
“It is not an act of noblesse oblige to tax people to spend their money on things you want, and it is not an act of greed for people to want to keep what they have earned.”
But in a desert of reform, even a glass of salty water looks good.
None of her proposals dealt with the underlying problem: reckless government spending. In one sentence she acknowledges spending, but not a single program that needs trimming.
The teals were meant to be able to say the unsayable and think the unthinkable. And they do when it comes to Israel, but there is scant – almost no – criticism of the $15 billion of taxpayer money funnelled to crime gangs through the CFMEU, the same with the fraud in the NDIS.
Anyone who starts a discussion about tax reform without first highlighting the waste, fraud and abuse in our spending is, simply put, not serious.
The changes would massively add to complexity. It would continue some of the highest, most distortionary marginal tax rates in the world that keep the low paid low paid.
Worst of all, it would remove some of the last remaining pathways to prosperity that Australians have. Proposals to limit negative gearing only applies to individuals. Corporations and real estate trusts (the sort the wealthy have) will continue to write off expenses against income.
Experience in other countries is that rents go up while renters are left to deal with huge corporations. In Berlin, one trust owns 160,000 apartments. This cuts off one of the few pathways to prosperity left for Australians.
There should be clear principles on which we judge tax reform: does it start with reducing spending? Because spending is the real tax as you pay for it eventually. Did it reduce distortionary social policies masquerading as welfare? Did it remove complexity and does it flatten marginal tax rates so that there is more reward for risk and innovation?
Some will say that this benefits the well-off. True, but not as much as it benefits the less well-off. It is not an act of noblesse oblige to tax people to spend their money on things you want, and it is not an act of greed for people to want to keep what they have earned.
If we were serious about fairness, we would close tax shelters. The R&D tax incentive, designed to address innovation spillovers, too often operates as corporate welfare as large firms routinely redefine software updates as “research” to claim the subsidy.
Taxpayers end up subsidising activity that would have occurred anyway while genuinely innovative firms see little benefit.