A new discussion paper released by The Australia Institute on Sunday set out to evaluate different taxes and concessions through a five-principle framework which aims to decipher their merit and functionality, and highlights the tax system’s failure to curb inequality.
Matt Grudnoff, senior economist at The Australia Institute, said he encourages debate over how the Australian tax system can work more efficiently to reduce inequality, instead of driving it.
“Australia taxes wealth lightly compared to other OECD nations,” Mr Grudnoff said. “With inequality in Australia only getting worse, we need a debate and better policies about taxing wealth properly and reducing inequality rather than exacerbating it.
“While many are concerned about the size of our taxes, consideration must also be given to the shape of our taxes because, as this research shows, not all tax measures are created equal.”
The first principle used to evaluate tax measures in the report suggests a tax measure should minimise changes in behaviour, unless its intention is to alter a behaviour that society would like less of, like smoking, in which case it should be effective in changing behaviour.
Another suggests a tax measure should reduce inequality, while the third suggests a tax measure should be levelled on those who are best able to pay.
The final two principles suggest that a tax measure should be easy to comply with, simple to administer, and easy to understand, and that it should be difficult to avoid for those it targets.
Among the worst-ranking taxes and tax concessions evaluated by the framework were excess franking credits and the capital gains tax (CGT) discount.
The report highlights that Australia is the only country in the world that offers refundable excess franking credits, which it says effectively offers tax refunds to those who don’t pay tax. Because income from superannuation in retirement is tax-free, the report says, excess franking credits largely benefit wealthy pensioners.
Through The Australia Institute’s five-principle framework, the concession scores poorly. The report found that it failed to have a desired impact on behaviour, because excess franking credits encourage wealthy superannuants to invest in shares that pay franking credits.
Excess franking credits were also identified as a driver of inequality, as they’re often received, according to the report, by high-wealth and high-income households. When stacked up against whether it is being targeted at those best able to pay, it failed for the same reason, even though it was found to be simple to comply with, administer and understand.
The CGT discount scored poorly for the same reasons. The report found that the CGT discount encourages speculation in assets, as income from CGT discounts are taxed at half of the standard rate.
Like excess franking credits, the report says the CGT discount is “overwhelmingly” received by high-income, high-wealth households, who it suggests need it least. It was found to be simple enough to comply with, administer and understand, though, and was deemed difficult to avoid.
Another tax measure to score low on reducing inequality was the goods and services tax (GST), which has attracted renewed calls for reform in recent months.
The report suggests that, while it achieves its desired behavioural impact, it’s regressive because lower-income earners spend a larger proportion of their income than those who earn more.
Further to that, the report highlights the tax’s design flaws. It underscores the burden placed on businesses in collecting the tax, which it describes as a “significant” one.
Mr Grudnoff said that, as tax reform debate heats up once again, policymakers should consider the pros and cons of different taxes objectively, and cast aside self-interested voices.
“The tax debate is awash with the voices of the self-interested,” he said. “What Australian policymakers need are solid tools to evaluate the pros and cons of different taxes, to sort the self-interest and ideology from the genuine constructive policy advice.”
John Buckley is a journalist at Accountants Daily.
Before joining the team in 2021, John worked at The Sydney Morning Herald. His reporting has featured in a range of outlets including The Washington Post, The Age, and The Saturday Paper.