Who do we tax and why?

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Each year, Accountants and Tax Agents approach Federal budget time with both anxiety and optimism.  Potential changes may bring not only opportunities for us to help out clients but also the risk for an increased level of complexity that doesn’t necessarily resolve any of the inherent issues that exist in the current tax system.

I’m always asked by a number of clients and colleagues leading up to the budget what I’d like to see.  My response is usually the same. I’d like us to have a serious discussion in this country about who we tax and why.  I’d like everybody to pay their fair share, I’d like the tax system to drive an attitude of reward for effort, I’m like the Townsville Crocs to make a comeback… You get the picture.

So what on earth is a “fair share”? Good question. The answer is often ideological based on amounts. But most people can agree on some kind of marginal tax system. While the concept of a completely flat tax system similar to Singapore seems like a good idea, in practice it seems to drive the gap between the classes further apart in a “rich get richer, poor get poorer” society.  The extreme alternative to this would be a complete socialist regime where government intervention through the tax system leads to everyone ending up with the same amount of money regardless of what they earn.

In other words, a marginal system of some description seems to be a reasonable middle ground. A system that continues to reward effort, but doesn’t drive the classes so far apart that advancement up the classes seems impossible.  So, where does Australia fit? Lets break it down into 3 segments of the tax system.

Firstly looking at the lower end of the tax scale. Its widely understood that the tax free threshold tops out at $18,200, however in actual fact when coupled with some other offsets the number is more like $20,500. Regardless of the number, most people can understand that this is in place to not reach into the pocket of those who need it the most. However, when you overlay the tax system with the Centrelink system and other Australian Government organisations that pay benefits, the concluding effect is that more than half of Australian households pay no net tax.  That being that they collect more from the Government than they contribute.  This raises two questions for me. Is half of the country doing it that tough that they can’t afford to contribute anything? And if that’s the case, is the combination of tax/benefit going to thrust them into prosperity?

Second, lets look at the top end. The top marginal tax rate is 45% which currently kicks in at $180,000 (although that’s quickly changing after the budget announcements).  So how many people pay tax in this top marginal tax rate?  There are about 25 million people in Australia.  16 million of whom are active in the workforce or looking for work.  Approximately 450,000 of these actually pay tax in the top marginal tax rate.  Now if you ask me, nearly half of someone’s income is quite a lot to give as a reward for earning only 2.2 times the average wage, but if that’s what the rate is then I would have thought that there are more than 450,000 people in that bracket.  There are approximately 1.2 million millionaires in Australia. Now obviously being a millionaire doesn’t necessarily equate to having a large income, but there would be some kind of correlation… I guess again, this raises two questions for me.  Is it too easy for “the rich” to split/deduct/or scheme their way below this bracket? And wouldn’t Australia be better off overall if everyone was more wealthy and consequently there were more people in the top bracket? (regardless of the rate)

Now lets analyse the middle.  Barak Tchelet wrote an excellent article in the Tax Institute’s magazine called The truth about the practical tax rate for families that looked into how the tax rates overlay with various benefits and looks at how much that leaves for that household after everything is considered.  The article gives an example where a worker, who has a stay at home partner, who is a full time parent to three kids. One in high school, one in primary school and one in daycare.  This worker is on $79,000 per annum and receives a $12,500 payrise.  One would think that this payrise would result in approx $8,000 increase in their take home pay. However once the reduction in Child Care Subsidy and Family Tax Benefit A & B are factored in, the net result of the payrise is an increase in their annual take home pay by only $2,539.  The article then goes on to looks at what the net take home increase would be if this payrise was $25,000 rather than $12,500.  The result is a new take home increase of $2,217.  So in other words, through the middle income range of the tax system there is an example of where government intervention results in different families being left with the same amount of income regardless of what they earn.

This Federal Budget takes a step in the right direction to address some of these issues present in the current tax system, but without a open, mature and comprehensive discussion about who we tax in this country and why, its impossible to create a tax system that rewards those who strive to contribute, provide a safety-net to those who can’t, and reduces the hand out to those who wont.

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