Two weeks ago, Scott Morrison and Josh Frydenberg told Australians that they had formed a committee to save the world.
Their JobKeeper policy (a surprisingly good policy given the circumstances) sounded like an act of charity.
It is anything but.
Like any government spending, JobKeeper is another transfer of wealth from one part of society to another. Like the aged pension, the policy is highly unfair and arbitrary — some people get it, others, like foreign workers, casuals or large companies may not.
However, given the likelihood of businesses and goodwill being destroyed, and the possibility that the epidemic doesn’t actually last that long, providing businesses with bridge cash is a reasonably smart policy.
To really determine the winners and losers it’s not just a question of who gets the cash, but rather: who’s paying the bill?
The immediate costs of the government’s various stimuli (and it isn’t just JobKeeper) is more than $130 billion. This is around a quarter of our annual GDP. There are two ways the government could force Australians to pay for this.
An increase in revenue through higher taxes/levies (or similarly a reduction in exemptions) for the next few years, or it can essentially print money to pay for higher debt/interest payments. This makes everyone poorer but they don’t realise it.
The first option is politically more difficult, the second option is incredibly unfair on younger generations.
How should we pay for this?
Given the stimulus is largely targeted as businesses (which tend to be owned by those who are older and wealthier), it seems fair that they should pay the costs (that is, a targeted option one).
Here is where we can start:
Negative gearing: a classic rort which essentially acts to allow those who own investment properties to reduce immediate income and instead create a deferred capital gain which is taxed at half the level. This costs around $1.6 billion annually and generally benefits the relatively wealthy.
Super concessions: this tax loophole is so large and ingrained that most don’t even think about it. Super allows you to move into a “retirement phase” when you turn 65. This means you pay zero tax on earnings from investments (in the accumulation which comes just before the retirement phases, tax is a still very low 15%).
Meanwhile, the 21-year-old barista who is making your latte each morning is paying a chunk of their tiny income in tax. The original rationale of not taxing super earnings was to ease pressure on the pension. However, super concessions now cost upwards of $40 billion a year. Almost all the benefit goes to the richest quartile of old people.
Get rid of it all and tax superannuation earnings at the marginal rate. Many pensioners would still pay zero tax but very wealth pensioners may, heaven forbid, need to pay something.
Dividend imputation credits: somehow Labor botched the communication of fixing Australia’s most revolting tax policy. In really simple terms, the dividend credit scheme supercharges the superannuation loophole (above) to give old rich people actual cash refunds when they invest in businesses that pay some company tax.
UTS professor Elizabeth Savage determined “the largest average benefits are paid to the wealthiest group. Their wealth measured by superannuation account balance is 20 times that of the group that receives no cash refund. Their superannuation wealth is 76 times their taxable income.”
The cost of this policy is around $5 billion. Even Geoff Wilson, who doggedly fought to retain the loophole for his well-healed clients conceded this disgrace has gotta go.
Principal residence exemption: another forgotten but massively inequitable tax law that has been politically poisonous (largely because so many Australians own their own home). This policy is naturally, hugely favourable to the wealthy.
Case study: The Age recently noted that the Algama family is selling their Kew mansion Ross House with expectations of $25 million (having paid $4.7 million in 2003). A $20 million-plus windfall gain would be taxable at precisely zero.
This exemption costs taxpayers more than $70 billion a year. A middle ground could be to index the cost base of the property to inflation, and then tax any windfall profit at, say, 15% — this could raise around $10 billion. A fairer solution would be to tax the gain like any other capital profit which could raise upwards of $30 billion.
The government needs to urgently find more than $100 billion a year. The above measures might cover 50%-70% of that cost, and create a much fairer tax system going forward.
Sadly, it’s far more likely the Liberal government will make the inequities worse by increasing debt levels and printing money (so the cost is shifted to the young and those not yet born) or by using progressive taxes (such as increasing the GST level or creating an emergency levy) which leaves the poor and middle class to pay a far higher proportion of the bill.
Adam Schwab is a company director and angel investor, and the author of the best-selling Pigs at the Trough: Lessons from Australia’s Decade of Corporate Greed