A modest wealth tax will help cut income tax and boost economic growth

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ARE workers’ wages and salaries really the rightful target of the taxman’s scrutiny, the best way to allocate Australia’s crushing tax burden?

Discussion about Australians’ relative welfare is framed almost entirely by how much people earn. So-called “high income” earners with $80,000-plus pay packets didn’t get a cracker in the government’s recent carbon-tax-inspired tax cuts.

But it is not annual income that signals a person’s command over resources or their ability to pay, but net wealth, which is much less equally distributed than income.

The top fifth of households are bringing home $3943 a week — almost 11 times what the lowest 20 per cent earn. The richest fifth of households have a net worth over $2.23 million on average — about 62 per cent of Australia’s private wealth — which is about 70 times that of the poorest fifth, who have less than 1 per cent.

About 6 per cent of Australia’s 8.4 million odd households are worth more than $2m, after subtracting loans.

These relativities are for 2009, from the Australian Bureau of Statistics’ most recent wealth survey, and would be starker now given the rebound in the price of houses and superannuation — which makes up over 70 per cent of the net wealth of even the richest households — since then.

To the extent capacity to pay matters, why do we target income? The marginal income tax rates — now crushingly higher than anything Mill or Keynes would have thought economically feasible for any country — punish workers in the best years of their life when they are trying to provide for children, buy a home, or thinking about starting a business.

Personal income tax is also gigantic noose of suffocating red tape around the economy because of the costly lengths people go to to hide their income and the taxman’s relentless quest to find it. Individuals can far more easily funnel income to their children or deal in cash than they can hide their house or car.

Even shareholdings and superannuation accounts are more easily tracked than personal income. Sir Humphrey would call it a “courageous” reform, but introducing a wealth tax and using the proceeds wholly to reduce income tax would provide a massive boost to economic growth and make the country a beacon for skilled workers.

Because Australian households have private wealth in excess of $6 trillion, even a modest tax could raise vast sums.

A wealth tax would not be delayed punishment for hard work either — the ABS survey shows the average age of the head of the richest fifth of households is 57, only four years more than his median counterpart, suggesting that a large proportion of the wealthiest Australians have inherited it rather than earned it.

Economic liberals are right to be concerned about wealth taxes: they ultimately tax earnings twice and could encourage the wealthy to emigrate. But low rates should not cause too much economic harm or enlarge government.

The cantons of Switzerland, a country thought to be a relative bastion of liberty among rich countries, levy small, progressive taxes — from 0.3 per cent in Zurich to 0.94 per cent in spendthrift Geneva — on net wealth greater than about $200,000.

Plainly these have not prompted an exodus. . . .

Australia’s unique natural beauty and envied standard of living might also give pause to those considering moving to avoid any wealth tax.

Excluding the value of personal belongings and unincorporated businesses, a net wealth tax of 0.8 per cent per year would raise about $43 billion a year in 2009 dollar terms, enough to abolish income tax entirely for workers earning up to $75,000 a year, for example, or to slash dramatically all the marginal income tax rates. Such a shift would also end the ongoing hand-wringing about the damaging interaction of byzantine tax and welfare systems.

The Henry review, a thoughtful list of Australia’s taxation shortcomings and sensible proposals, extolled the benefits of estate or “death” taxes, but stopped short of recommending introduction of them.

An estate tax, a less extreme form of the wealth tax suggested here, is potentially another way to offset, albeit more modestly, the dreaded income tax.

A wealth tax has the added benefit of making other politically difficult tax reforms easier: those perceived to hurt poorer households, such as broadening the base of the GST to include fresh food, education and health.

A wealth tax that enables hefty cuts in personal income tax should unite both the economic rationalist and the passionate leftist alike.
by: Adam Creighton – The Australian – July 19, 2013

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