Why one person’s tax concession is another’s tax bill

Up there with reading the liner notes of a new Kate Bush album for excitement is thumbing through the details of the Federal Budget and the annual tax expenditures report.

The Budget, that insight into a Government’s true agenda as well as the state of the economy, is a good measure of spending and taxing priorities.

The tax expenditures report, while not nearly as well known as the Budget, is almost as important.

That’s because it’s a document that gives a view on the costs of decisions that are baked into our way of life.

For those with a more interesting and varied life than my own, tax expenditures are the cost of taxing something differently.

The most obvious is around superannuation. The earnings inside your super fund, for instance, are taxed at 15 per cent rather than your marginal tax rate.

And when you take income from your super fund in the retirement phase this is not taxed at all.

So, if I was a 64-year-old earning $80,000 a year, I would pay $17,547 in income tax. If I was a 66-year-old taking $80,000 in income from my super fund, I wouldn’t pay tax on that income.

The “tax expenditure” is that $17,547 difference on the way that $80,000 of income is taxed between two almost identical people.

There are all sorts of tax expenditures that include a variety of tax exemptions, deductions, offsets or concessional rates.

The various superannuation tax expenditures are, to varying degrees, aimed at encouraging people to put money away for their retirement so as to take pressure off the annual bill of the age pension (the single most expensive element in the Budget). Some are negative. We thump cigarettes with high levels of tax to encourage people not to smoke the things.

According to this year’s tax expenditures report from Federal Treasury, the concessional tax rates on super cost the Budget more than $34 billion.

The single-biggest tax expenditure is the way a person’s house is exempted from capital gains tax. That’s worth more than $73 billion.

Then there are the carve-outs put in place by the Howard government around GST.

By not imposing the GST on fresh food, education, health and financial services, these products — and consumers — escape $18.5 billion in tax a year. One of the smallest expenditures is around brandy. A decision by Robert Menzies to woo South Australian grape producers in the 1950s is the reason brandy has a slightly lower level of excise than other forms of alcohol.

It costs $4 million a year.

All of them, however, mean one thing. The more exemptions the more tax everyone else has to pay.

Take the example of our 64 and 66-year-olds. Combined, the pair pay $17,547 in income tax.

But only one of them is actually paying it. If we required the 66-year-old to pay some income tax then the amount paid by the 64-year-old could be reduced.

The four areas that are excluded from the GST have been the four with the fastest growth in spending since the introduction of the tax in 2000.

The Government has moved to widen the net of the GST, particularly around online overseas-based services and on goods bought from foreign websites.

While the Government has, accurately, described this as responding to changes in the way goods and services are delivered to Australians it has also been forced into finding ways to cover the cost of not imposing the GST on fresh food, health, education and financial services.

Labor’s plans around negative gearing and franking credits would possibly resonant more strongly with voters if it was planning to use the revenue raised by its policies to cut the overall tax of everyone else. A person with four or five negatively geared properties is being directly subsidised by non-property owning taxpayers.

That’s the issue with tax perks. Only some people benefit and it means the rest of us have to pay more tax.

There can be good reasons for some tax expenditures. The idea of rewarding people to save for their retirement via a lower tax rate through superannuation makes sense and the use of so-called sin taxes to stop us smoking or drinking too much have broader social benefits.

Low-alcohol beer attracts a lower rate of excise than full-strength beer because policy makers think there is a public health good in not having drunk drivers on our roads (at a cost of $5 million a year).

Perfect sense. But there’s also an excise concession on beer made at those growing “brew-your-own” franchises which doesn’t differentiate between low or full strength.

Some measures don’t work exactly as planned. Farm management deposits were created to enable farmers to put away money in good times and remove it in the bad. Using them comes with tax advantages.

It’s a sound policy and one that should be encouraged. It’s just that in some cases they are not being used that way. For instance, despite terrible drought on the east coast, NSW grain and livestock farmers have increased their holdings in these deposits rather than run them down.

The most important point to remember in all this is that one person’s tax concession is another person’s tax bill.

It’s one of the reasons people who get concessions fight vehemently to keep them, warning of death and destruction if they’re taken away.

It might be death and destruction for them and their tax management strategies, but for everyone else it means fewer dollars given to Canberra and more kept in their own wallets.

That would be the wallets of you and me, so we could buy more Kate Bush albums.

And that would definitely be a good thing.

Farewell

Readers, this will be my last column for The West Australian.

It’s been a great 12 years, writing about everything from GST to the Budget to the economics of marriage and the privatisation of Australia Post. Thanks to all of you who have written, emailed or phoned me over the years. It’s made the past dozen years even more enjoyable.

Just remember to keep in mind the insight of that great philosopher Kate Bush: I just know that something good is going to happen.