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ANALYSIS: One in eight Australians live below the poverty line, and yet taxes in this country are the ninth-lowest in the OECD. The stage three adjustments are a start, but broader reform is urgently needed to address inequality and fund essential services. By Cassandra Goldie.

The case for tax reform beyond stage three

A homeless person is seen sleeping on a park bench in Perth, Wednesday, June 29, 2022.
A homeless person is seen sleeping on a park bench in Perth, Wednesday, June 29, 2022.
Credit: (AAP Image/Dave Hunt)

Prime Minister Anthony Albanese’s decision to redesign the stage three tax cuts is good for Australia.

Some commentators say it was born out of nothing more than political expediency in the face of the upcoming Dunkley byelection. That, however, is exactly the point: the government listening to voters is what democracy is supposed to look like.

From the beginning, the Australian Council of Social Service consistently opposed the original stage three package as bad policy and grossly unfair. I had previously written in The Saturday Paper about the cynical history of the original stage three. Its damaging reality was about to hit us all.

The Albanese government is to be congratulated for listening to these deep concerns. Rethinking the government’s position was exactly what was needed.

The policy change will deliver tax cuts for people on modest and middle incomes, with every dollar helping people to pay the bills.

Yet the missing piece of cost-of-living relief remains. The difficult truth about tax cuts is they cannot help the people who need help the most: the one in three people on incomes so low they are outside the income tax system.

People receiving $43-a-day Youth Allowance, $54-a-day JobSeeker and other woefully low income-support payments are facing abject poverty and struggling to keep themselves alive.

These are the people hit hardest by the soaring cost of rent, energy and food, the people who truly need the prime minister’s help.

In 2023, surveys conducted by ACOSS found almost three in four people receiving income support were eating less or skipping meals, and cutting back on heating or cooling their homes, due to the low rate of payments and rising cost of living.

Many are living in their cars or on friends’ couches. One woman we have been in contact with recently has been saving up for a tent, fearing she is one rent rise away from homelessness.

When Albanese stood up at the National Press Club to explain his stage three tax changes, he repeatedly said they were designed to deliver his election campaign slogan: “No one held back, no one left behind”.

The big problem, of course, is that more than a million people are indeed being left behind right now. I’m sure the prime minister doesn’t mean to suggest that only people with incomes high enough to pay income tax are worthy of not being left behind.

To deliver on his mantra, Albanese should adopt the recently formed Economic Inclusion Advisory Committee’s first recommendation and deliver a substantial and ongoing increase to JobSeeker and related payments.

The committee found lifting payments to 90 per cent of the Age Pension, from the current $54 a day to $70 a day, would substantially improve adequacy and return them to payment relativities of 1999. ACOSS recommends lifting JobSeeker to the pension rate of $78 a day once and for all.

Adopting this measure would be the most effective way to ease severe financial distress felt by people who are the most disadvantaged. It is something the government needs to do now.

Of course, there’s more to stage three than the additional help it will deliver to people on modest incomes facing this cost-of-living crisis.

The legislated stage three tax cuts would have created a flat 30 per cent tax on income between $45,000 and $200,000. This would have made Australia something of a tax haven compared with peers such as the United Kingdom, France and Germany, where rates above 40 per cent kick in much earlier.

The government’s plan sensibly retains the 37 per cent rate for most people currently paying it. This was a priority for ACOSS to maintain a progressive income tax system, the hallmark of a fair society.

The redesign of stage three is broadly revenue-neutral over time. There is a danger now that we enter a damaging bidding war on tax cuts when in reality Australia faces a serious revenue challenge.

We are not a high-taxing country despite the commentary that would suggest otherwise. Australia already raises less revenue from personal income tax than the OECD average, at 18 per cent of GDP compared with 21 per cent. The overall tax rate for an average full-time worker is lower in Australia, at 23 per cent, compared with 24.8 per cent in the United States.

Overall, we are the ninth lowest-taxing country in the OECD.

We need to raise more revenue, not less.

The changes to stage three cannot stand in isolation when it comes to tax reform. The government’s willingness to change stage three – combined with its decision last year to apply a higher tax rate of 30 per cent to the investment income of superannuation funds valued at more than $3 million – is an encouraging sign that broader tax reform may be within reach.

That cannot be a bidding war offering bigger tax cuts, however. To go down this path now would be a community disaster.

Australia is facing persistent poverty; growing inequality; rising costs of housing, food and energy; increased demand for essential services, including disability and aged care; high levels of mental illness and domestic violence; and the catastrophic threat of climate change.

Despite being one of the wealthiest nations in the world, about 3.3 million people, or one in eight people, live below the poverty line, including 761,000 children. If we are to reduce poverty and inequality, and fund our essential services, we must secure an adequate revenue base.

We must strengthen our revenue base to close yawning gaps in essential services and income supports and deliver fast and fair action on climate change. On current budget settings, expenditure on most Commonwealth services and supports is projected to decline over the next decade as a share of GDP.

The case for broader tax reform is urgent. We must reform the way we tax investment incomes from property, shares and superannuation, which are currently taxed at lower rates than the average worker’s wage.

As a report published last week by the national housing campaign Everybody’s Home highlighted, negative gearing and capital gains tax concessions will cost the budget $146 billion between 2023 and 2033. Instead of fuelling speculation, this money could be used to build half a million homes for people locked out of the broken housing market.

To help tackle the rental crisis, we should also deny deductions for dwellings that stand vacant.

On superannuation, the government should tax the investment income of super funds during the retirement phase. Not doing so is unsustainable when we have an ageing population and are already struggling to meet the costs of quality health and aged care.

We must also crack down on tax avoidance by multinational companies and by individuals who use private companies and trusts.

We must secure a fair return for Australia’s offshore gas reserves, while removing business tax concessions that are economically and environmentally harmful, such as fossil fuel subsidies.

Anthony Albanese’s stage three tax cut changes are welcome. His plan is patently fairer than the current legislation. He must now address the missing piece: a substantial increase to JobSeeker and related payments to deliver a proper cost-of-living package that reaches people outside the tax system. This must be a precursor to the broader tax reform Australia so badly needs.

This article was first published in the print edition of The Saturday Paper on February 3, 2024 as "The case for real reform".

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