21
Mar
2018

Hits and myths in the tax debate

by Danielle Wood and Brendan Coates


Published by The Canberra Times, Wednesday 21 March

The reporting of federal Labor’s dividend imputation policy and earlier policy debates around negative gearing shows how easy it is to mislead Australians about who loses from tax changes.

The full range of tricks used by vested interests and political combatants to scare and confuse was on display. Here’s what you should look out for.

First, any mention of taxable income rather than total income.

Taxable income is the number that determines the amount of tax you pay. But using it as a measure of a person’s financial position can be highly misleading.

For example, Scott Morrison told us last week that abolishing refunds of excess imputation credits will mainly hurt low-income earners. He said 54 per cent of people affected by Labor’s policy – about 610,000 individuals – have taxable incomes of less than $18,200. Sounds unfair, right?

That’s until you realise that a lot of very well-off older Australians have taxable incomes of less than $18,200. Retirees can have $10 million in their superannuation accounts and not record any taxable income (as funds withdrawn from a super fund are not taxed).

Indeed, more than 40 per cent of the richest over-65s – people with an average financial wealth of $1.9 million, not including the value of their home and other properties – declare a taxable income of less than $18,200.

And when we debate negative gearing, using taxable income is misleading precisely because people who negatively gear use losses on their investment income to reduce their taxable income. This explains the high proportion of people with no taxable income owning loss-making property investments – their declared losses are so large they have reduced their taxable incomes to zero. If we adjust to look at people’s incomes before rental losses are taken out, we see that the vast bulk of the tax concession goes to those at the top.

The second trick is the “bait and switch”: find a sympathetic group that might be hurt and focus on them, regardless how small they might be in terms of the overall impact of the policy.

That’s why just about every newspaper has published a story in the past week about a full pensioner with a handful of Telstra shares or a low-income part-pensioner who would be worse off under the ALP policy. Labor’s materials suggest there are 14,000 full-rate pensioners who receive some excess imputation credits. That’s around 1 per cent of full-rate pensioners. And the share of revenue coming from this group is less than 0.5 per cent of the total amount of revenue raised from the policy.

More part-pensioners are affected: around 200,000. These are people who don’t get the full pension because their assets or income is above the threshold required to access the full pension. Often these people live on low incomes because they don’t draw down on their savings, instead leaving big bequests.

Most of the revenue from Labor’s policy comes from retirees with self-managed super funds. And most of the revenue from self-managed super funds comes from the 10 per cent of funds with the highest balances: $2.4 million or more.

In the negative gearing debate, it was teachers and nurses who were trotted out as the “real” losers of tax reform. Of course some people in these professions would be affected: around 12 per cent of teachers and 9 per cent of nurses negatively gear. But they are much less likely to use investment tax breaks than anaesthetists (29 per cent), surgeons (27 per cent) and finance managers (23 per cent). And the average anaesthetist reduces their tax bill by ten times more than the average teacher.

The final trick is to overlook the winners from policy changes. The federal government forgoes $5 billion in revenue each year because of refundable dividend imputation credits. Labor hints it will use the money for budget repair or perhaps to offer income tax cuts. If that happens, the winners will be working Australians who have disproportionately borne the brunt of recent efforts to repair the budget through bracket creep, and young Australians who will be the ones asked to pick up the tab for a decade of government borrowing to fund recurrent expenditure. We’ve heard very little from these groups in the debate on the effects of the tax changes.

So, next time you see a media report on someone who loses from a tax change, ask yourself: does the story tell me just their taxable income or also something about their total income or wealth? Is this person representative of the losers from the policy? And who might be the winners? Could they be poorer and younger Australians?

We won’t have a better tax system until we demand a better tax debate.