A Question Of Trust In Greater Opportunity

Written by:
1 August 2017
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The Labor Party is proposing another attack on wealth-creating businesses with its planned tax hike on discretionary trusts.

It remains unclear how substantial the tax hit will be. Labor is claiming the crackdown will confiscate $1.7 billion from 135,000 trusts each year on average for the next 10 years. However, the devil will be in the detail. While the extent of the tax grab will depend on implementation, one thing is for sure: it will add more complexity and red tape to an already highly inefficient tax system.

The precise operation of the tax, including how much revenue it raises, is beside the point. The planned tax hike is entirely political. It sits alongside a commitment to undo tax cuts for businesses and raise the top income tax rate from 47 per cent to 49.5 per cent. The end game for Labor is to convince voters that their stagnant income growth is a result of a rigged system that benefits the wealthy.

We had a taste of how the political rhetoric will shape up over the coming months at the NSW Labor Party conference this past weekend. In his address to the conference, Bill Shorten said “our system should not be subsidising those who are already wealthy”. But a cursory look at the data demonstrates that it doesn’t. The top 1 per cent of income earners pay more in tax than 50 per cent of the taxpaying population. That’s a funny-looking subsidy.

Unfortunately, the entire debate about inequality got off on the wrong foot. The data used to claim that inequality is at a 75-year high – a pretext for the trust tax hike – was based on the proportion of pre-tax income earned by the top 1 per cent of income earners. Pre-tax income is a deficient measure of inequality because it doesn’t account for Australia’s tax and transfer system.

A more reputable source is the Gini coefficient. On that measure income inequality in Australia is about the average of comparable OECD nations and, in recent years, has either increased slightly, according to the Australian Bureau of Statistics, or decreased slightly, according to the Household, Income, and Labour Dynamics in Australia (HILDA) Survey. Besides, not even the Gini coefficient captures all private and public cash and non-cash transfers, so it is impossible to form precise conclusions about income inequality.

However, while it is difficult to reach firm conclusions on inequality of income, inequality of opportunity in Australia is more apparent. There is inequality between those who have a job and those who don’t because of the Fair Work Act; between those who have a good education and those who don’t because of the centralised bureaucratic approach to education policy; between those who can afford a house and those who can’t because of constrained supply; and between those who can afford to turn the heating on and those who can’t because of high cost, unreliable renewable energy subsidisation.

It would be much more productive for policymakers to focus on policies which will expand the opportunity for all Australians to flourish and become socially mobile. Today’s low-income earners are tomorrow’s high-income earners. Any policy which raises the tax burden on the wealthy also discourages upward mobility by penalising life-time success.

This brings us back to the issue of trusts. The main reason that trusts are so attractive is because Australia has a punitively progressive income tax system, which features a milieu of deductions and a high income tax free threshold. And of course the top marginal rate is high by international standards. Reducing and flattening the income tax schedule (ideally to one flat tax rate), eliminating deductions, and reducing the tax-free threshold would make trusts less attractive. Moreover, thousands of lawyers and accountants would be freed to engage in more productive activities.

A flat income tax schedule has the added advantage of not penalising success or discouraging aspiration. It means low-income Australians will not be discouraged from taking a higher-paying job or investing in their skills and education to move into a higher paying industry. It would also send a signal that Australia is a land of opportunity that celebrates and encourages success, rather than looking down upon it.

In these pages yesterday, Craig Emerson wrote that “comprehensive tax reform, based on the principle of broadening the base to lower the rates, will have to wait”. Wait until when? Tinkering with trusts will just add more complexity and red tape to an already grossly inefficient tax system. Policymakers should get on to the job of real reform to expand economic opportunity and give all Australians a better chance at success.

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