COMMENT

A Hillary Clinton-style tax on Australia's rich is a bad idea

We shouldn't tax the rich more. Hear me out before passing judgement.

In the United States, Democratic Presidential hopeful Hillary Clinton wants to raise tax rates on those earning over $5 million a year by 4 per cent.

Democratic Presidential hopeful Hillary Clinton wants to raise tax rates in the US on those earning over $5 million a ...
Democratic Presidential hopeful Hillary Clinton wants to raise tax rates in the US on those earning over $5 million a year by 4 per cent.  Photo: Charlie Neibergall

The "fair share surcharge" is among other proposals to close tax loopholes that allow multimillionaires to pay lower tax rates than American middle-class families.

But it only applies to 0.02 percent of taxpayers. And in an Australian context it makes little sense.

US investor Warren Buffett has publicly admitted he pays less tax than his secretary and advocates a minimum tax on top ...
US investor Warren Buffett has publicly admitted he pays less tax than his secretary and advocates a minimum tax on top wage earners. Photo: Bloomberg

Wealth inequality in Australia is not as high as that seen in the U.S and United Kingdom, although it is widening.

There's been some discussion about addressing inequality via a new Buffett rule (named in honour of billionaire US investor Warren Buffett who has publicly admitted paying less tax than his secretary and called for a minimum tax on top wage earners).

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According to campaign group GetUp, 79 per cent of Australians support its introduction.

The Australia Institute says the Buffett rule, which federal Labor has said it will consider, would limit tax planning.

Mr Hockey had originally wanted to rent out the home.
Mr Hockey had originally wanted to rent out the home. 

Of those that do report their tax affairs to the ATO (and we know there's many who don't, so the true number is likely much higher) fifty-five of Australia's highest earners paid no income tax at all during 2012-13. 

All were earning at least $1 million, but with the help of tax advisers, managed to legally reduce their taxable incomes to below the $18,200 tax-free threshold.

A Buffet rule could mean those in the top 1 per cent (those earning above $300,000) face a minimum 35 per cent income tax rate. 

But wouldn't it be more beneficial in the long-term to simplify our tax system, and make it more equitable, by eliminating, or at least restricting, concessions that primarily benefit the wealthy?

We know the rich use superannuation to tax plan.

Instead of paying tax at their top marginal rate, there's a flat 15 per cent tax on super contributions. (Except for those earning more than $300,000, who pay 30 per cent tax on their concessional super contributions, but this is still far less than the top rate which, with the Medicare levy and debt levy, is almost 50 per cent).

Not only do the rich avoid income tax this way, but then there's an added benefit: no tax on super earnings after 60. 

A Grattan Institute report, Superannuation Tax Targeting has sensibly proposed restricting "concessional contributions" made from pre-tax income to $11,000 per year.

But super isn't the only tax planning tool available to the wealthy. They can also rely on Australia's peculiar negative gearing system, coupled with generous capital gains tax (CGT) concessions

ATO figures show that in 2012-13 the biggest deductions, from a total of 12.77 million individual tax returns lodged for the period, claimed after work-related expenses was negative gearing ($12 billion) and personal superannuation contributions ($2.9 billion). 

It revealed 1.26 million people deducted losses made on investments (including mortgage interest) from their overall income.

While the biggest band of property investors claiming tax deductions was in the $37,000 to $80,000 a year tax bracket, the average "loss" made per property more than doubled for those in richer tax brackets. 

These people declare a "paper" loss, when in fact, their investments are actually breaking even. And in the long-term they further increase their wealth by paying or little tax on gains made (note, there's also no CGT on the family home).

Groups such as the Grattan Institute, The Australia Institute, and Australian Council of Social Service are not alone in their view that such concessions are inequitable. 

The head of the federal government's Financial System Inquiry, ex Commonwealth Bank boss David Murray, has called for a rethink on superannuation concessions.

He stopped short of calling for limits to tax breaks such as negative gearing and capital gains tax concessions, but has pointed out that these have fuelled household borrowing and pose a risk to the financial system

Murray has also suggested that the negative gearing system be changed to a "neutral gearing" system, so that people no longer borrow above their means.

Even those who have made their names out of advising Australia's wealthiest families and business leaders – big-four firms like KPMG, and individuals like tax lawyer Mark Leibler – agree there's scope to end concessions that are basically used as "tax shelters".

The rich also like to use trusts to reduce income tax (for example assets go into the names of lower-income earning children in the family) and to avoid paying tax at the higher company rate. Joe Hockey had controversially proposed trusts be taxed like companies when he was in opposition. 

Whatever options are canvassed in the government's upcoming tax review, there's little doubt that the system is in need of a complete revamp.

The rich shouldn't have to pay higher tax rates. In fact there's scope to reduce personal tax rates to avoid bracket creep.

But the rich should have to pay. It's time to close up loopholes that enable the rich to tax plan.

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