Tax background paper. National Reform Summit John Daley, Grattan Institute August 2015

Transcription

1 Tax background paper National Reform Summit John Daley, Grattan Institute August 215

2 Summary Budget repair should include some tax increases Australia has small government by international standards Using expenditure/gdp in 28 as a benchmark cherry-picks an unusual year when nominal GDP was boosted by both business cycle and mining revenues Size of budget challenges mean that Commonwealth and State governments will need to boost revenues as well as contain spending History suggests that the politics are unworkable if budget repair is attempted only through expenditure reductions Current tax breaks on superannuation should be wound back More than half the benefits go to the top 2 per cent of households, most of whom would save anyway, and be unlikely to qualify for an Age Pension Most of the voluntary contributions are tax structuring by over 6s rather than early savings for retirement Tax free earnings for over 6s mainly benefit retirees with high incomes Negative gearing and capital gains tax discounts should be limited These tax breaks distort investment choices and inflate house prices A higher or broader GST would be an efficient way to raise revenues and compensation can be effective Compensation can be targeted to the bottom 2% through the welfare system Broad-based property taxes are efficient and fair Property tax revenues grow with the economy and are less volatile than stamp duties 2

3 Australian government is relatively small, even including super General government expenditure, OECD countries, as % of GDP, 214 Finland France Denmark Belgium Sweden Austria Italy Hungary Slovenia Greece Portugal Netherlands Norway OECD UWA* UK Luxembourg Iceland* Germany Spain Turkey** Japan* Czech Republic Poland OECD WA* Slovak Rep Israel* Aust (inc super)* NZ Canada Ireland Estonia USA* Australia* Switzerland* South Korea Mexico* Data for countries marked with an asterisk is for 213; for Turkey is 212 Source: OECD Compulsory super contributions 3

4 Australian labour taxes are relatively low if social security contributions are included Taxes on labour costs, OECD countries, as % of gross wages, 214 Belgium Austria Germany Hungary France Italy Finland Czech Republic Sweden Slovenia Portugal Slovak Republic Spain Greece Estonia Turkey Denmark Netherlands Luxembourg Norway Poland Iceland Japan United States Canada United Kingdom Ireland Australia Switzerland Korea Israel Mexico New Zealand Chile Source: OECD Taxing Wages 215 Income tax Employee social security Employer social security (inc payroll tax) Compulsory super contributions

5 Australia s top marginal tax rate is unremarkable, although the threshold is relatively low Top marginal tax rate, percent Portugal Slovenia Belgium Denmark Sweden Finland France Netherlands Ireland Spain Japan Israel Canada Norway UK Germany US Italy Australia Greece Iceland Luxembourg Austria Switzerland Korea Chile Poland Turkey Hungary Slovak Rep NZ Mexico Czech Estonia Top marginal threshold, AWE multiple Source: Treasury, Re:think; Grattan analysis

6 The low point of expenditure in 28 coincided with boost from mining and business cycle Commonwealth expenditure, and budget balance impact of terms of trade and business cycle per cent of nominal GDP 28% 8% 26% 24% Expenditure 6% 4% 22% 2% 18% Terms of trade Net Cyclical 2% % -2% 16% Financial year ending Source: Fiscal Pressures on Australian governments 214, Grattan analysis -4% 6

7 Filling a budget hole of $4b without revenue increases is implausible Budgetary impact of budget choices worth at least $2b/yr 213 $b per year Age Pension assets test Negative gearing Pharmaceutical spend Pension and super access CGT discount Higher ed subsidies Defence spending Cost effective medicine Super contr concessions Super earn concessions Fuel tax indexation Transport infra costs Industry support School class sizes GST broaden Health rebate Mining royalty CGT owner occ Payroll threshold Fuel tax credit Bracket creep Source: Grattan Institute, Balancing Budgets Positive impacts Negative impacts Revenue Mixed Expenditure 7

8 Summary Budget repair should include some tax increases Australia has small government by international standards Using expenditure/gdp in 28 as a benchmark cherry-picks an unusual year when nominal GDP was boosted by both business cycle and mining revenues Size of budget challenges mean that Commonwealth and State governments will need to boost revenues as well as contain spending History suggests that the politics are unworkable if budget repair is attempted only through expenditure reductions Current tax breaks on superannuation should be wound back More than half the benefits go to the top 2 per cent of households, most of whom would save anyway, and be unlikely to qualify for an Age Pension Most of the voluntary contributions are tax structuring by over 6s rather than early savings for retirement Tax free earnings for over 6s mainly benefit retirees with high incomes Negative gearing and capital gains tax discounts should be limited These tax breaks distort investment choices and inflate house prices A higher or broader GST would be an efficient way to raise revenues and compensation can be effective Compensation can be targeted to the bottom 2% through the welfare system Broad-based property taxes are efficient and fair Property tax revenues grow with the economy and are less volatile than stamp duties 8

9 The top 2% of taxpayers receive more than half of the superannuation tax breaks Share of superannuation tax concessions by income decile , per cent Bottom Top 1 Taxable income decile Source: Treasury (215), Financial Services Inquiry Final Report, p

10 High income earners have usually saved a lot by age 5 mostly outside super Average wealth per household by age with household incomes above $1, $211-12, $ millions All other wealth Other financial assets Super Other property Home Liabilities -1 5 to to 59 6 to and over Age of head of household Source: Grattan Institute analysis of Survey of Income and Housing

11 The most wealthy retirees earn more from superannuation and even more elsewhere Annual income, people aged >65 21$ 16, Wealth 21$ m 4 12, 8, Other income Wages Investment & business earnings Superannuation Pensions 3 2 4, 1 Bottom Top Wealth decile Source: HILDA survey 29-1; Grattan Institute analysis. 11

12 Tax incentives don t increase overall savings rates much Where do the extra contributions into tax advantaged vehicles come from? 1% 8% 6% 4% 2% % Venti Engen Attanasio Ayuso Chetty Estimates new savings from tax advantaged US Individual Retirement Accounts Biased result - assumes same savings preferences between IRA contributors and Estimates new savings from IRAs More robust than Venti but result sensitive to cut-off points chosen for analysis Estimates new savings from IRAs by comparing new and existing contributors Estimates of (short-run) effects on new savings not significantly different to zero Estimates new savings from tax-favoured retirement plans in Spain Amongst near retirees that contributed most, almost all contributions reshuffling from Reduction in tax break for higher income earners in Danish retirement accounts Comprehensive data of all citizens tax advantaged and other accounts over 14 years Would have been saved anyway Additional savings Study reliability non-contributors other savings Sources: Venti & Wise (1986, 1987, 1988, 199, 1991). Mid-point of range of estimates reported. Engen, Gale & Scholz (1996), see also Gale and Scholz (1994). Attanasio & DeLeire (22); Ayuso, Jimeno & Villanueva (27, 28); Chetty et al. (214). 12

13 Those on high incomes benefit most from the earnings tax concessions Superannuation earnings for 6+ year olds in drawdown phase $ , 4, 3, 2, Earnings tax concession Superannuation earnings without tax concession 1, Bottom Top 1 Income decile (including super earnings) Notes: Assumes a 5 per cent nominal return; 2.5 per cent inflation; 2 per cent of super fund earnings are attributed to capital gains and 8 per cent to other earnings, resulting in an effective tax rate on super earnings of 14 per cent in the drawdown phase. 13 Source: Grattan Institute analysis of Survey of Income and Housing

14 People with high incomes contribute significantly more to their super Average contributions for for people over 5 25, 2, 15, Personal concessional contributions (i.e. self-employed) Salary sacrificed voluntary contributions 1, 5, Compulsory contributions Bottom Top 1 Taxable income decile Source: Grattan Institute analysis of ATO Taxation Statistics

15 Non-concessional contributions are almost one third of all contributions Total contributions to all super funds, by contribution type $b (nominal) 12 Other contributions Voluntary non-concessional 9 contributions 6 3 Voluntary concessional contributions Compulsory concessional contributions Source: Grattan Institute analysis of ATO Taxation Statistics ; APRA Superannuation Bulletin June

16 High income earners are more likely to make non-concessional contributions Share of taxpayers that make nonconcessional contributions (per cent) , Average nonconcessional contribution ($212-13) 4, 3, 2, 1, Less than $18,2 $18,21 - $37, $37,1 - $8, $8,1 - $18, 18,1 or more Taxable income bracket Source: Grattan Institute analysis of ATO Taxation Statistics ; ATO 2 per cent sample file

17 Retirees make large average nonconcessional contributions Share of taxpayers that make nonconcessional contributions (per cent) Average nonconcessional contribution ($212-13) 6, 4, 2, Under 3 3 to 49 5 to to 59 Age Source: Grattan Institute analysis of ATO Taxation Statistics ; ATO 2 per cent sample file to to 69 7 and over 17

18 Summary Budget repair should include some tax increases Australia has small government by international standards Using expenditure/gdp in 28 as a benchmark cherry-picks an unusual year when nominal GDP was boosted by both business cycle and mining revenues Size of budget challenges mean that Commonwealth and State governments will need to boost revenues as well as contain spending History suggests that the politics are unworkable if budget repair is attempted only through expenditure reductions Current tax breaks on superannuation should be wound back More than half the benefits go to the top 2 per cent of households, most of whom would save anyway, and be unlikely to qualify for an Age Pension Most of the voluntary contributions are tax structuring by over 6s rather than early savings for retirement Tax free earnings for over 6s mainly benefit retirees with high incomes Negative gearing and capital gains tax discounts should be limited These tax breaks distort investment choices and inflate house prices A higher or broader GST would be an efficient way to raise revenues and compensation can be effective Compensation can be targeted to the bottom 2% through the welfare system Broad-based property taxes are efficient and fair Property tax revenues grow with the economy and are less volatile than stamp duties 18

19 Capital gains are disproportionately earnt by individuals, on real estate Taxable net capital gains , $billion Real estate Other assets 5 Shares Individuals Companies Funds Source: Grattan Institute analysis of ATO Taxation Statistics

20 Most capital gains are made by the top 1 per cent of income earners Percentage of net capital gains for each income decile (212-13) 7% 6% 5% 4% 3% 2% 1% % Bottom Top 1 Taxable income decile Source: Grattan Institute analysis of ATO Taxation Statistics

21 CGT discount contributes to very low tax rates for geared investments Real effective marginal tax rate on investments 35% 3% 25% 2% 15% 1% 5% % -5% No borrowing Borrowing 5% investment value (positive gearing) Borrowing 8% investment value (negative gearing) Notes: Assumes a 6 per cent nominal return, 2.5 per cent inflation. 5 per cent of the return in attributed to capital gain and 5 per cent to rental income. All investment income is taxed at the top 45c tax rate. The property is held for seven years and then sold. Source: Grattan analysis 21

22 More landlords are negatively gearing and average losses are growing Number of people Average net rental loss $214 1,4, Number of people negatively gearing 14 1,2, residential property (LHS) 12 1,, 8, Average loss (RHS) 1 8 6, 4, 2, Financial year ending Source: Grattan Institute analysis of ATO Taxation Statistics

23 Collective losses became large after the CGT discount was introduced Total net rent $ ($bn) CGT discount introduced Source: Grattan Institute analysis of ATO Taxation Statistics

24 High income earners get biggest benefit from negative gearing Percentage of the total tax benefits from rental losses by income decile 5% Taxable income deciles after rental deductions Taxable income deciles before rental deductions 4% 3% 2% 1% % Income decile Income decile Source: Grattan Institute analysis of ATO Taxation Statistics

25 Summary Budget repair should include some tax increases Australia has small government by international standards Using expenditure/gdp in 28 as a benchmark cherry-picks an unusual year when nominal GDP was boosted by both business cycle and mining revenues Size of budget challenges mean that Commonwealth and State governments will need to boost revenues as well as contain spending History suggests that the politics are unworkable if budget repair is attempted only through expenditure reductions Current tax breaks on superannuation should be wound back More than half the benefits go to the top 2 per cent of households, most of whom would save anyway, and be unlikely to qualify for an Age Pension Most of the voluntary contributions are tax structuring by over 6s rather than early savings for retirement Tax free earnings for over 6s mainly benefit retirees with high incomes Negative gearing and capital gains tax discounts should be limited These tax breaks distort investment choices and inflate house prices A higher or broader GST would be an efficient way to raise revenues and compensation can be effective Compensation can be targeted to the bottom 2% through the welfare system Broad-based property taxes are efficient and fair Property tax revenues grow with the economy and are less volatile than stamp duties 25

26 Taxes and property and GST are the most efficient taxes Loss of economic activity for each $ increase in the tax cents per dollar of revenue Council rates Land tax GST Local State Commonwealth Personal income tax Insurance duty Payroll tax Company tax Commercial stamp duty Residential stamp duty Sources: KPMG Econotech (211); Treasury (21) cents per dollar of revenue 26

27 Consumers are spending less on goods and services liable for GST Change in use of household disposable income 24-5 to Percentage point change 4 2 Proposed inclusions Remain exempt GST liable GST Liable Food Health Education Housing Financial services Notes: Some food and financial services are subject to GST. These individual products/services are not separately identified in the data so are not included in the GST liable category. 27 Source: Grattan Institute analysis of ABS National Accounts

28 Low income earners spend proportionately more on exempt goods Per cent of spending, % 18% 16% 14% 12% 1% 8% 6% 4% 2% % Bottom Top 5 Household income quintile Source: Grattan Institute analysis of ABS Household Expenditure Survey Childcare Education Health Exempt food 28

29 Most direct way to compensate the poorest households is through welfare payments Sources of income, per cent of total income 1% 9% 8% 7% 6% 5% 4% 3% 2% 1% % Bottom Top 5 Household income quintile Source: Grattan Institute analysis of ABS Household Income and Income Distribution, CURF data Welfare Super Investment income Employee income 29

30 Summary Budget repair should include some tax increases Australia has small government by international standards Using expenditure/gdp in 28 as a benchmark cherry-picks an unusual year when nominal GDP was boosted by both business cycle and mining revenues Size of budget challenges mean that Commonwealth and State governments will need to boost revenues as well as contain spending History suggests that the politics are unworkable if budget repair is attempted only through expenditure reductions Current tax breaks on superannuation should be wound back More than half the benefits go to the top 2 per cent of households, most of whom would save anyway, and be unlikely to qualify for an Age Pension Most of the voluntary contributions are tax structuring by over 6s rather than early savings for retirement Tax free earnings for over 6s mainly benefit retirees with high incomes Negative gearing and capital gains tax discounts should be limited These tax breaks distort investment choices and inflate house prices A higher or broader GST would be an efficient way to raise revenues and compensation can be effective Compensation can be targeted to the bottom 2% through the welfare system Broad-based property taxes are efficient and fair Property tax revenues grow with the economy and are less volatile than stamp duties 3

31 Australia has lower property tax revenues than in comparable countries Taxes on property and transactions, per cent of GDP 4% 3% Transaction taxes 2% Property taxes 1% % Source: OECD (214), Revenue statistics. 31

32 Taxes on land have been the growth taxes over the last decade Change in tax collection relative to 1% increase in GSP 21 to 214 2% 15% 1% 5% % Taxes on property and transactions Revenues grew faster than economy Revenues grew slower than economy Note: Property levy shows the revenues that would have been raised with a broad-based property levy of.2 per cent applied to unimproved land values had it been in place since ; GST is for the period since its introduction in 2-1 to Source: Grattan analysis of ABS Taxation Revenue, various years.

33 Broad based property tax generates more stable revenues than stamp duties Standard deviation between annual revenue growth and long run average growth for all states, ( to ), per cent 25% Taxes on property and property transactions 2% 15% 1% 5% % Revenues are more volatile than average Revenues are less volatile than average Note: Property levy shows the revenues that would have been raised with a broad-based property levy of.2 per cent applied to unimproved land values had it been in place since ; GST is for the period 2-1 to only, but displays similar volatility compared to state taxes assessed over this shorter period. 33 Source: Grattan analysis of ABS Taxation Revenue, various years.

34 Households with low wealth would not pay much for a property levy Average annual levy per household in each net worth decile 3, 2, 1,.15% Average annual levy as a share of net worth (per cent).1%.5%.% Bottom Top 1 Source: Grattan analysis of ABS Survey of Income and Housing Net worth decile 34

35 A property-based levy could generate significant revenues from a modest rate Forecast annual levy revenue and actual collections $ billions 15 Broad-based property levy of.2 percent of unimproved land value (215-16) Current property-related revenues (212-13) 1 5 State gvt revenues from property levy Less lower Cwth gvt income tax Net combined revenue gain Land taxes Council rates Stamp duty Notes: Property levy revenue forecasts are for , whereas land tax, council rates, and stamp duty revenues reflect collections. Source: ABS National Accounts ; ABS Taxation Revenue ; Grattan analysis. 35