How The Tax System Is Setting Young Aussies Up To Fail
The inter-generational divide in this country is growing.
The tax concessions baby boomers hitting retirement age enjoy (and believe they are entitled to) compared to the high taxes younger generations are forced to pay is creating a two-tiered society.
Superficially Labor is looking to wind back some of the generous deductions baby boomers enjoy, suggesting that the generational divide is becoming a partisan one too.
However, that is not entirely the case.
As much as there are generational divides in voting patterns, and in the way the major parties market themselves, the truth is that Labor’s policy scripts affect both ends of the generational divide. And the major parties are on a virtual unity ticket protecting retirees and their super from fair taxation.
Let’s take a closer look at some of the policy debates, starting with super. Both major parties think that super has now been “reformed” such that adequate tax is being paid. But let’s run the numbers on that claim and you be the judge of what is “fair”.
In retirement an individual can have up to $1.6m in super, and interest earned on that total is tax-free. And of course the principle isn’t taxed either. Couples can have $3.2m. Anything in someone’s super beyond that amount also isn’t taxed, but the interest earned on it is, at a flat rate of just 15 percent.
Let’s keep the maths simple. If you earn 10 percent on your super investments, a couple with $3.2m invested would earn $320,000 every year and pay absolutely no tax on that total. Anything they earn on additional super would only incur 15 percent tax. In other words, a couple with $5m in super would earn $500,000 every year yet only pay $27,000 in tax on that total, paying no tax on the $5m principle sum.
Is that fair? Earning $500,000 as your annual income yet only paying $27,000 in tax? Compare that to a law partner earning $500,000 and the income tax they pay. While defenders of generous tax treatment for earning on super regard that comparison as false equivalence, the following comparison is perfectly analogous.
Let’s look at a young couple looking to save for a home, for school fees, or for whatever the case might be. If they are a high income couple, with both earning $150,000 a year, they are close to the top marginal tax rate, meaning that any money they save (which they only save after incurring income taxes let’s not forget) will have tax on its earnings of nearly 50 percent. That’s even the case for a single income family on $150,000.
The above younger Australians don’t pay no tax on the first $320,000 they earn from savings like the retired couple, or just 15 percent on all earnings from savings after that. The younger couple pays 50 percent tax on all income their savings earn from the get go. No wonder it’s hard to save for a deposit on a home without a little help from one's parents.
The generational disparity is mind-boggling. But it doesn’t stop there. As young people get taxed left right and centre with globally high income taxes and significant taxes on interest earned, those older Australians with accumulated wealth are able to negatively gear investments, not just property. They receive franking credits as well. While Labor is looking to make adjustments in this space, the tax benefits to those older Australians with accumulated wealth will continue. For example, there is grandfathering as part of Labor’s negative gearing reforms. And even if those reforms go through, you can still endlessly negative gear new properties.
But the wealth disparity gets worse. Older Australians with accumulated wealth will be able to pass that wealth on, tax free, to their children, exacerbating class divides even in the young, based on the wealth accumulation of previous generations. It’s a new form of aristocracy. Australia is one of the few countries in the world without inheritance taxes. We are also one of the few countries that doesn’t tax the family home.
The Australian tax system means that even high income earners find getting ahead difficult -- because of too much income tax. If you aren’t born into intergenerational wealth, the tax system stings you.
The biggest problem with tax treatment which provides such generous advantages to baby boomers is that it takes money out of consolidated revenue which could be used for better services, to reduce income taxes or to pay down debt. All of the above would help younger Australians directly and indirectly, but the major parties feel it necessary to pander to the baby boomers because they are a disproportionately large voting cohort. Their size as a grouping exacerbates the opportunity cost of taxes not collected from them at the same time as it increases their political clout. Throw in that younger voters tend to be less tribal and less politically engaged compared to older voters and the likelihood that the baby boomers can sway political opinions only increases.
Some might say not to worry, because one day we will all retire, and therefore be able to take advantage of the generous tax treatment mentioned above. If we have significant accumulated wealth that is. Maybe, in theory yes. Living that long is of course everyone’s goal. But by the time younger Australians get there you have to assume the loopholes and tax treatment will have been reformed, out of institutional necessity. An ageing population can’t sustain a tax system which allows wealthy older Australians to pay so little tax.