Tax system unfair, inefficient, discourages working

8 May 2008

The Brotherhood of St Laurence today released a ‘snapshot analysis’ of the tax system claiming that the system unfairly favours high income earners and does not encourage those on welfare to return to work. The Brotherhood backs calls for a major rethink of the tax system.

The report entitled ‘The Case for Change’ undertaken by Professor John Freebairn and Dr Rosanna Scutella highlighted a range of concessions that favour the wealthy introduced under the previous government.  For example, the research shows that an executive earning $100,000 per year can have a quarter of the effective tax rate of a gardener moving from unemployment to full time work at a salary of $31,000, by salary sacrificing into super.

*This takes into account the tax free threshold, LITO and the Medicare Levy.  #Includes the loss of Newstart allowance. 
Source: BSL calculations

The research shows that numerous exemptions, deductions and concessions, many of them favouring the most wealthy in the community, cost up to $30 billion a year in foregone revenue.

The report also highlighted the following inequities within the tax system:

In many cases people on welfare returning to work face effective tax rates that are significantly higher than the highest income earners who face a personal income tax rate of 46.5%. Many people on welfare looking to return to work face effective tax rates of 40-65% as well as the withdrawal of benefits such as the health care concession card and rent concessions.

Single parents on the Newstart Allowance who wish to undertake part time work can face particularly high effective tax rates (59%) - making it very difficult to balance the care of children with part time work.

These provisions have the effect of discouraging job seekers from rejoining the workforce.

This is in contrast with very generous concessions for high income earners.  Income derived from superannuation receives favourable tax treatment (essentially a flat tax of 15%). High income earners are able to rort the system by making huge contributions to super which have a much more favourable tax rate.

The Brotherhood is calling for:

• The concessional half tax rate on capital gains be removed (currently this concession results in $7.4 billion in lost revenue annually).
• Superannuation to be taxed on exit in the same way as personal income tax (super concessions currently cost more than $20 billion annually).
• A combination of working credits (where those returning to work are able to retain their benefit for a period of time) and the retention, for a period of time, of health care concession cards and rent concessions for welfare recipients starting work in order to encourage greater workforce participation.
• Family payments should aim to prevent child and family poverty. Both the baby bonus and Family Tax Benefit B to be subjected to much greater means testing and in the longer term overhauled.

Tony Nicholson, the Executive Director of the Brotherhood offered some support to the Government’s signalling of means testing of the baby bonus.

“We would offer some support for this move however we would urge the Government to continue the process of reform as the current system is riddled with unfairness and inefficiency. Tax reform, starting with the forthcoming Budget will inevitably produce losers but we have to ensure that the losers are those who can afford to pay,” he said.

Download a copy of The case for change: a snapshot analysis of the Australian tax system by Professor John Freebairn and Dr Rosanna Scutella (PDF file, 69 kb)