It’s not just former ATO SES officers like Petroulias who hide behind identity takeovers, as Pierre Castel, the French billionaire behind the Nicolas chain of wine shops, was ordered to pay hundreds of millions of dollars in Swiss back taxes in a court ruling that found he deliberately hid his identity for decades as head of a global drinks empire.
What’s in a name? Exiled 95-year-old wine billionaire hit with $663m Swiss tax bill
How the 47 per cent tax rate drives a tax avoidance industry
Earnest Labor campaigners against the stage 3 tax cuts tend to overlook real-world reactions of the people that they hope to harvest more tax revenue from.
John KehoeEconomics editorAmid the furore over the stage three income tax cuts, a high top personal tax rate of 47 per cent may seem like a fair and progressive way to run a tax system.
But high marginal tax rates are encouraging tax minimisation by people who can structure their financial affairs, and punishing hard-working wage earners.
Labor’s greatest treasurer, Paul Keating, has called the top rate “too punitive”, and said in 2017 the top marginal rate should be 39 per cent “at the most”.
I’m not sure modern Labor, bureaucrats in Canberra and the left-leaning commentariat campaigning to dump the stage three tax cuts understand how they’re helping to make tax almost optional for a class of Australians.
Too many of them think like accountants, simply seeing tax as revenue to spend.
They need to think about tax more like behavioural economists, by considering the dynamic responses of people to incentives and disincentives in the tax system.
By international standards, Australia’s top 47 per cent tax rate (including the Medicare levy) cuts in at a relatively modest income of $180,000.
It smashes wage earners and drives people into artificial tax planning structures, so they pay very little tax.
Let me offer some examples.
Case study one is a Melbourne friend who quit their job as a high-paid (and high-taxed) employee. He set up a self-employed consultancy.
Now, earning several hundred thousand dollars a year, they pay themselves a notional salary of about $100,000 attracting marginal rates of between 19 per cent and 32.5 per cent.
They intermingle their business and private expenses, such as for vehicles, rent, IT equipment, travel, accommodation and other items. The tax deductions for these expenses massively reduce their taxable income.
Just before the end of the financial year, they dump a large amount of cash in a tax-concessional, self-managed superannuation fund. He will then withdraw the money tax-free after he turns 60.
The poor old wage earner is repeatedly forced to pay more tax to make up the difference through levies and bracket creep.
My friend reckons they now pay very little income tax and certainly far less than when they were a high-taxed employee.
Case study two is a Sydney friend who says peers in his well-heeled Lower North Shore circle have “tens of millions” of dollars of assets in trusts.
They stream a relatively small amount of money each year to family members who pay very little tax on the income. They claim government transfer payments, such as family tax benefits, for being low-income earners.
Income “bunching” by trust beneficiaries is common, whereby the money they receive is often just below the marginal income tax thresholds of $18,200, $37,000 and $87,000.
Parliamentary Budget Office analysis says there are “spikes in the distribution that appear just below each tax threshold”.
“There is an incentive for the trustee to minimise the overall tax paid on trust income by allocating income first to beneficiaries paying lower marginal tax rates – when a beneficiary’s income reaches the next tax threshold, any additional trust income allocated to this beneficiary will be taxed at a higher rate,” the PBO says.
Labor went to the 2019 election pledging to apply a minimum 30 per cent rate to trust distributions. It was a reasonable idea that could be revisited.
The problem was Labor also pledged a 2 per cent budget deficit levy on personal income tax, to take the top tax personal rate to 49 per cent.
For clever tax planners, it would have created a 19 percentage point gap between the trust rate and top personal marginal rate. The plan was dumped after the 2019 election and Labor supported the Coalition’s three-stage income tax plan in 2022.
Do the government and bureaucrats understand how the real world works?
Many of them have never run a small business or worked in private enterprise. They’ve worked in politics, unions and big law firms.
I suspect the Liberals have some inkling of the shenanigans. But being aligned to small business, the self-employed and asset rich such as farmers, conservatives are likely turning a blind eye.
Public servants advising the government need to interact more with the real world.
Some of them are in on the game. Some bureaucrats quit as government employees, then quickly return as highly paid consultants operating through business entities that can massively reduce their tax bills and claim benefits such as instant asset write-offs for new cars.
Ripping off the tax man is a national pastime in many people’s eyes.
But regrettably, it means the poor old wage earner is repeatedly forced to pay more tax to make up the difference through levies and bracket creep.
Only 50 per cent of taxpayers pay net income tax in Australia, after government transfers.
The overly generous tax-free superannuation for people aged over 60 is also intergenerationally unfair.
Moreover, the Coalition government’s reduction in the small company tax rate to 25 per cent, from 30 per cent, is incentivising workers to incorporate into self-employed entities to slash their tax bill, instead of being a high-taxed wage earner.
It’s crazy that there is up to a 22 percentage point spread between earnings on a fixed wage and someone who is self-employed and can claim huge tax write-offs.
Hence, it’s not surprising that the Australian Taxation Office estimates there was a small business income “tax gap” of $12.9 billion for the five million small businesses in 2018-19.
A flat tax is a dirty concept among progressives. Yet, we should move towards aligning the top marginal rate, the 30 per cent large company rate, the small company rate and the rate on trusts.
A uniform rate of about 30 per cent would suck more people back into the Pay As You Go taxpayer system because the benefits of using other structures would be reduced.
A flat 32.5 per cent personal income tax rate for all incomes above $120,000 would cost only about $2.6 billion a year more than the current stage three tax cuts (instead of a 30 per cent rate for incomes between $45,000 and $200,000 and 45 per cent thereafter).
This excludes other likely revenue benefits from deterring people using artificial structures and the opportunity for the government to close down tax loopholes.
A flat tax rate on incomes above $120,000 would still be fair. High earners would pay a lot more tax in absolute dollar terms than lower income earners.
A flat tax would be fairer, incentivise work, reward effort and make Australia a magnet for global talent.
A close family member lives in Singapore. He and his wife are moderately high-income earners and pay low Singaporean tax rates of between 15 per cent and 22 per cent. In Australia, they would likely pay 47 per cent.
Australia has other natural advantages, so it doesn’t need tax rates as low as Singapore. But we do need to be globally competitive to attract highly skilled workers to be local taxpayers to fund services.
Labor has been considering unwinding the legislated increase in the top income threshold from $180,000 to $200,000, and the flat 30 per cent rate for incomes between $45,000 and $200,000 from July 2024.
Instead of denying the return of bracket creep to overtaxed wage earners and encouraging tax minimisation, Labor should think about the behavioural impact of its actions and broaden the tax base in other areas, such as superannuation, consumption, trusts, capital gains discounts and the distortionary small company rate.
Otherwise, the joke will be on wage earners.
John Kehoe is Economics editor at Parliament House, Canberra. He writes on economics, politics and business. John was Washington correspondent covering Donald Trump’s election. He joined the Financial Review in 2008 from Treasury. Connect with John on Twitter. Email John at jkehoe@afr.com
