Picture yourself as the treasurer on the night of the budget announcement.
Each colleague presents a valid request with expectations of support. The defence sector seeks submarines. The health sector requests funds for hospitals. Aged care requires more staff. Infrastructure demands building materials. Education needs more teachers. Housing seeks financial aid.
Regions are asking for better roads. Urban areas seek rail improvements. The arts require preservation efforts. Industries want financial incentives. Backbench politicians desire projects that cater to their constituencies. Ministers aspire for programs that carry their names for posterity.
Everyone has a demand, provided the treasurer finds the funds. The treasurer's role may seem straightforward but is actually harsh – agree sparingly, decline frequently, and somehow amass substantial funds.
For many years, the easiest source for funding was the paychecks of Australian workers. In the most recent budget, personal income tax contributed to more than half of the total federal tax income. This source is dependable, hard to evade, and politically recognized.
However, this is where the system is beginning to show signs of strain.
Affluent yet feeling impoverished
Australia is a wealthy nation, and its government is also financially sound.
The federal government possesses assets valued at around one trillion dollars. These include infrastructure like roads, railways, defence resources, educational institutions, hospitals, land, and some financial investments like the Future Fund, student loan portfolios, and interests in companies such as NBN Co.
Still, each budget presents challenges. Every dollar is contested.
How can we simultaneously experience wealth and poverty?
The reason is that a large part of the government's assets is non-liquid and does not yield high returns. This indicates that the government has valuable possessions that do not provide much cash flow.
A highway does not directly provide revenue to the Treasury, but rather enhances the economy through better connectivity. A public hospital does not create direct revenue, but improves public health. Even the most significant assets are meant to provide services rather than generate cash.
I would contend that our government’s most valuable resource is not even recorded on the financial statements. It is its authority to impose taxes on 28 million Australians (along with the businesses they run) and to regulate a resource-rich continent.
Consequently, our treasurers (regardless of whether they belong to the Liberal or Labor parties) consistently return to the same source for their budgetary needs: Our earnings.
We relinquished the cash generation
It was not always the case. In earlier times, governments owned banks, airlines, and telecommunications firms.
Entities such as Qantas, Telstra, and the Commonwealth Bank were publicly owned. They generated revenue, distributed dividends, and contributed to state finances.
Then came the significant wave of privatization during the 1990s and early 2000s, when governments sold off these income-producing assets but retained their obligations.
This approach seemed rational to the authorities at that time. It was believed that the private sector would manage these enterprises more proficiently. The funds from sales helped to improve public financial standings, allowing treasurers to claim low or nonexistent national debt.
However, the enduring impact is often overlooked. We substituted dividend revenue for tax revenue.
Today, the treasurer is left with a framework that depends on income tax to cover all the governmental expenses.
The demographic pressure
This may have functioned well in a younger Australia, but demographics are changing.
The proportion of Australians in the working-age group is declining compared to retirees, with experts referencing the dependency ratio in this discussion; meanwhile, there are increasing financial pressures in an aging population.
This leads to a fundamental squeeze—fewer individuals in the workforce, rising expenditures, and unchanged dependence on income tax.
The only way this scenario remains balanced if other factors stay the same is that the typical worker will need to contribute more in taxes.
Some of this increase occurs subtly through bracket creep. As wages grow with inflation, tax brackets fail to adjust, resulting in average tax rates gradually increasing. This is the most effective form of tax increase due to its relatively unnoticed nature.
However, over time this accumulates, raising a crucial question—are we taxing the correct elements?
Taxing wages while neglecting assets
Australia's tax framework has a peculiar aspect. It imposes significant and consistent taxes on work-related income. Conversely, it applies lighter and more inconsistent taxes on wealth and assets.
This distinction is important because the wealthiest Australians are increasingly gaining their financial power from assets rather than salaries. Real estate, stocks, trusts, and businesses can be more challenging to tax effectively and are often taxed under more favorable conditions.
For instance, a nurse's overtime earnings are immediately taxed. In contrast, the profit from a property sale benefits from discounts and deferments.
The PAYG system is reliable, while the domain of trusts and asset structures offers more flexibility.
Even though the income tax system is progressive in absolute terms, wealth does not receive progressive taxation. Presently in Australia, we impose taxes on effort (i.e., labor) with greater precision than we do on wealth (i.e., the passive management of assets)—this contradicts our Australian ethos of acknowledging hard work.
Tax reform that we continue to delay
This is where the necessity for tax reform emerges. Although it may seem like a dry phrase, it represents a significant issue.
In 2010, the Henry Tax Review presented a framework for a more coherent system. It advocated for focusing taxes on four major areas—personal income, corporate income, consumption, and economic benefits derived from land and resources.
It called for fewer, more straightforward taxes. A more extensive consumption base. Enhanced efficiency in land taxation. Better collection of resource benefits. And a tax system that would remain sustainable as Australia ages (i.e., worsens the dependency ratio).
Sixteen years later, the recommendations from Henry are gathering dust in a Canberra cupboard. My understanding of Henry's reasoning is quite straightforward—let's impose taxes on assets that cannot be moved or concealed. Land is immovable. Natural resources are also fixed.
In contrast, labor is facing constraints. Increasing taxes on it is the easiest choice, not necessarily the best policy direction—I believe any treasurer who is not actively working to reduce income tax lacks foresight.
Additionally, as long as the budget is dependent on income tax, it is unreasonable to propose decreasing our migration numbers. Any politician advocating for reduced migration should simultaneously discuss their comprehensive plans for systemic tax reform.
If I had the role of treasurer
Therefore, if I were in the position of treasurer, I wouldn't eliminate income tax entirely, but I would strive to reduce the extent to which we rely on it.
I would expand the base for consumption, redesign the taxation of property to ensure that we impose taxes on land more effectively while minimizing taxes on transactions, and I would secure a larger (and more equitable) share of resource revenues when global prices increase.
You might say that I would increase taxes on balance sheets slightly while decreasing them on our wages a bit.
This isn't about penalizing wealth; it focuses on aligning the taxation framework with actual economic capacity. It aims to restore a middle class.
The political situation
Naturally, implementing these changes isn't straightforward. Additionally, this modest piece won't initiate significant structural changes.
Every tax has a group that benefits from maintaining the current system. Every proposed change creates clear losers. That's the reason tax reform is frequently debated yet seldom executed.
Real change necessitates a government ready to endure immediate political hardship for enduring structural benefits. It requires assurance that voters will understand the rationale, even if they may not approve of the specifics.
Australia might be on the brink of such an opportunity more than it has been in a while, as Labor seems poised to win the upcoming election due to the Liberal Party's ongoing identity crisis.
This moment may be the most favorable political chance for substantial tax reform since the Henry Tax Review.
Until we overhaul the tax system, the treasurer will consistently turn to the same mechanism on budget night: the Australian worker's paycheck.
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