by Terry McCrann
Responding to criticism by the Minister for Finance, Senator Walsh, Terry McCrann sets out his reasoning and evidence for the claim that Australia's capital gains and wealth taxes are among the most severe in the industrialised world. This article is based on two columns which appeared in the Melbourne Age on June 19 and June 20 (1986).
SENATOR Walsh took me to task, uncharacteristically gently, for referring to the Government's capital gains tax as the most punitive in the world. While I concede this was a touch exaggerated, Australia certainly has one of the most punitive taxes. Further, we appear to have among the highest levels of "wealth" taxes among developed industrial countries, with many ordinary wage and salary earners each year having to pay $1,000 or more -- and rising rapidly -- hi these forms of tax.
According to Senator Walsh, the key point is that whereas most OECD countries levied capital gains taxes at a rate around 30 per cent, they did so on nominal gains (with the exception of Britain). Thus, while our all-new local capital gains tax would be levied at the taxpayers' normal marginal income tax rate -- which in most cases would be either 47 per cent or 61 per cent, maybe dropping back to a maximum 50 per cent next year -- only real gains were to be taxed down under. Obviously, if a realised capital "gain" was entirely due to inflation, no tax would be payable in Australia in contrast to some tax paid in most of those other OECD countries. Conclusion: our tax was less punitive.
Senator Walsh makes this point as follows: if an asset was bought for $100,000 and both "the market price of the asset (sic: I suggest he meant to say, the annual increase in the market price of the asset) and the inflation rate remained constant at five per cent for 14 years and the asset was then sold," the tax levied in Australia would be zero as against perhaps $30,000 under the common OECD-type tax.
The good Senator was kind enough to concede that if one made different assumptions, such as the particular asset's value rising at a faster pace than inflation, then the numbers would not be so dramatically favourable to the Australian tax.
So the same $100,000 asset held for 14 years with five per cent annual inflation but a 10 per cent compound increase in its value -- assumptions he stressed were "highly unlikely" -- the typical OECD capital gains tax would take just under $90,000 with the down-under model claiming just under $80,000.
His bottom line was that "with any ratio of inflation to asset value increase less than the 1:2 ratio which is cited in that hypothetical example, the Australian tax would be lower than under the common type of capital gains taxes which prevail in the OECD."
Unfortunately, this is barely half the story.
There are less salubrious features of our new tax. Two in particular. The first is that our tax bears far more harshly than the common OECD tax on short-term capital gains, where inflation is irrelevant. A common example is where an investor buys $100,000 worth of shares, the market booms, and he sells them for $200,000 one year and one day later. Assume a 10 per cent inflation rate and the investor having other income amounting to the mammoth sum of $35,000. That investor will pay tax of 61 per cent (maybe 50 per cent after next year) of $90,000. That is equal to $54,900 (maybe $45,000 if the rates are cut) compared with $30,000 under those far tougher common OECD capital gains taxes.
And why did I say he sold the shares one year and one day after acquiring them? Because that got him into the "softer" version of Senator Walsh's range of capital gains taxes. The Government plans to leave in place the existing provisions of the Income Tax Act which tax as ordinary income any gains, indeed any nominal gains, on the sale of an asset within 12 months of acquisition.
Now Senator Walsh might argue that this is an income tax and not a capital gains tax. Others might take a different view and even chance their arm that this is the most punitive capital gains tax in the world -- without fully knowing the tax systems of Gabon, Gambia, Guinea et al.
If my mythical investor had sold after 364 days, he would not have even picked up Senator Walsh's "generous" allowance for inflation. He would have paid 61 per cent of the full $100,000 (ditto as before, maybe 50 per cent sometime in the future) -- or just about exactly double the amount levied under those terribly harsh taxes common in most other OECD countries.
The second point is that the Government in its generosity will allow realised capital losses to be offset against capital gains to reduce any tax liability. This, of course, applies to most capital gains taxes in the OECD and, with a moment's thought, is self-evidently the only equitable thing to do.
But, in the case of our overly-generous tax, only realised nominal losses will be allowed to be offset, not as one might have expected realised real losses. Assuming continuing inflation it will be almost impossible for investors to incur nominal losses -- except on assets held for short periods where inflation has not had a chance to work its miracles. Whoopee!
Consider an example where an investor buys one parcel of shares for $100,000 and an investment house also for $100,000. Over 10 years (with aggregate 100 per cent inflation) the house appreciates in value to $300,000 while the shares languish at that original $100,000 -- a not unlikely prospect to anyone who lived through the early 1970s. Under Senator Walsh's tax the after-inflation profit on the house is $100,000 and thus $61,000 of tax is payable. No offset is allowed for the real loss on the other parcel because there is no actual nominal dollar loss.
But consider what happened to that investor's investment portfolio -- the combination of the house and the shares. The investor started with a $200,000 investment portfolio. After 10 years the inflated value of his portfolio was then $400,000 which is exactly what he realised on sale. He may have made a real profit of $100,000 on the house, but in real terms he lost $100,000 on the shares. In short, he did not make a penny of real profit on the portfolio taken as a whole. Yet he is still up for $61,000 tax.
Wealth Taxes
The lunatic, and not-so-lunatic, left -- and various economists, academic and otherwise -- clamour for a wealth tax in this country on the grounds of tax "rationality", economic "efficiency" and "equity".
It is undeniably true that one would search in vain through the tax laws for any imposition of a "wealth tax", or even its less emotive title, "net worth tax". But that, of course, proves nothing, as a thorn by any other name would still cause pain. In truth, we do have "wealth taxes" -- at least three that I can think of without too much effort. And, what is more, they are unfair in their impact as they are levied on gross assets without any deduction for liabilities as against the conventional wealth or net worth tax, which is levied on net assets -- the total value of the taxpayer's assets at a particular point of time less liabilities outstanding.
Furthermore, the down-under wealth taxes are levied almost exclusively on one particular form of asset or wealth which, to use one of those awful phrases I detest from the tax "reformers", renders them horizontally inequitable. That asset is property.
Various disguised wealth taxes are state property taxes, council rates and Melbourne Metropolitan Board of Works or other water rates. My comments apply to the Victorian situation and especially to the people who live in the Melbourne metropolitan area, but I presume the position is not significantly different elsewhere in Australia. Thus, just about anyone who owns a house in Australia -- even just the one family home -- is paying at least one, most likely two and possibly three of these disguised wealth taxes.
And in the main they are paying those wealth taxes out of after-tax income as -- income-earning properties aside -- they are not deductible against federal income tax. Indeed, they might be paying those wealth taxes even though in the strict sense they don't actually own any property at all, if they have just started paying off their house bought with borrowed money.
Before explaining this, it is worth emphasising that rates and state land taxes are very definitely a form of "wealth tax" -- or worth, or asset, or capital tax, whatever particular name is used. They are levied either entirely or almost entirely on the value of the asset, in this case property or land. They are not levied on income or capital gain or the like, simply on the value of assets. The fact that it is only one asset -- land -- is, apart from the tax equity questions, simply irrelevant.
It might be argued that water and council rates are not really a tax but a fee for service -- garbage collection, provision of water, etc -- and therefore equivalent to any other expenditures people make, such as for petrol or food.
One response to this is that all taxation is one way or another a "fee for service" -- the services being defence, schools, hospitals and so on to even include social welfare which, it might be argued, makes for a less unpleasant environment.
More importantly, though, these rates are less and less related to the cost of provision of the service -- and are more and more simply a means of raising revenue. The added costs of collecting one garbage can from a house on a hectare in Toorak compared to a small weatherboard in Williamstown does not justify the Toorak resident paying several thousand dollars for the "service" as against a few hundred for the Williamstowner.
Even accepting in part the fee-for-service argument, one might note that the taxes are levied only on people owning an asset, to wit, the land. They are not levied on users who do not own land. Quite clearly, the money raised by council and water rates is nothing less than a direct tax on "wealth".
And we now find that even people with just one piece of land -- the family home -- in suburbs a long way from a hectare in Toorak are paying the state land tax. Under the previous Liberal Government (and still so in most other States) the family home was generally exempted from land tax and you had to own at least two properties to be assessed for the tax. This is no longer so and, although there is an initial exemption threshold, people owning quite modest homes which are their only property asset are paying $60 to $100 a year in property tax. And that is the amount this year. The way the tax is structured it will almost certainly rise exponentially as the land value increases at a faster pace than the exemption threshold.
Unless significantly amended, it will mean that ordinary one-home-owning wage and salary earners (and those not even earning) could be paying $500 or more in this disguised but very real wealth tax hi the not-too-distant future.
On rates, it is not uncommon for people with ordinary blocks to be paying $600 or more to both the local council and the Board of Works. Add in the land tax and many ordinary Victorians are now paying $1,200 to $1,500 in these disguised wealth taxes.
And they have to find that money out of after-tax income. If their wage/salary is around $20,000 they have to apportion around $2,500 for their "wealth" tax. If they are really rich and earning about $35,000, they have to set aside $3,000 or more.
To emphasise, for many Victorians 10 per cent or more of their pre-tax income is now being paid in these disguised wealth taxes. Those "wealthy" citizens have to pay those taxes whether or not they actually "own" the family home in the true sense. They may pay up to $1,000 a year in "wealth" taxes on an $80,000 home even though they have a $60,000 mortgage and thus only $20,000 of equity in the property.
That alone suggests that our disguised wealth taxes are among the most punitive in the world, but the international comparisons, such as they are, provide further evidence. According to the Chart, the share of government revenue from taxes on wealth in Australia is well above the OECD average and higher than in 16 of the 22 OECD member countries.
Wealth Taxes
Relative size of taxes on wealth in OECD countries (1982)
Source: Reform of the Australian Tax System, draft white paper, AGPS, June 1985
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