How much tax is too much tax? Craig Turnbull

GUEST OBSERVER

I consider taxes a necessary evil. Without us citizens paying a chunk of our hard earned to Federal, State and Local governments, we don’t have roads, schools, hospitals, power – all the sorts of things that we have come to expect from living in a developed first world nation. 

Over the years though, I formed a view that much of our tax money was wasted by Government and I decided that I could more likely use that tax money to provide for myself and my family. So I vowed only to pay the exact amount of tax I legally needed to – no more and no less. I began to invest for my future and made use of the laws that supported tax deductions for losses incurred for owning investments that would someday provide an income. I could do this when I borrowed to buy property or shares and even for businesses. The losses could be claimed under negative gearing laws, lowering the amount of tax I had to pay today, while building my wealth for tomorrow. I will be one of those fortunate people who won’t need to rely on the government pittance (pension) when I choose to stop work and begin my “living years”, which is what I now refer to instead of using the word “retired.” 

And now there is a lot of white noise that negative gearing for property is what is responsible for the massive price hikes over the last few years in Sydney. If negative gearing was responsible for this why haven’t there been the same massive gains in every other Australian city? Negative gearing has been available for property since the 1980’s – why so much fuss now?

And why would some vested interests be saying that negative gearing tax concessions are a rort for the rich? Data from the Australian taxation office showed that in 2011-12, 1.266 million Australians claimed negative gearing losses. Of those people, 883,000 – about 70%, earned less than $80,000 per year.

But negative gearing is a tax concession – not a tax I hear you say. Yes, correct – actually I have always been of the view that a concession always works better than a tax to change a behaviour. I think the carrot is better than the stick. The removal of the negative gearing carrot will have all sorts of unintended consequences, just as it did when Paul Keating revoked it in 1985, only to reintroduce it just 18 months later.

There is a very real argument to show that a massive part of the cost of housing is made up of tax. Some market commentators estimate that over 40% of the cost of a new home in NSW is tax paid to Federal, State and local governments. Imagine how many more homes could be built, bought and owned if those taxes were reduced or eliminated?

How much tax is too much tax?

Peter Costello, former Federal Treasurer says – “A government short of money is like an ice addict short of supply. It will do things it wouldn’t do to try and balance its budget.”

Invariably, it is far easier to think up and create new taxes than to cut expenditure.

I can remember a number of instances of where new taxes were introduced, that were supposed to replace others, but once mandated, the old taxes were not withdrawn. A good recent example is the GST, introduced in the 1990’s. It was supposed to be a tax on all goods and services, rather than more taxes on income. It was described as a way for the government to “broaden its tax base” – which is poli-speak for “raise more tax.” A raft of taxes like stamp duty, payroll tax, FID & BAD were to be eliminated as a part of the package. We still have stamp duty – an inefficient property tax and payroll tax in every state and territory of Australia. And there have been rumbles about increasing the GST rate too, only a few years after we were promised the rate would never increase, ever.

Never let a government introduce a new or “temporary” tax, even if the offer is to eliminate another tax. They don’t get withdrawn once introduced.

Income tax in the USA was first levied, at a rate of 3%, in 1862, to pay for the Civil War effort. It wasn’t until 1913, that the temporary income tax was made permanent, at the same time adding the ability to tax corporations. In 1895, the state of NSW introduced its first income tax at a rate of 2.5%. Federal income tax was not introduced in to Australia until 1915, ostensibly to pay for the war effort in the First World War.

There has been a campaign started recently by real estate industry related interests to have stamp duty reduced to the actual cost of recording a property transfer. This makes eminent sense to me. And would save property buyers about 5% of the cost of buying a home – this could be anywhere from $20-$30,000 or more for a median priced property. This is cash that would not need to be saved and paid at the time of purchase.

Did you ever stop and think about the number of taxes we actually have to pay in Australia?

Here is just a few:-

Personal Income tax (up to 48.5%).

Corporation tax (up to 30%).

Fuel excise – tax on petrol, about 40 cents per litre, now automatically increased every 6 months.

GST – 10% on all good & services, with the exception of some basics like food.

Capital gains taxes – at your personal rate, with a possible 50% concession.

Property taxes – land tax on any land you own you don’t live on, stamp duty on purchase.

Departure tax – leaving the country must mean you can afford another tax.

Other excise – taxes on alcohol and tobacco – if you can afford to buy smokes & beer…….

Luxury car tax – for cars priced over $57,466. If you can afford one of those you must be rich.

Payroll tax – levied on an employer once too many people are hired. Insidious and anti-employment.

Fringe Benefits Tax – levied on non-cash benefits you receive.

Superannuation taxes –taxed three times – on contribution, on income received and on funds withdrawal.

It’s a dizzying array and various groups are putting up ideas for yet more. The Grattan Institute just released a paper advocating an across the board tax on all land – ALL land, not just investment property, that could equate to around $7 Billion per year, a measly $500-$800 per year per property. These kind of taxes were introduced in the UK in the late 1700’s, before some bright spark thought up the idea of introducing income taxes, which were of course to pay for a war – those with Napoleon. 

How much tax is too much?

I think we are there already. Such multiple layers of tax across all levels of society are a genuine disincentive for people to invest. And such taxes lower economic growth.

Progressive governments around the world are lowering taxes. The UK just dropped its corporate tax rate to just 20%. Hong Kong & Singapore levy the same tax at 15%.

We haven’t got a lack of tax problem in Australia, we have a bloated spending problem.

Let’s start axing taxes that hinder investment.

It will make Australia an even better country.

Craig Turnbull is a property investor and author. He can be contacted here.