Tax wealth properly, and Australia's ageing population will enjoy better health services, report says

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There is no reason why Australia’s ageing population should put health budgets under pressure, given the amount of untaxed wealth in the economy, a new paper argues.

The Australia Institute think tank has released a paper questioning the quality of the analysis behind the federal government’s recent Intergenerational Report (IGR).

The IGR, released in June, warned that Australia’s tax system would struggle to support our ageing population in coming decades.

But it ignored wealth and capital gains as a potential source of revenue, thereby underestimating Australia’s capacity to pay for government services, the paper says.

Household wealth in Australia has jumped $1.7 trillion in the last 12 months, on the back of soaring house prices and shares, to hit $12.7 trillion.

By contrast, the value of Australia’s annual economic activity (its gross domestic product, or GDP) is a relatively modest $2 trillion.

It’s part of a 30-year trend of growth in wealth and capital gains outpacing the growth of the economy itself, which has contributed to rising wealth inequality in Australia.

David Richardson, a senior research fellow at the Australia Institute and author of the report, said the IGR failed to account for that reality.

He said the IGR implied that government services could only be funded by conventional measures of income — such as taxes on wages, salaries, and businesses — while excluding capital gains from its analysis.

“Because Australia currently has no taxes on wealth, and collects very little income from capital gains, government revenues have not grown nearly as rapidly as the wealth of Australians,” he said.

“The Australian government may keep choosing not to tax wealth and capital gains of our wealthiest people as thoroughly as it taxes the incomes of ordinary workers.

“However, such choices make it hard to argue that Australia ‘can’t afford’ to provide healthcare in the years to come to what will clearly be the wealthiest generation Australia has ever known.”

Measures of income need to be wider

Mr Richardson’s 36-page discussion paper argues that the IGR’s analysis biases the discussion towards a belief that Australia will be “unable to afford” a wide range of services in the future.

His paper is titled “The Intergenerational Report ignores booming wealth and capital gains”.

It argues if the IGR adopted a broader definition of national income to include capital gains, it would change the national conversation dramatically.

The first IGR was published in 2002, and successive papers came out in 2007, 2010, 2015, and 2021.

All of the reports ignore wealth and capital gains as a potential source of government revenue.

Mr Richardson said former Treasury secretary Ken Henry’s review into the taxation system in 2010 made it clear that capital gains should be included in discussions about tax.

“The IGRs have been used to try to suggest that future generations will be burdened by the need to provide for the ageing population,” Mr Richardson argued.

“Australians will experience something like an 80 per cent increase in real incomes over the next 40 years, yet even that understates what is really going on.

“Income as conventionally measured has increased and will continue to increase, wealth has boomed and, with wealth, so capital gains have boomed.

“Including capital gains in income measures dispels any concern about future fiscal burdens. In 40 years, projections show that per capita income including capital gains could be higher by 158 per cent.

“The idea that Australia will not be able to afford the present pattern of government services is just wrong.”

He said the Henry tax review suggested taxing capital and capital income lightly because people had to save out of post-tax income and taxing capital amounted to taxing that income twice.

“But when the overwhelming bulk of net wealth is generated by capital gains that argument disappears.”

The definition of wealth?

According to the Bureau of Statistics, “wealth” refers to the economic resources held by members of a household after all of their debts are theoretically paid off. It is made up of:

  • residential property
  • superannuation savings
  • shares and other financial assets
  • other non-financial assets (cars, furniture, artwork)
  • investments in other real estate (investment properties)

A household’s wealth can increase in different ways.

It can increase when the estimated sale price of their home goes up, relative to the size of the principal outstanding on their mortgage.

It can increase when their share portfolio increases in value. It can increase when their savings grow.

In 2018 in Australia, the highest 10 per cent of households by wealth owned almost half (46 per cent) of all household wealth.

The lowest 60 per cent of households, who were younger and poorer, owned just 16 per cent of the wealth.

Mr Richardson’s argument is that the distribution of income and wealth is almost entirely neglected in the IGR.

He said the big picture showed that wealth in Australia had increased massively in recent decades, increasing from 3.6 times GDP 30 years ago, to 6.4 times GDP now, and was likely to keep running ahead of the economy.

“If present trends were to continue household wealth would be 18 times GDP in 2060-61 while per capita income including capital gains will be 158 per cent higher,” he said.

A wealth tax?

Mr Richardson said the increase in wealth in Australia had taken economists by surprise to some extent.

“While household net worth at March 2021 stood at 6.37 times GDP, in March 1990 it was a more modest 3.58,” he said.

“That would seem to suggest Australia has experienced a very substantial shift in the structure of the economy. Wealth now looms so much larger than it did three decades ago.”

He said similar trends had been observed in other countries.

In the US, wealth to income (net national income) increased from approximately 3.8 times in 1990 to 5.5 times in 2017, while in the UK the ratio of wealth to national income rose from 3.7 in 1995 to 5.7 in 2018.

He said future analyses of the impact of Australia’s ageing population on government services should not ignore this rapid growth in a source of income.

“A consideration of the likely scenarios for wealth and capital gains in Australia suggests the Australian tax system is missing out on a very large tax base to the benefit of the wealthiest of Australian households,” he argued.

“Moreover, the worsening of the income and wealth distributions in recent decades is likely to get ever worse being driven by accelerating capital gains.

“Attempts to understand fiscal pressures in 40 years’ time need to take into account the fact that income received as capital gains might be well over the value of GDP or income as conventionally defined.”

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