Treasurer Jim Chalmers should consider double income taxation

Now here’s a big, bold idea.

An important tax reform that could achieve more productive and fairer taxation is a “dual income tax system” used in the Nordic countries that divides income and deductions into two components: labor and capital/l ‘saving.

It would be a very labor reform that could help hard-working employees, while providing fairness and efficiency.

After presenting his first budget on Oct. 25, Chalmers should seriously consider a dual income tax system in the second half of this government term for the next election.

It would be a very labor reform that could help hard-working employees, while providing fairness and efficiency.

A flat tax rate of, say, 25% on personal capital income and deductions would be a simpler and fairer system than the current hodgepodge of concessions and distortions. It would help eradicate “tax planning,” Kennedy lamented.

Currently, a real estate investor sees their capital gains taxed at half their marginal tax rate. For high income, this equates to a top tax rate of 23.5%. But they can fully deduct at a rate of 47% their interest and other real estate expenses, including salaries and wages. It’s an asymmetrical trade-off that makes little sense.

Meanwhile, a simple saver pays a penalizing rate of up to 47% on bank interest, without any deduction.

Uniform rate on all personal capital income

While there are legitimate asset protection reasons for trusts, they allow income to flow to beneficiaries to minimize tax for wealthy families who can afford smart accountants and lawyers.

The dual income tax system would limit investment income and deductions to a flat tax rate of around 25%.

Investment losses would be carried forward to offset future capital income, not immediately or fully deductible from wages.

It may be possible to deduct a portion of wages and salaries, but only the dollar amount determined by a fixed capital income rate of 25%.

A uniform rate for all personal capital income would reduce tax distortions.

Otherwise, the selective selection of individual tax breaks without a comprehensive approach simply leads tax planners to look for the remaining loopholes.

Over time, a dual income tax system would give the government greater fiscal capacity to reduce taxes on wage earners and prevent bracket drift from reaching an all-time high of over 26 % by 2030, as Kennedy’s analysis shows.

The Australian Taxation Office’s unique world-class payroll system would also make it easier to distinguish between earned and capital income.

Income tax reductions would be limited to employees and would not result in tax relief on capital income. It would be more affordable for the budget.

For years, the coalition government has disclosed billions of dollars in tax refunds for “unearned” or passive investment income through the $8 billion annual low- and middle-income tax offset.

Moreover, at a time of labor shortages, easing the tax burden on employees would increase the incentive to work longer hours and promote participation in the labor market.

Possibility to recalibrate third stage tax reductions

There could also be an opportunity to recalibrate — not reverse — the $15 billion-a-year Stage Three personal income tax cuts due from July 2024, to get the most for their money.

Perhaps the tax cuts for high earners could be partly exchanged for further concessions on pensions and capital income.

In the longer term, a dual income tax system may provide an opportunity to lower the top personal income tax rate for labor income to a level closer to labor income rates. capital and the 30% rate on companies.

This would further reduce tax arbitrage through corporations and trusts.

Former Labor Prime Minister and Treasurer Paul Keating has consistently advocated cutting marginal tax rates, including the 47% top rate (including Medicare premium) which amounts to $180,000 a year.

By international standards, the upper threshold applies to relatively low-income earners living in the high-cost cities of Sydney and Melbourne who are trying to pay mortgages or rent and raise children.

A simpler tax system and more uniform rates would reduce Australia’s heavy reliance on tax agents. More than 70% of taxpayers use a tax agent to file their tax returns, although 86% claim no deductions or only claim work-related expenses, gifts, and tax-handling fees.

In the Nordic countries, less than 5% of taxpayers use tax agents.

Australia’s human capital pool would be improved by having fewer well-trained tax lawyers and accountants and by diverting these smart people into more innovative and productive engineering, technology and science professions.

Robert Breunig and Kristen Sobeck, economists at the Australian National University, have advocated the dual income tax system apply a flat tax rate to most economies. They argue that the savings rate should be low – between 5 and 20% – because savings have usually already been taxed as wages. They also suggest taxing the principal place of residence, even though this would be politically very difficult.

The 2010 tax review by former Treasury Secretary Ken Henry recommended taxing labor compensation, including wages, salaries, benefits and employer pension contributions, “in a more coherent and with few exemptions”.

“Savings income would be taxed on a more consistent basis with other income.”

Chalmers is the government’s best public communicator. He might have the ability to connect with the community and sell economic reforms like Keating.

Chalmers takes a medium-term view and isn’t rushing to offer counterproductive band-aid solutions to cost-of-living pressures and the energy crisis.

He has learned the follies of trying to win daily media battles since working as a senior adviser in Rudd-Gillard governments.

Let’s hope real tax reform comes on its agenda.

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