What is your one big idea?
After working for three years on tax reform, choosing just one big idea is like choosing your favourite child.
But one idea I want to see on the agenda is a dual-income system of tax – a system that taxes labour and capital income on separate schedules.
With a dual-income model, we could reduce taxes on wages by rebalancing taxes on other forms of income. This would be done by introducing a separate schedule for passive incomes such as rent, interest and capital gains which could either have a flat rate or a simplified progressive structure, as we have with wages.
You could still deduct losses from an investment property, for example, but only against other capital income, or carried forward to offset the tax paid when the asset is sold. Not against labour income.
What are the benefits? How would it help Australia?
It will make our tax system fairer and more sustainable, while encouraging people to invest in themselves and build their skills. It will also reduce the incentives to split or reclassify income – often through the use of trusts – to exploit lower tax rates.
Australia’s current tax system applies progressive income tax rates to earnings from work – wages and salaries – but taxes other sources of income, including property, shares and superannuation, in a variety of ways.
The idea of all income being pooled together sounds good in theory, but in practice, it means two people earning the same total income can pay vastly different amounts of tax depending on where that income comes from. This creates two problems. First, people on the same income can pay different amounts. Second, people on higher incomes can end up paying less tax than those earning less.
What are the downsides?
Some argue this would reduce the incentive to save. However, evidence shows tax rates have little impact on how much people save, but do influence where they put it. The current system favours some forms of saving over others.
How practical is it?
A dual income system is not a novel concept and has been used in several European countries since the 1990s. The proposal has broad support by tax experts, including the Australian National University’s Tax and Transfer Policy Institute.
How politically risky is it? How could it be sold to the public?
All tax reform is challenging.
Rebalancing tax across income sources would allow Australians to smooth their total tax paid more evenly over their lifetime, instead of loading it most heavily when they have a good, well-paying job but also the most expenses: raising their kids, paying down student debt, and saving for or paying off a mortgage.
Secondly, we have an ageing population and budget deficits underwritten by the implausible strategy that working Australians won’t notice us taxing them more and more each year (through bracket creep).
Finally, and importantly, this isn’t about redistributing wealth from one generation to another or punishing those who have been savvy with their money. It’s about preserving the overall progressivity of the system that all Australians expect while also encouraging people to invest in themselves.