Aussies & NZ: You're the Voice Try and Understand It

[Jeor]

On 1/25/2024 at 1:37 PM, Paxter said:

Good luck taxing wealth in Australia any more than it is now. The Right would never allow it. 

Given that, it's important not to give tax cuts towards the top end. We need people higher up to be doing the heavy lifting.

There are a few ways to do it (taxing wealth) - the playbook we've been talking about for years on this board, i.e. getting rid of franking credits, negative gearing, capital gains tax concession rate, all of which advantage people who are asset-rich. 

I think one of the reasons I'm annoyed at the high-income tax thing is that it doesn't address the fundamental issue with our tax system, which is the massive intergenerational divide. It is ridiculous that a wealthy retiree with a healthy super balance pays zero tax, and in fact, may get franking credits from the government. Any superannuation income stream is completely tax-free after you've turned 60. You could be drawing down 100K per year in retirement and not get taxed at all. You could do this while owning several investment properties that are negatively geared, and then flip them for a massive profit that gets a capital gains tax concession.

It's one reason why I've been advocating reducing income tax and beefing up the GST. Yes, it is regressive (unless you try to balance it out with the income tax adjustments) but GST is an unavoidable tax for every person regardless of income, wealth, age, etc. This makes it a future-proof tax as far as demographics, wealthy tax-dodgers etc are concerned.

The superannuation $3M tax was also a broken promise by Albo but it was at least a go at taxing wealth. It should have been indexed (in 30 years' time, $3M might be a standard balance) but at least it was a step in the right direction.

 

[Paxter]

Raising the GST would be a complete disaster for people actually doing it tough in Australia. 

We have 13% sales taxes in Ontario and it f*cking stings. Not to mention provincial and federal income taxes.  

[The Anti-Targ]

GST is the [classical] liberal tax panacaea. The most anyone has ever done in arguing against it is get liberals to admit it's regressive. But they always say, sure it's regressive but...

But the first thing everyone needs to recognise is that tax does not pay for national / federal govt spending in NZ or Aus. Once everyone understands that truth you can look at the tax system in a completely different way. You don't have to go around looking for coins in the back of peoples' couches so that the govt can pay for roads, schools, hospitals etc. You think about what should and shouldn't be taxed to manage inflation, facilitate desirable behaviour (investment in productive activity, e.g. building houses, constructing non-CO2 emitting electricity generation) and disincentivise undesirable behaviour (investing in unproductive and wasteful activity, e.g. buying houses (aside the the one you live in), burning fossil fuels). So, since wages and salaries up to a certain level are purely productive, earned income should possibly be tax free up to, say, $100K. Also since companies that produce stuff or provide useful services are productive corporate tax should be low or nil, except where profits significantly exceed what's reasonable. Personal spending on stuff is essential in a productive economy, so a general GST should not be applied, but targetted consumption taxes are worth considering, e.g. "sin taxes" on smoking, alcohol (and other drugs), gambling etc, fossil fuel, and taxes on luxuries (needs definition).

Municipal and state govts have no choice but to pay for things using tax / fee / levy revenues, so it's important to also think about what should be payed for by municipal and state govts and what should be paid for by the national govt. Most of the taxes people pay should be local / state taxes and national taxes as a proportion of personal income should be low.

[Jeor]

So are we saying that touching the GST is completely off the table?

I know people may not agree with me, but I think we have a problem if the current revenue continues to depend on income tax. Australia has the second highest proportion of income tax of all tax revenue in the OECD (Denmark is the first). Figure 2 of this link suggests that income tax is about 50% of federal government tax revenues, company tax and GST are about 15% each and nothing else is really in the ballpark (i.e. inheritance taxes etc aren't going to make up a significant amount).

This heavy reliance on income tax is not good for any country's ageing demographics, but Australia has a specific weakness on this as I've highlighted in my post above - income streams from super are completely exempt from tax once you are over 60. This will be an absolute killer in a couple of decades' time, when most retirees will start to have "full" super balances (which have been paid into over their whole careers) and a vast segment of the population will continue to draw comfortable incomes and not pay a cent in tax, while a smaller proportion of workers, particularly high income workers, will be paying heavy taxation to support this wealthy older generation.

The Stage 3 tax cut changes make some sense. But let's not pretend it's a great "equaliser"; Stage 3 changes will have absolutely zero effect on wealthy, asset-rich, superannuation-heavy, low-spending retirees (the truly "rich" in Australian society), as compared to higher income workers with lower asset bases, mortgages, supporting children, etc.

Hence - GST as one possible solution as an unavoidable tax. Yes, super reform altogether would be great, too. One or the other, I guess.

Edited January 27 by Jeor

[Jeor]

While we're at it - I don't know what other peoples' circumstances here on the Board are, but supporting two children (and in my case, an elderly mother-in-law as well) is an absolute killer for finances. Not only are there the far higher housing costs for getting enough space for said family, our grocery bill routinely tops out at $1200/month (and we don't eat fancy = 15K/year), second car (cars paid off, but probably cost 10K each per year in petrol/insurance/rego/services), hideously expensive childcare ($150/day even after govt subsidies - yes, that means 40K a year on childcare for ONE child if you did it full-time to enable your partner to work, 80K a year if you had two children in childcare), bills (electricity/internet/water/council rates = 10K annually).

We're already at 85K and that doesn't include the mortgage living in Sydney, which for some people would easily be 50K a year (4K a month), and doesn't assume any private school fees either (which can be up to 30-40K annually per kid). Yes, tell me I'm rich taking home 130K after taxes on a 180K income.

Now, if I were single, yes 180K gross income would make me rich. My outgoings would be probably 35K (subtract 40K for childcare, 10K for the second car) or even less if you proportionally reduce the groceries etc. I'd be super rich with a likely 100K surplus (minus whatever mortgage), but with a family? No way. And my income prices me out of pretty much all government support (e.g. Family Tax Benefit A cuts out at 80K), so I'm not drawing any tax/spending benefit from having a family from the government, apart from the very low childcare subsidy.

Until you actually have children, it's easy to deride people on 180K as huge income earners and fat cats who should bear the brunt of tax. You might change your tune after a couple of children come along...

Edited January 28 by Jeor

[Paxter]

The median income in NSW is about $55k. So it's definitely tough for those households on or around that income and raising a family, even if it's a dual-income situation. Certainly, saving for a mortgage, running multiple vehicles, and private schooling are completely out of the question. And you are probably only able to rent a small apartment in a city like Sydney. 

[karaddin]

Yeah my fucking rent is higher than that hypothetical mortgage spending which is where this country is absolutely cooked. I do live in an inner suburb, but it's a small duplex with 1 less bedroom than we actually need and yet it's still that high. When I moved to Sydney this place wouldn't have struggled to get a tenant and it would have been for $400 a week or so. 

I can assure everyone that the average incomes for renters has not gone up even close to as much as the housing costs.

Another problem (aside from the regressive nature) of treating the GST as an inescapable tax that even hits the wealthy retirees living off their super is that it's still not true. Wealthy retired people have a lifetimes accumulation of possessions, young people from lower socio economic backgrounds simply have so much more shit they have to buy. The retirees are basically food and luxuries and that's it. There's also the idea of the poor tax - poor people have to buy the cheapest shit available because that's all they can afford, but that also wears out/breaks so much faster than the higher quality goods the wealthy are able to buy - it already costs much more over time but they simply don't have the cash in hand to "shop smarter". So every time they're clocking up another iteration of buying the same thing, they're also getting hit for another round of GST - so they're also paying more of that there. 

I don't disagree that the mini property tycoon retirees living off plump super funds and their portfolio are a problem, but the GST is not going to meaningfully address that problem.

And the cost of land isn't even just a home issue, rent for commercial spaces is a huge chunk of the expense for any start up small business and damaging the economy driving them bust as well.

[Skyrazer]

Our whole tax structure needs to be overhauled, there's no doubt about it.

Many (myself included) have been beating this horse since the Henry Tax Review. Problem is, the average aussie voter doesn't have the stomach for it so we end up with tinkering with tax cuts being the most we can hope for. Every time real reform is put on the table such as peeling back NG or adjusting franking credits (usually by the ALP), the electorate screech in horror and go voting for whoever promises not to touch said inefficient tax breaks (usually the LNP).

Upping the GST would have to be accompanied with other major adjustments to our tax system so it doesn't burden the lower/middle income groups too heavily and there's no way I could see that getting traction with the electorate.

[The Anti-Targ]

Here's an interesting video on tax I saw just today, that was first posted a year ago. I think as a starting point for a great tax reset it's an interesting idea.

I've liked pretty much every Mr Beat video I've seen. He's got a great deadpan style, but it also helps that he and I seem to play in the same socioeconomic viscinity.

 

[Skyrazer]

LVT is a sensible tax yes and was part of the Henry Tax Review. Too bad it got all but mostly ignored.

NSW Libs briefly introduced a property tax which was similar in vein as an alternative to stamp duty (which is an atrocious tax that shouldn't be a thing IMO), but of course they then got voted out soon after and the Minns govt pretty much immediately scrapped it.

Tax reform in this county is just a doomed endeavour.

[The Anti-Targ]

6 hours ago, Skyrazer said:

LVT is a sensible tax yes and was part of the Henry Tax Review. Too bad it got all but mostly ignored.

NSW Libs briefly introduced a property tax which was similar in vein as an alternative to stamp duty (which is an atrocious tax that shouldn't be a thing IMO), but of course they then got voted out soon after and the Minns govt pretty much immediately scrapped it.

Tax reform in this county is just a doomed endeavour.

Except of course the "reform" that increases the burden on the poors and gives much needed relief to the rich.

[Jeor]

Yes, stamp duty is a scourge that should be abolished. The land tax that Perrottet introduced in NSW wasn't a bad idea and would have been much fairer over the long run, not to mention potentially free up mobility.

2 hours ago, The Anti-Targ said:

Except of course the "reform" that increases the burden on the poors and gives much needed relief to the rich.

The fundamental problem of tax reform is that no one would ever want less money in their pocket, and no one would ever want lower quality government services or support. Hence the need to tinker around the edges and only hit small segments of the population. I actually think "reform" is more geared towards hitting the rich rather than the poor. America is a weird outlier on this but in a compulsory voting democracy like Australia, the Albo plan of changing Stage 3 was made easier by the fact that only 10% of the population were worse off while 90% were better off.

If Albo wants to get rid of negative gearing, now might actually be the time to do it. People are already asking questions. There is a fair bit of support in the electorate for abolishing negative gearing (or at least limiting it to only one property) because, fairly or unfairly, it's seen as a major driver of the housing affordability crisis and he wants to be seen as doing something like that. 

If he's broken a couple of promises (superannuation, Stage 3), he may as well go the whole hog and go for negative gearing, franking credits, CGT reductions...

In other news, the Future Fund now will have Greg Combet as chairman taking over from a retiring Costello. I hope the Fund doesn't become a political warchest to spend on whatever priorities the government of the day has, or is liquidated just to retire government debt. I'd rather have a large asset and a larger liability, rather than no asset and a large liability. At least with an asset you have a chance to grow faster than the debt.

[Impmk2]

On good news inflation continues to drop ahead of forecasts. The RBA seems to have known what its doing.

Another quarterly read like Q4 (0.6%) and we're within spitting of the 2-3% target band. Things may not go as smoothly but looks like the back has well and truely been broken at least.

Edited January 31 by Impmk2

[Jeor]

6 hours ago, Impmk2 said:

On good news inflation continues to drop ahead of forecasts. The RBA seems to have known what its doing.

Another quarterly read like Q4 (0.6%) and we're within spitting of the 2-3% target band. Things may not go as smoothly but looks like the back has well and truely been broken at least.

Yes, for all the criticism of the RBA being behind the 8-ball (and leaving rates lower than the US, UK and NZ), it seems to be working. I expect rates will stay on hold throughout the year and a cut won't come right until the end, not as soon as people are predicting. Cuts only really come if inflation undershoots (highly unlikely) or if the economy crashes (less likely, though still a possibility).

There hasn't been a wave of foreclosures, a prolonged period of underinflation, a massive spike in unemployment, or a sudden increase in business failures, so there's no reason for the RBA to drop rates anytime soon unless 2 or more of those things happen.

[The Anti-Targ]

On 1/31/2024 at 1:53 AM, Jeor said:

Yes, stamp duty is a scourge that should be abolished. The land tax that Perrottet introduced in NSW wasn't a bad idea and would have been much fairer over the long run, not to mention potentially free up mobility.

The fundamental problem of tax reform is that no one would ever want less money in their pocket, and no one would ever want lower quality government services or support. Hence the need to tinker around the edges and only hit small segments of the population. I actually think "reform" is more geared towards hitting the rich rather than the poor. America is a weird outlier on this but in a compulsory voting democracy like Australia, the Albo plan of changing Stage 3 was made easier by the fact that only 10% of the population were worse off while 90% were better off.

If Albo wants to get rid of negative gearing, now might actually be the time to do it. People are already asking questions. There is a fair bit of support in the electorate for abolishing negative gearing (or at least limiting it to only one property) because, fairly or unfairly, it's seen as a major driver of the housing affordability crisis and he wants to be seen as doing something like that. 

If he's broken a couple of promises (superannuation, Stage 3), he may as well go the whole hog and go for negative gearing, franking credits, CGT reductions...

In other news, the Future Fund now will have Greg Combet as chairman taking over from a retiring Costello. I hope the Fund doesn't become a political warchest to spend on whatever priorities the government of the day has, or is liquidated just to retire government debt. I'd rather have a large asset and a larger liability, rather than no asset and a large liability. At least with an asset you have a chance to grow faster than the debt.

Of course, within limits, once people stop believing the "tax pays for [national] govt spending" lie they can have both. The tax burden, esp on the poor and low income, should be much lower than it is now, and govt spending does not need to decrease.

[Jeor]

16 hours ago, The Anti-Targ said:

Of course, within limits, once people stop believing the "tax pays for [national] govt spending" lie they can have both. The tax burden, esp on the poor and low income, should be much lower than it is now, and govt spending does not need to decrease.

I read your earlier post as well as this one, and I'm not quite sure I follow. I get that there is a difference in purpose in how you might view taxation (more as controlling the economy appropriately, rather than trying to pay for spending), but in practice, is this really any different? It seems if you're looking for low taxes and high spending you're inevitably going to run up large government deficits.

How would this system deal with large systemic deficits? The USA has run lots of high deficits lately, but they are the world's reserve currency so have not had much trouble financing them. In other countries like Australia, large, continual deficits would push down our exchange rate, make imports much more expensive (hence increase inflation), push up government bonds, and increase the interest rate on the government debt. If the government was seen not to worry about large deficits and hence not be "good" to pay off the debt (or could only pay it off through printing more money), that would lead into a debt spiral, currency crash, and hyperinflation. It sounds like Modern Monetary Theory to me which I must admit I'm not very convinced by.

Edited February 1 by Jeor

[Paxter]

Australia is running higher inflation than the US. Let’s not give the Reserve too much credit! That’s eating into real incomes. 

ETA: For the wonks: Cost of living Australia: Nation records biggest income decline in the developed world (afr.com)

Edited February 2 by Paxter

[The Anti-Targ]

4 hours ago, Jeor said:

I read your earlier post as well as this one, and I'm not quite sure I follow. I get that there is a difference in purpose in how you might view taxation (more as controlling the economy appropriately, rather than trying to pay for spending), but in practice, is this really any different? It seems if you're looking for low taxes and high spending you're inevitably going to run up large government deficits.

How would this system deal with large systemic deficits? The USA has run lots of high deficits lately, but they are the world's reserve currency so have not had much trouble financing them. In other countries like Australia, large, continual deficits would push down our exchange rate, make imports much more expensive (hence increase inflation), push up government bonds, and increase the interest rate on the government debt. If the government was seen not to worry about large deficits and hence not be "good" to pay off the debt (or could only pay it off through printing more money), that would lead into a debt spiral, currency crash, and hyperinflation. It sounds like Modern Monetary Theory to me which I must admit I'm not very convinced by.

Search "The deficit myth" get a full, first hand, understanding of what people like Stephanie Kelton and Warren Mosler are saying.

The first question to answer is why do govt deficits matter (for the Australian federal (and NZ) govts)? The deficit is just the difference between what the govt spends and what it receives by way of taxation, fees, levvies, fines etc. They key thing is the federal govt is the sole producer of the thing that it is both spending and receiving. If the govt is the monopoly producer of money, why does it need to collect what it produces from us for it to spend the money? So, if the govt doesn't need tax in order to spend, what does it need tax for? The govt absolutely does need to collect tax, but it doesn't need to tax to balance the budget.

The true reason a govt needs to tax is hugely important to understand in order to then answer the question: who and what needs to be taxed, how much tax should be collected and in what proportion from each part of the economy? Though the answer to that also very much depends on how sensible the govt is in its spending. The wiser and more sensible a govt is in spending the less it needs to tax.

Tax creates demand for the currency, the only way you can pay your tax is with money (you can't pay tax in eggs, gold or bitcoin). If you have no tax liability you have no need of money, but it's very hard to live a decent life in NZ or Aus without having a tax liability placed on you from somewhere. Tax gives money value. When the AUD replaced the AU pound the only reason to suddenly universally buy and sell things in dollars in the private sector was because the govt stopped accepting tax payments in pounds and would only accept tax payments in dollars, and the only way for people to physically get dollars was for the govt print shit loads of them and hand them out to everyone. They exchanged them for pounds, which the govt simply then incinerated (or shredded) as they were completely useless to the govt as soon as they were handed over. Thus the pound's value went to zero immediately on the introduction of the dollar, even though there would still be lots of pound notes out there that people could accept for payment if they wanted. But why would you when you can't pay tax with those pounds? Anyone hoarding pound notes under their mattress would just have useless, highly combustible mattress stuffing, unless they went to a bank to exchange the pounds for dollars within the window of time the govt had allotted for making such exchanges. 

Govts can always make any payment so long as the debt is denominated in that govt's currency. Govts should avoid taking on debt in any other currency. Govt bonds issued in AUD are merely passive income for people who are already rich. Tax helps to control inflation. Tax is required to manage the money supply aspect of inflation, but that is only part of what contributes to inflation. The trick is to know how much and what to tax in order to keep inflation within the boundaries the govt sets as sustainable long term. Another effect of govt spending on inflation is what the govt is spending money on. If the govt is building houses and roads and hospitals and schools it is competing with the private sector of access to those resources. That will also have an inflationary effect if govt procurement leads to an excess of demand over supply. So the govt needs to watch its resource demand, probably more so than it's deficit.

Deficit is a scary word for people, because in our own lives deficit means we have less today than we did yesterday. But for the govt money deficit means money surplus in the private sector, money surplus for the govt means money deficit in the private sector. The terrible and highly inaccurate analogy many on the right especially use is saying govts are like households, and so should be run like households. That analogy has been so harmful because govts are nothing like households and should never be seen or run as such.

Edited February 2 by The Anti-Targ

[Impmk2]

7 hours ago, Paxter said:

Australia is running higher inflation than the US. Let’s not give the Reserve too much credit! That’s eating into real incomes. 

I mean you're obviously far more of an expert, but if i recall inflation started spiking in the US a good 6 months before it did here, so it makes sense it would also lag the fall.

7 hours ago, Paxter said:

ETA: For the wonks: Cost of living Australia: Nation records biggest income decline in the developed world (afr.com)

Behind a paywall unfortunately, but from what I can read the first couple factors listed are mortgages and tax. Mortgages are no real surprise given Australia's absolutely insane housing market leading to one of the highest level of indebtedness in the world, leading to a massively outsized impact of rate rises.

Taxes (again without being able to see the article) are down to bracket creep? To a certain extent that should be helped by the revamped stage 3.

Would be interested to see the same analysis run in 12-18 months time, when we'll hopefully be at a more neutral cash rate, and stage 3 has kicked in. As is it seems like it's written mid-story.

Of course none of that will help the large underlying causes of the problem - the ridiculousness of the Australian housing market and a stupid tax system no one can touch without the vested interests destroying them politically.

Edited February 2 by Impmk2

[Paxter]

On 2/2/2024 at 3:22 AM, Impmk2 said:

Behind a paywall unfortunately, but from what I can read the first couple factors listed are mortgages and tax. Mortgages are no real surprise given Australia's absolutely insane housing market leading to one of the highest level of indebtedness in the world, leading to a massively outsized impact of rate rises.

The underlying cause is high inflation. Australia has been and is running one of the highest rates of inflation in the OECD. Housing costs are one element of this. 

The US has not had the same erosion in incomes, in part because it happens to use the world’s reserve currency. One of the reasons our incomes have suffered in Australia is a dive in the exchange rate as the Reserve has not maintained the higher interest rates of other developed nations. The petrol we import, for example, is typically US dollar denominated.

ETA: I should add, the story here is not about timing or whether inflation lagged in some countries from a timing perspective. It’s that Australia has had one of the highest magnitude falls in real incomes since the pandemic. 

Edited February 3 by Paxter