Social Assistance for the Wealthy?
Social Tax Expenditures in the Context of the Henry Tax Review
Dr. Ben Spies-Butcher & Mr. Adam Stebbing Department of Sociology Macquarie University
Overview
• The Henry Tax Review and Middle Class Welfare Debates • Social Tax Expenditures & Why they are of Growing Concern • The FHSAs & the Process of Conversion • Case Study: Superannuation • A Way Forward?
Australia’s Future Tax System: The Henry Review
The Rudd government announced the Henry Review as the one of the most comprehensive reviews of the tax system in the last 50 years. The Henry Review is focused on:
• • • • • • Taxes on work, investment and consumption, as well as environmental taxes; Reforms to the tax and transfer system facing individuals, families and retirees; The taxation of savings, assets and investments, including company tax; The taxation of consumption and property, and other state taxes; Simplifying the tax system, including the interactions between federal, state and local government taxes; and Interrelationships between the elements of the tax system, as well as the proposed emissions trading system. For more info: http://ministers.treasury.gov.au/DisplayDocs.aspx?doc=pressreleases/2008/036. htm&pageID=003&min=wms
Ken Henry on Inequity and the Tax Review
“How we distribute prosperity is absolutely inseparable from how we create it. This is something parts of the welfare sector have been arguing strongly for some time, and it has been pleasing in recent years to see welfare representatives developing this position further. It's something I'd like to encourage and I hope what I have to say today adds to this important debate… I consider this [How much inequity should we allow?] to be one of the most significant choices society faces. Indeed, the question assumes inequity is a social choice.” - Ken Henry at ACOSS National Conference 2009
Where are we up to?
• Recent media and research attention on super tax concessions. i.e. Australia Insitute, ACOSS & ACTU.
• It is now clear that the Australian economy is in recession.
• Budget ‘rumours’: restructuring super tax concessions to pay for pension increases.
Middle Class Welfare Debates
Debates about middle-class welfare have largely focused on: • Tax-welfare churning
• Further targeting of income transfers (and social services)
But, as we will argue, of more concern are the inequitable distributive effects & low accountability of Social Tax Expenditures.
What are Social Tax Expenditures?
Tax expenditures refer to items of the tax code that lower the tax liability of tax payers who belong to particular groups or undertake certain actions. The resource allocations of tax expenditures are ‘conceptually equivalent’ to direct outlays, meaning that they must also be financed through raising taxes, directing expenditure from elsewhere or running deficits. Social tax expenditures (STEs) allocate resources in the key areas of welfare such as housing, social security, assistance for retirement incomes and support for families and the community.
Tax Expenditures as Social Assistance
Table 1. Large Social Tax Expenditures
Key Area of Social Assistance Low-income earners Families with Children Tax Expenditure Low-Income Tax Offset Tax Exemption of the Family Tax Benefits Child Care Tax Reb ate (30%) Concessional Taxation of Superannuation Private Health Insurance Rebate Non-taxation of capital gains; non-taxation of imputed rent. Social Security Recipients Tax Offset Revenue Forgone ($m) In 2006-07* 2 251** 2 480
Child Care Support for Older People
450 26 080
Health
3 500
Housing
20 000 15 000 1 200
Support for Individuals with Disabilities
* Tax Expenditure Statement 2007 ** Taxation Statistics 2006-07
Why do STEs matter?
• Rapid growth in number and budgetary cost of STE since the 1980s.
• STEs have limited transparency and public accountability compared to direct expenditures.
• STEs are more likely to have inequitable distributional effects that provide the greatest benefit to the most affluent tax payers.
The Rapid Growth of Tax Expenditures
Figure 1. The rising budgetary significance of tax expenditures
Low Visibility, Low Accountability
Table 2. Oversight of Tax Expenditures & Direct Outlays
Oversight Arrangement Estimates Compiled according to independent standards fit for the purpose. Identified for all Commonwealth agencies Subject to regular Budget review Reported in Budget estimates Existing Direct Outlays Yes Yes Yes Yes, generally by outcome rather than program. Yes, by outcome. Yes Yes Yes Existing Tax Expenditures No No Infrequently Infrequently
Subject to Budget monitoring Costs measured against measurements Subject to annual agency reporting Subject to annual audit
Infrequently Infrequently Infrequently No
Source: Auditor-General (2008)
‘Not for the poor?’
Tax expenditures benefit higher income earners because their benefits are linked both to the income tax system and to private spending on social services. Most tax expenditures in Australia relate to the income tax system, and because they are not capped, they return benefits equal to the notional amount of tax owed. As higher income earners pay more income tax and have greater purchasing power, these taxpayers receive greater benefits.
Tax expenditures & the recession
• The political and economic context has changed. • Tax expenditures are pro-cyclical. This means that their recent growth partly reflected the boom and they are likely to decline over next few years due to the recession. • Raises questions about their contributions over the economic cycle. • The political dynamics of the Global Financial Crisis don’t favour tax expenditures any more.
Conversion
• The process of conversion involves restructuring tax expenditures into direct expenditures. • As Kathleen Thelen and Jacob Hacker argue, conversion offers an incremental approach to reforming public policies towards new ends. • Conversion offers a strategy that creates political momentum toward equality.
FHSAs & the Process of Conversion
Table 3. The Conversion of the First Home Saver Accounts
Marginal Income Taxable Income* $0 - $6 000 $6 001 - $37 000 $37 001 - $80 000 $80 001 - $180 000 $180 000+ Tax Rate* 0% 15% 30% Election Proposal 0 0 15% 25%* 40% 45% 30% 25%* 30% 17% 17% Discussion Paper Proposal 15% 15% 15% Budget Proposal 17% 17% 17%
Case Study: Superannuation Tax Concessions
The relationship between super and tax is complex. Our focus is on the tax concessions for super contributions invested as part of the Superannuation Guarantee Scheme (SGS). Employers contribute 9 percent of workers’ incomes to super, as part of the SGS (with some exceptions). These super contributions are taxed at the concessional rate of 15 cents in the dollar. Benefits are regressive, increasing as income rises. We compare the current model with two alternative revenue neutral models that ‘convert’ the concessional tax rate for super contributions into a rebate.
Current Model: 15% Concessional Rate of Tax
Table 4: Estimate Value of Concessional Taxation for Mean Y of Tax Brackets in 2008-09**
Tax Bracket 2008-09*** $1 - $6 000 $6001 - $35 000 $35 001 - $80 000 $80 001 - $200 000 $200 001+ Mean Y of Tax Bracket 2008-09* ($) 3 153 22 313 51 726 109 143 419 290 Top Marginal Rate of Tax (cents/dollar) Nil 15 30 40 45 Mean Value of SG* 284 2 008 4 655 9 823 37 736 Rate of Tax Discount 0 0 15 25 30 Estimated Value of Tax Concession for SCG 0 0 698 2 456 11 321
Estimated Budgetary Outlay = $6 062 million*
Calculated from Taxation Statistics 2005-06
Model I: Flat Rate 15% Rebate
Table 5: Flat-rate 15% Co-contribution Scenario for 2008-09**
Tax Bracket 2008-09 *** $1 - $6 000 $6001 - $35 000 $35 001 - $80 000 $80 001 - $200 000 $200 001+ Mean Y of Tax Bracket 2008-09* ($) 3 153 22 313 51 726 109 143 419 290 Mean Value of SCG* 284 2 008 4 655 9 823 37 736 Cocontribution Rate 15 15 15 15 15 Estimated Value of 15% Flat Rate Cocontribution 42 301 698 1 473 5 660
Estimated Budgetary Outlay = $5 978 million*
Estimated using Taxation Statistics 2005-06
Model II: Tapered Co-Contribution Scheme
Table 6: Proposed Tapered Co-contribution Scheme
Taxable Income 2008-09 ($) 1 - 6 000 6 001 - 35 000 35 001 - 80 000 80 000 85 000 90 000 95 000 100 000 Mean Value of SG ($)* 284 2 008 4 655 7 200 7 650 8 100 8 550 9 000 Cocontribution Rate (%) 20 20 20 20 15 10 5 0 Estimated Value of Tapered Cocontribution ($) 57 402 931 1 440 1 148 810 427 0
Estimated using Taxation Statistics 2005-06
Why reform super along these lines?
If either model I or II were adopted, it would have the following benefits: • Increase the equity of public spending • Increase the transparency of public spending • Reduce the complexity of the taxation system • Reform existing super tax concessions in line with recent Labor policy reforms • Also supports revenue to increase pensions.
A Way Forward? The Process of Conversion
The process of converting tax expenditures into income transfers enhances the visibility of programs currently delivered as STEs, which makes inequitable policy structures clearer and increases their public accountability. The logic of converting tax concessions into direct payments is broadly applicable to other STEs. It has the potential to enhance the equity and accountability of public spending. By returning the tax system to its primary purpose of collecting revenue, and combining disparate social support schemes into the system of government payments, we can create a more inclusive, generous and affordable welfare state.