Australia may find itself next week on the path to the largest peacetime tax increases since Federation. It is not simply the magnitude of the tax rises that makes Labor’s plans exceptional — both in historical terms and relative to global trends — it is that they are so heavily focused on penalising saving.
The Conservative Party will fight Labor’s tax rises which is why it is so vitally important that more Australian Conservative Senators are elected to the Senate.
The Australian reports, Labor and its critics have concentrated on who would, and who would not, pay the higher taxes. However, the costs that tax increases impose are never limited to those who sign the cheque.
Rather, as people adjust their behaviour, the economy shrinks. What is uncontroversial is that for each dollar of revenue raised, taxes on savings do more damage than taxes on income or on consumption.
And it is also uncontroversial that the higher the taxes on savings are to begin with, the greater is the harm further increases will cause.
It would, in other words, be one thing if we were starting from a situation where taxes on savings were low, and all that was involved in Labor’s plan was to bump them up slightly. It is quite another to begin with tax rates that are already high and drastically increase them.
That is what Labor intends. And given how large its proposed increases are, the tax rates Australians will face on many forms of saving will be far higher than those on income or current consumption, taxing longer-term savings at especially punishing rates.
To understand why, it is crucial to recognise that when savings are taxed as ordinary income, the effective tax rates can be extremely high even if nominal rates seem reasonable.
That is because the amount saved will have already been taxed; then tax will be applied to each year’s returns before they are reinvested , with the tax compounding and the rate rising as the amount grows; and finally, when the savings are cashed out and spent, some part of that amount will be taxed too, including through the GST.
To make matters worse, because what is being taxed is the nominal amount, the taxes may deprive the saver of any compensation for inflation, driving real returns to or below zero.
Perhaps that doesn’t cause Labor to lose any sleep, but the broader consequences should.
A higher tax rate on capital gains, particularly when it is combined with a steeply progressive income tax structure, increases the incentive to hold on to gains and realise losses. That makes asset markets less efficient — in terms of their ability to settle at a price that reflects long-term value — and more unstable, as the withholding of assets during upswings accentuates the boom, while the rush to realise losses when prices decline aggravates the bust.
At the same time, higher taxes on capital gains will hammer the medium-sized companies that rely on retained earnings — and hence on capital gains — to fund expansion , reducing investment and entrenching the oligopolistic structure of our economy.
There is, in other words, a steep price to pay for Labor’s tax offensive on savers. It is difficult to see how the costs it imposes could be justified. And making them even harder to justify is the fact that while Labor will punish voluntary saving, it will — by raising the superannuation guarantee — force many families who have more pressing calls on their incomes to save. As so often happens , choice will be replaced by coercion as taxes soar.
We can therefore safely conclude that Labor’s plan is not merely the largest peacetime tax increase in our history, it must also rank among the most inefficient. If that is what Australians want, they know how to get it.
To read Henry Ergas' full article, click here.
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