labors policies hit the middle class not the wealthy
When Bill Shorten tells us he hasn’t got anything against wealthy people, he may well be telling the truth. But the real question is what does Labor have against aspiring middle-class people?
Think teachers, firefighters, ambos, nurses, small-business owners. These occupational groups are reasonably well paid although, of course, not all small businesses generate good earnings. Labor’s proposed changes to negative gearing and the taxation of discretionary trusts will hit the middle class in a much more damaging way than very high-income earners.
Under the changes to negative gearing proposed by Labor, any losses sustained through an investment in an income-producing asset — new real estate aside — cannot be deducted from the taxable income of individuals. Mind you, these losses can be deducted from any other investment income that the individual may have.
For wealthy investors who have a range of income-producing assets, including several properties for instance, life can continue as it is with investment losses set against investment income. But for the nurse or teacher or firefighter with one geared investment property, say, the net cost of investment will rise and the returns decline.
This is particularly the case because Labor proposes to halve the “discount” of the capital gains tax, putting our capital gains tax among the highest in the world.
Then we come to discretionary trusts commonly used by small businesses for the purpose of asset protection and to divide income between beneficiaries. Note that all the income must be distributed to these beneficiaries each year, who then pay income tax at their marginal tax rates.
While some see this as a sneaky form of income tax-splitting, this is not necessarily or mainly the case. When a husband, wife and adult children work in a small business, is it not reasonable that the income is split to account for their contributions?
But here’s the thing, if discretionary trust income is taxed at a minimum rate of 30 per cent, many beneficiaries will find that their income tax liability jumps 50 per cent or more. Mind you, this is only for those who currently receive relatively small distributions and may also have a low-paid part-time job. By contrast, for high-income earners, there will be no change. They will continue to be taxed at their marginal tax rate.
It is a sort of Buffet Rule but in reverse. Low-income earners receiving trust distributions must pay at least 30 per cent in tax. For high-income earners, the situation is unchanged.
There is also a way by which wealthy people can get around Labor’s new rules. Let’s face it, very many wealthy people have farms. Given that farm trusts will be exempt, there should be scope to wrap a range of assets into the farming activity.
The reality is Labor has lost the plot in terms of tweaking the tax system. Rather than recognise what are legitimate and efficient deductions which encourage investment, risk-taking and hard work, Labor seeks to describe them as loopholes to be closed.
And don’t be so sure of the supposed budget savings from the changes to the taxation of trusts. Labor is putting a figure of $4 billion over four years. Savings of $1bn a year when income tax will raise about $187bn this financial year is chicken feed.
The core weaknesses of our tax system are the excessively high marginal income tax rate — it will go to 49.5 per cent under Labor with the cut-off income point unchanged — and the gap between this and the company tax rate. Throw in the excessively high tax-free threshold and you have the recipe for tax arrangements that either take advantage of these features or try to obviate them.
Add Labor’s dopey idea that the increase in the Medicare Levy of 0.5 percentage points will only apply to people earning above $87,000 a year, which will create a massive jump in the effective marginal tax rate at that point, and the only description that springs to mind of Labor’s tax policy is: train wreck.
The tax system under Labor will become an even bigger drain on efficiency, risk-taking and hard work. Someone needs to point out that growing the size of the economic pie is much more important than dividing it up.
If Bill Shorten was genuine in his pursuit of equality and fairness in the tax system he would champion joint tax returns allowing couples to be taxed on their joint income, effectively giving working Australians similar benefits to those using trust funds and discouraging their use.
Of Course this is something he would never do as it would reduce the money available for his spending spree.