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Labor should focus on cutting Government spending

Writing recently in the Australian Financial Review, Associate Professor Steven Hamilton argued that, “There is one clear solution that public finance experts agree on, and that is the ‘dual income tax’ as implemented in the Nordic countries, which taxes all investment income and expenses (including trusts) independently of earned income at a flat rate and without a tax-free threshold.”

Achieving policy consensus among public finance experts, economists by another name, is no small feat. After all, if you ask three economists for their views, you’ll likely receive five different opinions. Nonetheless, after decades of studying, practicing, and observing public finance, this is the first time we have encountered such a claim of consensus.

It is true that investment income and capital gains are generally taxed at flat rates in Nordic countries: 30% in Sweden, 35% in Norway, and 42% in Denmark. However, it’s important to note that personal income taxes in these countries are so high and broad-based that there is little effective progressivity.

For example, in Denmark, the top marginal tax rate is 55.9%, and it applies to all individuals earning just slightly above the average income. In an Australian context, this would be akin to the top marginal tax rate of 47% kicking in at an annual income level of $100,000, rather than the current $190,000 threshold. In Sweden, all taxpayers pay a municipal income tax of 32% with no tax-free threshold, and a further national tax of 20% applies to incomes over SEK625,000 (approximately $100,000).

Hamilton is correct that Nordic countries tax trust income at a flat rate, but this is because trusts, as they are known in common law jurisdictions like Australia, do not exist in Nordic legal systems.

Most economists would accept that investment income should be taxed in proportion to the consumption it funds. Since income comprises savings as well as consumption, the tax on investment income either needs to be lower than that on labour income to more approximate consumption, or the tax shifted to cashflow (that is, consumption itself).

The appropriate lesson to be drawn from the experience of the tax regimes in Nordic countries, Australia, and the USA, is that to provide an adequate level of investment, the tax rate on investment income needs to discounted relative to labour income. One would hope that this is the duality that Hamilton had in mind.

Seemingly missed however is that Australia already has a dual income tax within the superannuation system, with most income taxed at 15% and capital gains on assets held over a year at 10%. By inference then, Hamilton’s dual tax proposal would need to extend beyond the superannuation system. This would likely impact dividend imputation, negative gearing, and accounting for inflation in capital gains (the so called ‘discount’).

Unclear is how a dual income system sits alongside the government's proposed 30% tax on higher super balances, including on unrealised capital gains. Particularly given the risk that once established, this model could leech beyond superannuation and become a broad-based wealth tax, including on the primary home. Such a ‘wealth’ tax would compromise the simplicity and efficiency of the current superannuation tax regime and significantly weaken Australia’s capital and investment markets.

These issues reflect the complexity of reforming Australia’s tax system. Thus, in contrast, we believe the Government's top reform priority should instead be tackling Australia’s persistently weak productivity growth.

Australia’s high tax rates and complex tax system undoubtedly contribute to its productivity challenges. However, an even greater barrier is the size, scope, and overactivity of the country’s bureaucratic and regulatory apparatus. This vast system, greatly expanded over the past 25 years, offers substantial opportunities for reform.

Scaling back Government would not only ease the fiscal burden but also create the political space needed to advance meaningful tax reform. Fundamentally, reversing the rapid growth in Government spending must be a top priority.

Major reformers of the past understood this sequence well. Hawke, Keating, and Walsh addressed Government spending before turning to tax reform, just as Howard, Costello, and Fahey did in their time.

Based on the 2025 budget and before election commitments are accounted for, approximately $300 billion or 40% of Commonwealth government spending will be on welfare and housing. The NDIS will cost 50% more than Medicare. Interest payments, which were essentially nil some 18 years ago, will be $30 billion. And by the end of the forward estimates, interest payments will be the Commonwealth’s 5th largest spending program; more than that budgeted for Medicare, defence, or aged care.

Real economic reform starts not with improving the efficiency of revenue raising, but rather with restoring discipline in how revenue is spent. Until the government reins in its own appetite, any attempt at tax reform, is simply rearranging deck chairs on the Titanic.

 

Peter Swan AO is emeritus professor of finance at the UNSW Sydney Business School. Dimitri Burshtein is a principal at Eminence Advisory.

 

26 Comments
Wildcat
May 11, 2025

In the year 2000 non market jobs were 22% of the economy. (This economist code for people who don’t make any thing eg bureaucrats). We had doctors, nurses, police etc. and we were fine. In 2024 this climbed to 30%. Or over a 33% increase. We don’t seem to have many more essential services, we have a shortage of nurses, teachers and GP’s. Govt bureaucracy has exploded. They largely serve little credible benefits and are a massive productivity drag.
We now have a situation whereby 70% of the workforce has to earn money to pay tax to then fund the was of all these extra bureaucrats. Noting of course Canberra also has the highest average wage in the country.

Throw in a tax system biased to the elderly and you end up with more people that vote for a living than work for a living.

Cutting costs is therefore politically unviable. Hence increasing taxes on what are becoming the minority is the easy political choice. I say this although I support Div 296 ( $3m super tax) although there should be no unrealised CGT and the limit should probably be the transfer balance cap which is of course indexed.

My solutions would be cut bureaucracy massively back to 22%, reign the joke a system NDIS in, remove refundable franking credits, include super pension income in seniors card calcs and drop the threshold to AWOTE, increase the taper rate on the aged pension and/or include a primary residence adjustment. Lastly we should increase the gst but assist the bottom 20% (yes this will mean a pension increase for some) and make it broad based to take pressure off of wage and salary earners.

Although this would right the ship no government will last more than one election if they did this.

Hence taxes will continue to explode in this country.

Talk about killing the goose that laid the golden egg.

d
May 11, 2025

Completely out of touch take proposing a tax system designed by the rich for the rich.

Half of all voters live off less than $50k per annum
75% live off less than $70k per annum

Cutting corporate taxes in the 80's sent the US, UK and Australia spiralling into debt. Corporate and investment taxes are too low not too high and have too many loopholes that allow the biggest corporations to pay the least.

The kind of thinking in this article is what led to the election wipeout of the Liberals

StarNine
May 10, 2025

The Basics of Land Value Tax: A Simple Breakdown
So, what exactly is a land value tax? At its core, it’s a tax imposed on the value of land itself rather than the buildings or improvements made on that land. This means that if you own a plot of land in a bustling urban area, you would pay taxes based on the market value of that land alone, regardless of what you’ve built on it. The rationale is that land value is influenced by community factors like infrastructure, schools, and public services, which should benefit everyone, not just landowners.
One of the key benefits of LVT is that it encourages efficient land use. By taxing land value, owners are incentivized to develop underutilized or vacant land. If the tax is lower than the potential profit from developing the land, property owners are more likely to invest in construction or renovation. This could lead to more housing options, parks, and commercial spaces, addressing the needs of growing populations in urban areas.
Moreover, a land value tax could significantly reduce the financial burden on working-class citizens. Since the tax is levied on land value, it would lower the tax burden on labor and capital, encouraging more job creation and economic activity. As cities grapple with the challenges of providing affordable housing and sustainable development, adopting an LVT framework could pave the way for a fairer and more prosperous community.
How Land Value Tax Can Change Our Cities for Good
Implementing a land value tax could have transformative effects on urban environments. For starters, it can lead to a more equitable distribution of wealth. By ensuring that landowners contribute their fair share to the community, LVT can provide much-needed funding for public services like education, transportation, and infrastructure. This not only raises revenue but also fosters a sense of shared responsibility among citizens.
Additionally, LVT can combat urban sprawl by promoting higher-density development. With the incentive to maximize land use, cities could see a shift towards more vertical living arrangements, reducing the need to encroach upon natural spaces and agricultural land on the outskirts. This aligns with modern sustainability goals and can help mitigate climate change impacts by encouraging public transit use and reducing reliance on cars.
Finally, LVT can empower local governments to make long-term investments in their communities. With a stable revenue source, cities can plan for future growth and invest in amenities that enhance the quality of life for residents. From parks to affordable housing initiatives, the possibilities are vast. In essence, a land value tax isn’t just a financial mechanism; it’s a tool for social change that can reshape how we envision and live in our cities.

Stephen
May 10, 2025

Care to give an example of any place that has implemented a LVT and reaped the benefits you’ve described?

Nick
May 09, 2025

NDIS is the spending program most in need of pruning. Costing 50% more than Medicare (which supports all Australians) makes no sense. If this represents the actual cost of providing support to the disabled then our definition of disability is wrong.

Russell Wadey
May 09, 2025

'discipline'.
Finally used in the second last sentence: the philosophy at the heart of every piece of conservative economic policy prognosticating I've ever heard. The justification for everything from the current US trade-war to not increasing the dole to something above the poverty line.
And behind all the teeth-gnashing over the amount spent on the NDIS and debt-service is the neoclassical economic assumption that taxation pays for federal government spending.
It does not (here's how it works in the UK: Berkely et al, 2024, https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4890683).
We've got this all backwards.
Can we PLEASE start tax reform discussion with what our societal policy aims are (I'll start: 1. actually dealing with climate change and 2. way less inequality), then work out a level of fiscal spending consistent with full employment (with a job guarantee) and low inflation. This is MUCH HIGHER than what is commonly believed to be the case now (especially with nominal G > i).
And it will need to be to start properly addressing objective 1.
All the rest is tinkering around the edges, equivalent to fiddling while Rome burns.
Of course I'm not holding my breath while the pollies and current batch of "economists" like Hamilton & Fraser are in charge of what passes for policy discussion.
Leadership on climate change? Anyone?

Dudley
May 09, 2025

"here's how it works in the UK":

Need to incorporate this:

'Revenue collection, including taxation, involves the reverse process, crediting the Consolidated Fund’s account at the Bank, thereby offsetting past injections.'
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4890683

James
May 09, 2025

"Can we PLEASE start tax reform discussion with what our societal policy aims are (I'll start: 1. actually dealing with climate change....."

How do you suggest we do that when Australia produces a very small proportion of world carbon emissions, has no sway over the world's biggest emitters and over enthusiastic, ideology driven climate action in Australia is only going to further hurt our economy, drive industry offshore and push up electricity prices!

Steve
May 11, 2025

"Start properly addressing objective 1". How? You used the word properly quite sensibly, but miss the point that we in Australia have virtually zero influence on anything to do with climate. We're about 1% of global emissions, so nothing will do will have any "proper" impact. So how about we instead start with "anything that pretends to address objective 1 is completely misguided and should be stopped and the resources used should be redirected to other priorities". Leadership in any form has to separate reality from fiction; it's a simple form of discipline to focus efforts on areas we can actually influence.

lyn
May 13, 2025

Steve & James, Agree.

OldbutSane
May 08, 2025

This doesn't really suggest any meaningful solutions.

The Government should start by realigning means tests for all government benefits. If family income is more than the median (or maybe no more than the top 40%), then there is no good reason why those need any Government support (given the median is well above the average). So, the $530k and $350k limits for childcare and parenting payments could be reduced. Likewise the CHCC limit if over $150k for couples should be reduced. In addition NDIS should be means tested, so that those who fur exemanple get large insurance payouts for disability (the amount usually includes ongoing care costs) can't double dip and get NDIS free as well

In addition the family home should be included in the pension assets test with a payback system for those who choose to receive the pension (ie thosedon't want to down size, but are income poor) similar to HECS, so that it is paid back on death or sale of the house.

Michael
May 08, 2025

According to ATO figures the median taxable income far lower then the average wage.
Median taxable income approx $65k.
AWE approx $87k.

Wildcat
May 11, 2025

Michael, that’s because account based pensions are not taxable income. Secondly as this is not taxed, the equivalent pretax income is even higher than what recipients actually receive. Comparing this to reported taxable income is therefore rather meaning if you are looking for data across the populous.

Dudley
May 09, 2025

"family home should be included in the pension assets test":

That changes the scheme from:
. all assets but Full Age Pension threshold in home
to:
. no more assets than Full Age Pension threshold.

Then apply for Rent Assistance.

Dudley
May 14, 2025

"Then apply for Rent Assistance.":

In due time, when assessed as needing age care, will not need a house to sell to fund an age care place.
Commonwealth will look after you at their expense.

Franco
May 09, 2025

Agree with NDIS being means tested, I have known some wealthy individuals receiving NDIS (one who was self funded and left an estate of over 8 million--- including millions to a Sydney private boys school)

lyn
May 13, 2025

HECS debt is extinguished at death, not claimable from Estate.

Peter Care
May 08, 2025

“Labor should focus on cutting Goverment spending.”. Great in theory, but the electorate and demographics won’t allow it.
Today is not the 1980’s which were the perfect time to reduce taxes and Government spending. Australia’s demographics are very different today and will dictate that Government spending will naturally increase.

One of the biggest increases in government spending is welfare spending and that is not because of unemployment benefits. It is the ever increasing age pension bill that is putting pressure on the budget. As we baby boomers retire we are eating more of the budget in age pension payments. As the largest demographic in our history, more of us are reaching age pension age and we are living longer. In other words you need to pay the full or part age pension to many more people than in the 1980’s, and because we are living a decade longer, you need to pay it for longer than in the 1980’s.
As well as ever increasing demands on our welfare budget (yes the age pension is a welfare payment), the ageing baby boomers also demand ever increasing spending on the health care budget. Superannuation helps a little but because more than 70% the aged receive some level of age pension the ever increasing welfare budget issue remains.
So two big budget items health and welfare must have significantly increasing spending.
Defence (another large budget item) will also have increasing spending as China flexes its muscles and the USA has an increasing isolationist policy.

So if Health, Welfare and Defence spending must increase how is Government spending going to decrease. We might have to slash or eliminate federal government grants to private schools but that won’t be nearly enough. (It is the states that mainly pay for government schools). You could also cut infrastructure spending but that would be bad for productivity.
Easy to say cut Government spending; much harder to do with our ageing population.

We are not in the 1980’s.

Dudley
May 08, 2025

"more than 70% the aged receive some level of age pension the ever increasing welfare budget issue remains.":

All well reasoned but I have never seen a plausible model of what might happen if the Age Pension Means Tests were abolished.

There are many interdependencies in the economy to consider.

Would Abolition result:
. in people working or running businesses or employing longer and paying tax longer?
. downsizing homes sooner; reducing the cost of 'family' homes; increasing worker productivity?
. ...?

Cam
May 09, 2025

Not sure there was much savings in the 80's. When Howard won in 1996 he had $96m of debt, the equivalent of around $500m in today's dollars.
Means testing Government handouts would be great. Families earning over $500k getting part childcare subsidies, retirees living in a $3m home with $1m in investments getting part age pension. The list goes on.

Dudley
May 09, 2025

"Families earning over $500k getting part childcare subsidies": Families should instead earn $250k and pay half tax?

Disgruntled
May 09, 2025

Howard and Costello wasted the revenue from the resource boom on middle class welfare to keep themselves elected.

Steve
May 11, 2025

Age pension cut off is way lower than $1M in assets. But fully agree on the excessively generous cut off for childcare subsidies.

James
May 11, 2025

" retirees living in a $3m home with $1m in investments getting part age pension"

No government is prepared to touch the scared cow of one's PPOR in welfare calculations, bar about $206,663 presently for means testing of aged care contributions.

As for the almost $1M in investments (for a couple) and getting a part pension the cutoff is presently $1,047,500 for a home owning couple and $1,299,500 for a couple who rent. Again, it's a brave government that takes something away from people! I wish they would, it'd make for good entertainment. BYO popcorn!

Dudley
May 08, 2025

"Labor should focus on cutting Government spending": They should; mostly not liked by effected voters but keeping debt small is more universally appreciated.

Increased productivity requires more financial capital per worker and / or invested more profitably.

Middle age workers, human capital, are the source of many considered business ideas, some potentially highly profitable.
Financial capital is usually required to realise the profit potential.

Tax policies which MAKE SAVING GREAT AGAIN, and result in middle age workers having accumulated unencumbered financial capital (SAVINGS outside Super) increase productivity.

Rent and mort-gage are the largest financial drag for most young workers and not sufficiently productive use of capital.

Tax policies which do not discourage the "Bunk of Dad&Mum" or empoyer provided accomodation would give younger workers a means of buying their homes "Cash on the Knocker" in under 4 years; or starting a business with more financial capital.

JohnS
May 08, 2025

Flatter income tax scales (less progressive) is code for the lower paid people paying proportionally more tax, and the higher income earners paying proportionally less

Bad move, no thanks

 

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