Time to slaughter some sacred tax cows

In this space each week, I usually write about investing. Sometimes a company, sometimes a theme or specific issue.

But today I’m taking a broader view. One that goes to the heart not only of the economic environment in which our companies operate, but to our daily lives. It seems pretty clear to me — and to most economists, that our current budgetary position is unsustainable.

Tax receipts are unable to fund government spending. With each passing day, we’re pushing the budget deficit further and further into the red.

The culprits are well known, but can neatly be summarised as past governments committing to recurrent spending from the proceeds of a one-off benefit. Remember those Howard/Rudd tax cuts, year after year? They were paid for with boom-time mining royalties and taxes on company profits. And the spending programs that have been committed to? They weren’t any more affordable either.

And just like your household budget, when you find your earnings don’t cover your spending, you have two choices: either boost your income, or cut your spending — or some combination of the two.

Now, I have no doubt that a multi-billion dollar bureaucracy has plenty of areas where services can be provided more efficiently, programs can be implemented more judiciously (or not at all) and where payments can be more stringently applied.

But, given the size of our budget black hole, to use that famous political slogan of years past, we’re not going to be able to nickel and dime our way back to balance.

So we have a clear choice — cut spending meaningfully, or substantially increase the tax take.

Pass (on) the ideology

At this point we get into ideological territory. Depending on your perspective, you’re either going to love or hate what I say next. Fair enough. But I’d encourage you to put your preconceived political leanings aside for a second.

Because, for the life of me, I can’t work out how one of the most prosperous countries with a proud egalitarian streak can find sufficient cuts to government spending to fix the situation. Should we have less-educated kids? Poorer healthcare? A permanent underclass of people who can’t afford the basic necessities of life? On the surface, it’s easy to sloganeer about waste, dole bludgers and government largesse, but it’s devilishly hard to find a decent amount of savings, even if you do try to tighten the spending screws.

So, if we aspire to be the ‘fair go’ country, with opportunity to succeed, but with a strong and sufficiently high safety net, we need to work on the revenue side of the budget.

Six of the best

And, compared to trying to find cuts to health, education or welfare, this one is easy. Here are six simple starting points to help get the budget back towards balance:

  1. Close multinational corporate tax loopholes. These are so big, you can sail an iron ore carrier through them. Marketing hubs in Singapore. Moving corporate headquarters to The Netherlands. Or Ireland. These are all designed to shift income offshore and minimise the tax payable in Australia. I don’t blame the companies — it’s the government that permits such arrangements. It’s time for an overhaul, to make multinational companies pay their fair share.
  2. Get rid of family trusts. Family trusts do have some valid structural purposes, but are used mostly to reroute income, and hence reduce tax. Non-working spouses, retired parents and adult children can be deemed to be receiving these payments, and — as they pay less tax — reduce the tax burden of the family. Again, this is both legal and legitimate, but it’s a loophole that needs to be closed
  3. End salary packaging. There are companies that exist almost solely within the tax minimisation industry, and perhaps the most egregious example is the salary packaging industry. Why you should be able to pay some expenses with ‘pre-tax’ dollars is beyond me — there’s simply no good reason, and it should be scrapped.
  4. Remove deductions for work-related expenses. One of the larger categories of deductions each year, work related expenses are part and parcel of doing your job and being paid for it. Ditto self-education expenses. If you need it, your employer should either reimburse you for it, or your pay should reflect it. It’s not the taxpayer’s job to underwrite those expenses for you.
  5. Wind back Superannuation deductions. This is the elephant in the room. Super is designed to reduce the government’s pension burden, not to act as a tax-advantaged wealth-building tool for multi-millionaires. Nor tax efficient inter-generational estate planning. Concessional tax rates should apply up to the point your super allows you to no longer be a burden to the pension system — after that, you should pay full tax.
  6. Stop franking refunds. No, I’m not talking about franking credits here. I’m talking about those in pension phase of Super who not only pay zero tax, but in addition receive a refund from the ATO of tax previously paid by companies on their dividends. Hypothetically, if Westpac was owned exclusively by self-funded retirees drawing a Super pension, the entirety of the tax paid by the company would be refunded. That is, the government would collect a grand sum of zero on Westpac’s billions of dollars profit paid to those shareholders. Let’s see how long the company can operate when corporate taxes go to zero.

Foolish takeaway

Offended? Upset? Fair enough. No change worth having can be made without challenging a few vested interests. There's something in that list to offend everyone, but then, who's ever welcomed a tax increase, other than one that applies solely to 'other people'!

We live in a wonderful country. We have a terrific society that is the envy of the world. But, as it stands, we can't afford the things we have, let alone the things we want to do. Reversing some tax gerrymandering -- of the sort mentioned above -- will go a long way to addressing that imbalance.

Now, start the tomato throwing.

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Scott Phillips is a Motley Fool investment advisor. You can follow Scott on Twitter @TMFScottP. The Motley Fool's purpose is to educate, amuse and enrich investors. This article contains general investment advice only (under AFSL 400691).

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