Is the tax system in Australia really fair?
Is the tax system in Australia really fair?
In meetings with new clients, I often hear the same question:
“Alex, I work really, really hard. Yet, I look at how much tax I am paying and it is a massive amount. Is there anything I can do?”
Every time I hear this, we then discuss opportunities to ensure their tax position is being legally optimised.
The thing is, I leave the meeting thinking, Is our tax system really fair and equitable?
Politicians always talk about everybody paying their ‘fair’ percentage, but we never hear them explain what this means in dollar terms.
This question circulates in my head: Is it fair that someone pays $100K tax, whereas somebody else pays only $30K tax?
To explain my point, let’s assume you’re a family of four and because of your income level, you pay the top tax rate of 45% plus a 2% Medicare levy.
The first scenario is a visit to the movies. You go to the ticket counter to purchase your tickets. The customer services person says, “Hi there, could you please insert your tax file number into the credit card machine.”
To purchase four tickets for your family, based on your income you are going to pay 47% more than the base ticket price. So, the base price is $20 for adults and $15 for children, but instead of paying a total of $70, you will be charged 47% more.
Next you go and buy some popcorn and drinks. At the counter, you are asked again to insert your tax file number into the credit card machine. The total cost is $60, but because of your income level, again you are asked to pay 47% more.
After you leave the movies, you stop at the pay station as you exit the car park you are again asked to enter your tax file number. The fee is $20 but due to your income level, you have to pay 47% more.
In this example, your family of four received the same experience as other families, but you paid 47% more for it.
Politicians often talk about people paying their fair share of taxation. The narrative is often directed to the notion that people who earn more money should pay a higher percentage of tax. But is this logical and is it equitable?
There are around 25 million people in Australia; should higher income earners have to pay a higher amount in dollar terms to get the same, or in some cases less, services and benefits from the government?
As an extension of this question, how do we move society to a point where we all pay the same, regardless of income?
When you start to peel back the layers of the taxation system here in Australia, you can see why it is such a mess.
The Australian Government has just released its latest budget for the 2022–2023 tax year. On the projected figures they are predicting a deficit of around $60 billion – the highest on record, and much higher than during the GFC.
What does this mean? Well, if your household were to do the same as the government, you would be living off the equity in your home to sustain your lifestyle. This is fine if your house keeps increasing in value and the bank keeps lending you money, but what happens if the property stops growing in value, or the bank stops lending?
This makes us wonder how long Australian society can continue to live well beyond its means.
So, what is the solution? The problem starts with people living outside their means; they never want the government to take anything away. As soon as voters fear a service is about to be cut, they vote out the incumbent party, and so the political cycle just does not allow any serious changes.
Thus we enter this never-ending, negative-feedback loop and hope like hell that the Australian economy can grow fast enough to get in front of its costs, or at least keep up with them.
In reality, every recession, which on average occurs every 7–12 years, just takes us back to square one and just as we start to get out of the hole, the economy crashes again.
The reality of a flat tax amount imposed on the population will likely never occur. The idea is an interesting proposition, whereby a flat tax is issued to the general population in Australia. And if you want a particular service where you live, then you pay an amount for that service.
The same would apply to businesses, trusts and super funds. If you have one, this is what it would cost to have one in Australia.
What about social safety nets I hear you say? Exemptions for the poor or homeless, for example, need to be considered – and this is where it starts to get messy. But this is a complex problem and finding the level of equitability is important to use the grey matter to work through these issues.
What discussion like this does do, is bring fresh ideas to the table on how we need to start thinking more innovatively about our taxing systems. Globally we are up against countries that are far more competitive in this area, to attract serious talent and businesses to their local economies.
Clearly, our tax system is stupidly complex and next time you hear the politicians banging on about making sure everybody is paying their fair share, think about walking into a supermarket or clothing store and being asked to pay more than the person standing next to you just because your income is higher. You are both consuming the same goods and services, yet you’re being charged more.
And in terms of that tax question I often get, there are usually a bunch of things people are not doing to optimise their financial position, which is all legal. At AJ Financial Planning, we sit down with clients and go through an extensive list of opportunities to make sure everything is being maximised legally and you are not leaving unnecessary money on the table for the tax department.
If this is something of interest to you as part of your broader financial planning needs, be sure to reach out and speak with us here at AJ Financial Planning.