Taxing our way to irrelevance

Taxing our way to irrelevance

The title of this blog post was going to be ‘How to mismanage an economy’. I decided against it because the cynical answer could seriously abbreviate the blog post to just, Give it to Victoria’s Labor government.

In Victoria, State Member for Warrandyte, Nicole Werner, recently outlined and commented on the state government’s imposition of yet another new tax. A new land tax on those running any business activities from their homes.

And before you get stuck into me because I am calling out Victorian Labour’s recent ineptitude, consider that I believe all political parties are guilty of, and responsible for, the mess in which our nation now finds itself.

Here’s Werner;

“…If they’re making money from home, the Victorian government is now going to make them pay land tax. How’s that for aspiration?…The Victorian government is now targeting everyday people who run small businesses from home by charging them land tax. This includes your start-ups, side hustles, freelancers, hairdressers, personal trainers, and physios with home studios, Airnbnb hosts, online businesses, allied health workers seeing clients from home offices. Why? Because Labor has lowered the land tax threshold [dropping the level it kicks in from $300,000 to $50,000] last year to make more properties eligible and force more Victorians to pay up to reduce their enormous debt [of $194 billion]. According to the Australian Financial Review, the result of these changes mean that more than 400,000 Victorians who run businesses from home are now getting land tax bills for the first time.”

If the business earns more than $30,000 a year and uses part of their home, that business owner will receive a land tax bill. For a home valued at a median house price, this could mean a new land tax bill worth thousands of dollars. In the middle of Labor’s cost-of-living crisis, more and more Victorians are turning to secondary jobs and side hustles just to make ends meet. Now this new land tax is kicking them while down and punishing Victorians who are just trying to get by.

“Socialist governments traditionally do make a financial mess. They always run out of other people’s money.” – Margaret Thatcher, This Week, Thames TV, 5 February 1976

Victorian residents, particularly those in Melbourne, are also grappling with a housing market that feels increasingly unaffordable. Skyrocketing prices, driven by a mix of economic factors, government policies, and supply constraints, have created a perfect storm for affordability.

Melbourne is the nation’s fastest-growing capital city, thanks to a surging population there, primarily driven by immigration, which is putting immense pressure on housing demand.

Meanwhile, building new homes in Victoria is increasingly expensive. The cost of construction remains high due to labour constraints, with wages in the building sector growing at twice the rate of the broader economy. This trend supports higher property prices, as developers pass on these costs. Additionally, the industry faces major bottlenecks in labour supply and land approvals, further limiting the ability to build enough homes to meet demand. While building material shortages are not a significant issue, the lack of workers and approved land continues to stifle progress. If immigration were to slow or pause, industry would have time to ‘catch up’.

Melbourne’s housing market faces additional hurdles due to state government policies. High state taxes, including hefty stamp duties, have created major market distortions, with the measures backfiring, halving apartment construction in Melbourne. This reduction in new builds has led to fewer stamp duty dollars for the state, higher rents, and even steeper price growth for existing properties.

And with unemployment at 4 per cent and industries clamouring for skilled workers, the government is unlikely to slow migration, further fueling demand.

Of course, if immigration paused, demand would slow, and industry wouldn’t be ‘clamouring for skilled workers’. An equilibrium might be found.

Of course, Victoria’s problems are the result of almost a decade of socialist policies and a bloated government that has squeezed out the private sector. The reason it’s hard to find a tradie to extend your kitchen, or you have to pay so much more to secure one, is that the state Labor government pays even more to employ those same skilled workers on significant infrastructure projects. Why work on your site, when they can earn more on a major infrastructure job, while enjoying the perks won by the labour government’s funding and policy partners in the unions?

And all these problems are in addition to the obvious deficiencies in our federal tax system, which forces individuals to fund the consequences of government mismanagement and misadventure through direct taxation rather than indirect taxes.

According to economists, the average Organisation for Economic Co-operation and Development (OECD) country (which consists of 38 member countries) obtains 34 per cent of its tax revenue from income tax, either imposed on companies or individuals. In Australia, that figure is 62 per cent, which is a tangible disincentive for companies to invest and for individuals to work. The system’s structure also fuels generational animosity because it forces young people to work harder and longer to fund the retirement pensions of older Australians.

For Australian individuals on the highest tax rate, they are effectively working to fund government ineptitude for six months of every year. Imagine that. If you’re on the highest tax rate, all of the money you earn from about July 1 to December 31 goes directly to the federal government. That’s a serious disincentive.

And it’s also because of the aggressively progressive nature of our personal tax brackets. In Australia, the top marginal rate applies to a salary of just twice the average weekly earnings. Go to the U.S., and the highest rate kicks in at six times the average weekly earnings. In Korea, Chile and Austria, the highest rate kicks in at 18-20 times the average weekly earnings. In fact, the highest rate also kicks in at higher-than-Australia’s multiples of average weekly earnings, in Japan, Canada, New Zealand, the UK, and Germany.  

And if you’re young and think you don’t have to worry about higher tax rates, think again.  Thanks to Bracket Creep, as your salary gently rises, you eventually tip into a higher tax rate, a rate that wasn’t intended for you. With inflation of course, you want your salary to go up. But it doesn’t have to be the case that, as your salary rises, you should now pay a higher rate of tax as well as a higher amount of tax. 

Interestingly, we are one of only four countries that don’t index their tax brackets. If they were indexed to inflation or salary increases, as our salaries rose, so would the tax bracket, and we’d remain at the same tax rate as previous years, instead of falling into a higher bracket. That’s another disincentive for many people to work harder or become more productive.

What can we do?

Of course, an overhaul of our tax system is necessary. Proper reform is hard. 

But man went to the moon because it was hard. If humans could put a man on the moon in 1969, Australians should be able to reform our tax system in 2025.

We shouldn’t have to tolerate socialist ideology that we cannot afford, or socialist ideology that governments attempt to fund by taxing individuals. And we need to ignore the special interest groups and vested interests. We need to put the contentment of all Australians, collectively, first.

Who doesn’t want the highest quality and safest childcare, education, social welfare and healthcare in the world? And who doesn’t want it to be free? It can achieved, but we need to be smarter.

We need to ask ourselves why we – and by ‘we’ I mean the ‘common wealth’ – aren’t participants in the money being made from extracting our resources? We – the common wealth – own those resources. The dirt, and what’s under it and above it, belongs to all of us. It’s Australia’s. It should not ‘belong’ to one person or one family. If that person or that family extracts it and sells it, they need to give thanks to the country that truly owns it, and that country needs to be properly compensated for it.

That can be achieved several ways. We can achieve it through government co-ownership of all mining operations, or it can be accomplished through a simple ‘Sharing Our Resources Tax’ that ensures the population participates in every tonne of iron ore, coal, silver, aluminium, or gold sold and shipped overseas, and in every gigajoule, British thermal unit, or petajoule of energy exported. 

And don’t even attempt to gild the lily, saying that if we tax the extraction of our resources more appropriately for the benefit of all Australians, big miners will invest elsewhere. I can assure you that if a company is making $18 billion a year now and its profits decline, by design, to $10 billion, it won’t walk away. Show me someone who doesn’t want to make $10 billion! And if they pull up stumps, no problem; we’ll find someone else.

Of course, it is a step too far to say that we would be as rich as the Saudis if we properly shared in our mineral wealth. That’s because our exports are more inelastic than oil.  Demand is more sensitive to price. But it is also true that a proper participation in the commonwealth’s resource wealth means redirecting some of those billions from a few private individuals and families to all Australians.

Unfortunately, these reforms to the tax system are too big or perhaps too hard for politicians to sell. Consequently, they don’t bother trying. In any case, the benefits would not accrue during their term, which unfortunately is only three years. 

There is support for extending the terms of the House of Representatives to longer periods. The benefits include improved policy making, stemming short-termism, increased business confidence, a lower cost of elections, improved debate less frequent distractions for voters.

As an aside, it beggars belief that we inherited the Westminster System from the UK, where members sit for a maximum of five years, and yet we insist on three-year terms. 

Internationally, 40 countries have five-year terms and 26 have four-year terms. Even Australian states, have four-year terms, with Queensland switching to four years from three in the 2016 referendum, so why don’t we start by insisting on a referendum that amends Section 28 of the Constitution to allow for a four-year term? In other words, beginning in 2034 or 2037 – that’s three or four elections away – the following term, and those afterwards, shifts to four years.

Politicians also struggle to bother trying to fix the system because it’s all too hard to explain and vested interest groups can now use social media to quickly distribute lies that result in election outcomes boiling down to puerile popularity contests, and to which party promises those of us in the vast middle class a few more dollars each week.

And to be clear, both parties are equally guilty of ineptitude, hubris and intransigence.

If you change nothing, nothing changes. Without change, however, Australia is on a downward spiral to lower productivity and much lower living standards.

MORE BY RogerINVEST WITH MONTGOMERY

Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.

He is also author of best-selling investment guide-book for the stock market, Value.able – how to value the best stocks and buy them for less than they are worth.

Roger appears regularly on television and radio, and in the press, including ABC radio and TV, The Australian and Ausbiz. View upcoming media appearances. 

This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.