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The Intergenerational Report reveals growing disparities in wealth between generations. As expected, calls to address intergenerational inequality have followed.

But focusing on intergenerational wealth disparity obscures the deeper and more malignant inequality problem. It’s one embedded within our inequitable and complex tax system – an inequality at odds with our cherished principles of rights and opportunities extended to some being extended to all.

It’s an inequality with the potential to cleave our society in two. Failing to address this inequality risks creating two classes in the coming generations – one with access to opportunity, and one without.

That older people are wealthier is the norm, not the problem. Society expects citizens to work hard, save, and become financially comfortable as they age. A society that encourages savings and hard work is productive and innovative.

Young people who work hard should be able to look forward to this. Increasingly, one cohort of young people, the less wealthy wage and salary-reliant cohort, is being denied that opportunity.

Australia’s taxation system is on one hand overly and increasingly reliant on income tax. On the other it increasingly enables wealth, once accumulated, to be held beyond the reach of taxation – principally by storing it in the family house, and further through superannuation and other tax minimisation devices such as trusts.

The disconnect between taxable income and wealth is growing. Anyone earning more than $19,000 in a year is liable for income tax, while other Australians holding wealth valued in the tens of millions have zero taxable income.

Australia’s lack of an inheritance tax means wealth held in an estate remains there, typically to the benefit of the next generation. Unremedied, today’s age-wealth disparity will augment societal inequality and in turn contribute to an exponentially larger age-wealth disparity in the next generation. And so on.

Making matters worse, Australia is funding current consumption with future taxes. Today’s young will pay throughout their lives for the benefits older citizens receive. The burden of Australia’s debt will rest heaviest on the non-wealthy, those whose income derives solely from salary and wages.

All this has been exacerbated by COVID-19. Older Australians, most vulnerable to the virus, benefit most from governments’ medical responses, the costs of which will have to be managed with future taxes. Governments’ economic stimuli, meanwhile, unleashed a sharp rise in asset prices – to the particular benefit of older Australians holding assets beyond taxation.

And to the benefit of those young Australians whose parents own substantial assets. The rest face missing out on home ownership, access to quality education, private healthcare, and more. Much like the old differences between peasants and nobility that we fought hard to eliminate.

How do we tweak the system to gather the funds required for the services we want in a way that is productive, fair across generations, and with little amenity for distortion? A national discussion to consider the details is long overdue but the principal components are well known:

  • Lower corporate and personal income tax rates.
  • Separate taxation of savings and income.
  • A flat tax on savings, including those held in superannuation and owner-occupied housing.
  • A broad-based tax on all land irrespective of use, based upon unimproved value, potentially with a progressive schedule.
  • A broad-based inheritance tax extending to superannuation and owner-occupied housing, potentially with a progressive schedule.
  • Pollution and carbon taxes, to avoid the cost of damage to the planet being pushed into the future and onto the young.

Lower income taxes will accelerate economic activity.

A tax on savings in the range of 7 per cent to 10 per cent will be more progressive than the current system with respect to wealth but will not discourage saving.

A broad-based land tax will add significantly to productivity. It will also ensure that government policies that drive up asset prices benefit all Australians.

An inheritance tax set at a rate similar to GST will enable people to pass on most of their wealth while sharing enough of it with the rest of the country to inhibit growth in the age-wealth disparity. An inheritance tax is the fairest way to fund age-associated challenges such as the costs of care.

Young people have a problem: neither major political party is interested in them. More accurately, older and richer Australians are far more effective at holding the attention of the political mainstream.

Older folk are organised and well-resourced. Many have time on their hands. They will casually threaten to switch political allegiances to preserve their privileges, and they will fight hard to keep every concession and carve-out they have been bequeathed. From personal experience I know the merest hint of land tax reform generates a flood of angry calls and emails.

Maybe young people need their own political party. Maybe they need to start caring about boring things such as tax reform.


First published at the Australian Financial Review on Sunday 27 June 2021.

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