our tax system is like a leaky bucket

Cracking down on some tax concessions would help boost bottom line

THERE are many ways to skin a cat and even more ways to boost the budget bottom line.

Politicians on the hunt for budget savings could do a lot worse than have a read of an eye-opening document produced by the federal Treasury each year called the Tax Expenditures Statement. It details the size of the benefit to taxpayers of the myriad tax loopholes, concessions and exemptions granted by previous governments.

Admittedly, at 244 pages, it is not everyone’s cup of tea. But some of us are perverse like that. Treasury produces the document because, as it says, the revenue loss from granting tax concessions is, in effect, the same as giving cash payments. These so called tax expenditures are just less visible. It is important, therefore, that these concessions are subject to as much scrutiny as government outlays.

A casual glance at the summary reveals that our tax system is like a leaky bucket, punched through with holes to help out all sorts of special groups, be they families, homeowners, businesses or even priests. One of the more bizarre discoveries is that employees of religious institutions are entitled to a tax break on fringe benefits tax, but only provided they are indeed propagating religious belief. Go figure.

All up, the direct benefit conferred on different sections of the Australian community by the concessions has been estimated by Treasury to be $113 billion in 2009-10. That is equal to one-third of total government revenues. That’s a big leak.

Admittedly, it is not as easy as saying all these concessions should be stopped. Good luck to the politician that tries to close the $40 billion capital gains tax break on family homes. Some people seek to justify tax breaks on superannuation on the grounds that incentives are needed to get people to save for retirement. You know you’re going about it the wrong way, however, when the incentive is strongest for those with the greatest capacity to save in the first place.

It is also not as simple as saying that ending a concession will boost the budget bottom line by as much as the former benefit inferred by the concession. Behavioural changes mean that while people might have done a lot of something when it was tax preferred, like put money in super, they may do less of that activity when the concession is removed, meaning a lower base to which to apply the new tax arrangement.

But these myriad concessions – all 349 of them – do help to illustrate all the ways politicians could potentially make substantial savings before they resort to cutting foreign aid, and/or imposing special levies for increasingly regular events such as floods.

THE IRVINE INDEX 12 February 2011

$448 million
Aid earmarked for schools in Indonesia that Tony Abbott wants to delay to use to fund flood rebuilding instead.

$113 billion
Total benefit to taxpayers each year of all the tax concessions, exemptions and loopholes from federal taxes.

Number of individual tax breaks and exemptions built into the tax system.

$40 billion
Annual benefit to homeowners from not having to pay capital gains tax when they sell their primary residence.

$27 billion
Taxing superannuation contributions and earnings at a flat rate of 15 per cent leaves those on higher marginal tax rates this much better off each year.

$1.11 billion
Benefit to people with company cars from a fringe benefit tax reduction, available only if they drive them far enough each year.

$1 billion
The concessional rate of excise on aviation gasoline and turbine fuel denies the budget this much each year.

$90 million
Benefit to employees of religious institutions because they are exempt from fringe benefits tax provided their duties involve the “propagation of religious beliefs”.

$50 million
Benefit to mining companies from a deduction available on exploration and prospecting.

$91 million
Impact of the exclusion of travel agent services from the GST.

Source: Australian Treasury, Tax Expenditure Statement 2010-11.

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