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Should seniors pay a coronavirus tax?

Australia has done well to keep coronavirus numbers down, to protect the older members of our society. (Image: Getty)

Australia has done a wonderful job of keeping coronavirus infections and deaths much lower than comparable countries.

But the health measures have come at an economic cost. Millions are out of work and the federal government will end up spending about $213 billion in direct assistance.

Then if you combine what the states have spent and future reduced tax revenue, the total bill could reach one trillion dollars, according to UNSW.

While all ages are affected by the terrible effects of Covid-19, the most demographic most vulnerable to death were the older Australians – aged 65 and over.

The nation is now in a situation where younger (working-age) Australians have copped most of the job losses, income reductions and the future debt burden.

So should elderly Australians now pay more tax to repay some of the massive bills?

"This is partially arguing intergenerational fairness – the high cost of protecting seniors as our most vulnerable group – and also a pragmatic approach that they are likely to have more capacity to pay, having accumulated assets over time," said UNSW Business School professor of practice Jennie Granger.

"Of course, not all seniors are wealthy and even those who have been self-funding their retirements have had their investments and incomes significantly battered by low interest rates and the bear share market."

How seniors could repay coronavirus debts

Granger suggests eight ways more tax revenue can be harvested from investors to help repay the government debts incurred from the coronavirus.

Targeting investors makes it more likely older Australians that have the capacity to pay more are asked to contribute, rather than younger folks or seniors who are struggling.

1. Limit franking credits

Franking credits were a hot topic in the federal election campaign last year, and the grey army eventually won after Labor was crushed for daring to suggest reform.

Similar to the election suggestion, only giving credits to tax owed – rather a cash refund for any surplus – would save the government money.

But in the post-coronavirus world, this change might backfire.

"In a more isolationist world, reforming dividend imputation might not be seen as desirable as it encourages companies to pay Australian tax and to distribute franked dividends in Australia – at least if you have domestic shareholders."

2.  Limit capital gains tax exemption on homes

Many wealthier older Australians are sitting on homes that have astronomically gained in value. Currently, if they sold this huge asset they pay no tax due to an exemption for primary residences.

"This exemption is projected to cost $41 billion in the 2020-21 fiscal year. Part of it could be clawed back by setting a limit (eg $2 million) above which the gain is taxable," said Granger.

UNSW professor Chris Evans also suggests a Scandinavian alternative where an exemption is only granted to the point of the cost of the replacement home.

"Professor Evans also suggests halving the capital gains tax discount from the current 50 per cent for individuals and trusts could be an option. The discount costs in excess of $10 billion per year."

3. Limit negative gearing

This was another hot topic during the federal election campaign last year.

"It could either be capped (e.g. to income earned that year) or restricted on what it can be offset against (e.g. other property income)," Granger said.

4. Tax superannuation withdrawals

Withdrawals out of superannuation are currently not taxed for recipients over 60 years of age, if the fund has already paid tax. This benefit could be revisited.

"The challenge is how to implement this in a fair way without creating even more complexity in the super system."

5. Limit concessional tax rate on superannuation earnings

This would involve setting a level deemed to be "enough for a comfortable retirement" then fully taxing funds above and beyond that, instead of at the 15 per cent concessional rate.

"The rationale is that once a comfortable level is reached, further savings should not be subsidised by the public purse," said Granger.

6. Broaden the tax base

Granger said Australia currently relies excessively on income tax (40 per cent) and corporate tax (18 per cent) to generate revenue, compared to the OECD average (24 and 9 per cent).

"Our indirect tax base also contributes much less than the OECD average. For example, GST contributes around 12 per cent to Australia’s revenue compared to the OECD average of around 20 per cent."

7. Reform the GST

Additional revenue can be earned by removing some of the current exemptions or – hold your breath – increasing the current rate.

"Australia’s 10 per cent rate is comparatively low compared to New Zealand’s 15 per cent, for example," said Granger.

"Increasing the contribution of a consumption tax has the advantage of not burdening businesses (they pass it along) and not directly burdening the income of people. 

"And, it can be argued to have an intergenerational fairness benefit since people’s accumulated wealth is taxed as they spend it."

But any changes to the GST are highly political and difficult to achieve, conceded Granger. The states rely on it, so any reforms have to have buy-in from multiple governments.

And there's this problem: "As it is a regressive tax, the impact will be felt most by those on the lowest income.  An important and complex part of the debate will be about what measures to put in place to improve this situation."

8. Reform state taxes

Multiple commentators over the years have lobbied for replacing stamp duty with a land tax.

"The rationale is that it will capture increased asset prices and also would make it easier for the young to buy houses once we have returned to a healthy economy and low unemployment," said Granger.

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