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The hidden inequalities of tax concessions- all the money we do not see

Article (2,000 words) posted on 14 May 2018 by Rosie Williams

In May each year the reigning government hands down the budget live to air as media and community groups emerge from their respective lock-ups to witness the spectacle of the Treasurer's carefully crafted speech and the passing of the Appropriations Bills.

What is less well known is that apart from the spending decisions which must be appropriated through legislation and passed by both Houses, there is another set of data required by the Charter of Budget Honesty. That data is from the annual Tax Expenditures Report (TES for short). Taxation expenditures include tax exemptions, tax deductions, tax offsets, concessional tax rates or deferrals of tax liability. Structural features like the effects of changes to marginal tax rates (just announced) are not counted as tax expenditures nor are estimates of the costs of non-compliance with tax law.

Revenue estimates published in budget papers and the taxation statistics made available by the Australian Taxation Office focus on incomes that are subject to tax and the revenue the Government collects. The Tax Expenditures Statement (TES) complements this information by primarily focusing on revenue the Government doesn't collect [original emphasis].

Far from singing the praises of the policies documented within, the annual Tax Expenditure Statement pulls no punches claiming up to half of all tax expenditures [should] be abolished or modified- a curiously strong stance for a government agency to take to their own policies!

Among the long list of criticisms are the erosion of the revenue base and the evasion of monitoring and analysis due to the lack of a requirement for tax concessions to be approved by the legislature or listed in agency annual reports as occurs with spending decisions.

Despite the term foregone revenue implying that these deviations from the normal tax rules imply a cost to budget revenue and the opinion of the Parliamentary Budget Office being that:

The rationale for reporting on tax expenditures is based on the proposition that providing assistance to taxpayers through the tax system is equivalent to providing the same value of assistance through budget expenditure..

Treasury is at pains to discourage punters from concluding that removing a tax concession would automatically restore this money to the budget.

Common sense suggests that once a tax concession is removed it doesn't automatically mean that an equivalent amount of money will flow back because a portion of tax payers will decide it is not worth the cost if they don't get the concession- which just goes to show how tax concessions distort the market!

Estimates that include behavioural effects are calculated using the revenue gain method and far fewer of those calculations can be done with confidence which is why the foregone revenue method is applied by Treasury to the full list of tax expenditures. Even so, 143 of the 289 current tax expenditures are unable to be quantified with sufficient confidence and so remain something of a mystery regardless of the method of analysis.

Notwithstanding these caveats, the relative size of the different concessions indicate the size of the shadow cast over government coffers through giving special treatment to certain transactions, classes of people and organisations.

The long history of publishing aggregates (totals) of all tax concessions was discontinued when the Liberals came back to power in 2013 (as was the practice of totalling by percentage of GDP). The last totals made in the annual reports come from the 2012 TES and puts the aggregate for the last available year at nearly $140 Billion - over a third of the 2015-16 budget total of $423.328.

The annual report released last January was the first ever publication of this data in machine readable format which allows Australians to interact with Tax Expenditures dataset for the first time ever through AusGov.info. This analysis shows the total for the last five years topping out at a hefty $182 billion for 2017-18 or 40% of our current budget total of $485 billion (Budget Paper 1, Statement 11).

Put another way, the financial gain accruing to the beneficiaries of tax concessions, offsets and the like when taken together approximate just less than half of the current budget spend. Figures like this demonstrate that tax concessions provide extraordinary financial benefits to those in a position to take advantage of them.

The largest tax concessions are the capital gains tax exemptions on owner occupied dwellings and the concessional taxation applied to super, which total 50% of the forgone revenue total and it has been found that the vast majority of the benefit from these tax concessions go to the wealthiest among us.

A joint report put out recently by Anglicare and Per Capital calculated that over 40% of capital gains tax exemption and nearly 60% of superannuation tax exemptions accrue to the top 20% of taxable income earners (p8-9).

By way of contrast, the lowest 20% of taxable incomes has been calculated as in receipt of just 7% of capital gains tax exemption.

According to the report, half of the foregone revenue from negative gearing goes to the top 20%, while just 6.2 per cent goes to the bottom quintile (p6).

Interestingly, due to the fashion in which tax benchmarks are created, items such as negative gearing are not included in the TES but according to the PBO could be calculated at regular intervals and included in the annual Tax Expenditure Statement. This means that totals and analysis of the beneficiaries of negative gearing (like those above) would be regularly made public by the government itself.

As pointed out in the Cost of Privilege, when the data is tallied up, the tax transfer system is actually geared toward the wealthiest in the population- a fact which contradicts the conservative narrative that it is the poor who are the leaners. In fact, the total bill for income support for 2017-18 is $95 billion, approximately half of the $182 billion in concessions going primarily to the most wealthy households!

2017-18 foregone revenue category totals v income support payments by size
Tax concession $182 B Income support payment $95.2 B
Capital Gains Tax $85.510B Income Support for Seniors $45.084B
Retirement Savings $41.440B Working Age Payments $17.024B
Goods and Services Tax $25.082B Income Support for People with Disability $16.576B
Personal Income $15.848B Income Support for Carers $8.513B
Business Income $10.838B Family Tax Benefit B $4.231B
Fringe Benefits Tax $5.852B Student Payments $2.798B
Natural Resources Taxes $0.6B Child Payments $1.07B
Commodity and Other Indirect Taxes $-2.424B