THE AGE http://www.theage.com.au/news/19991004/A38486-1999Oct3.html Howard helps the rich - again By KENNETH DAVIDSON Monday 4 October 1999 IF THE Senate passes the main recommendation of the Ralph report, to halve capital gains tax, it will have punched the biggest hole in the tax system since the Barwick High Court made the payment of income tax a voluntary exercise for the rich in the 1970s. The mind boggles. Under the guise of producing a more productive economy, the report approved by the Government has a raft of discriminatory measures designed to allow the rich to avoid tax and encourage speculation in real estate and share trading. The "level playing field" has been turned into a cow paddock. Under the tax reforms introduced by Paul Keating in 1985, a serious attempt was made to treat the income from work the same as income from capital gains. On the one hand, the GST was sold to the electorate on the grounds that the failure to tax all forms of spending at the same rate distorted resource allocation. Yes. But the fact was that ever since wholesale sales taxes were introduced in the 1930s and increased during WWII and thereafter, the distortions were quite consciously imposed to reflect the social priorities of the nation. What was wrong with taxing luxuries at a higher rate than necessities? The main problem was that it was a reasonably successful attempt to put some progressivity into taxes on spending. On the other hand, what was wrong with taxing capital gains at the same rate as income? The main problem was that capital gains accrue overwhelmingly to the rich. There is a consistency underlying the tax reforms of this Government. Behind the attempt to level the playing field on tax as it applies to spending and to tilt the playing field as it applies to tax on different forms of income, is that both "reforms" work powerfully in the direction of creating an unequal society. According to tax statistics, net capital gains totalled $3000million in 1996-97. These gains were distributed between 7per cent of taxpayers. Three-quarters of the gains were distributed to taxpayers on above-average incomes. But this probably underestimates the extent to which capital gains accrue to the rich. Most taxpayers on below-average incomes with net capital gains would have acquired the capital gains via income splitting and trusts. Individuals defined as wage and salary earners had net capital gains of $46million, or 1.5per cent of the total. Overwhelmingly, capital gains were derived from property ($930million, or 31per cent) and partnerships and trusts ($1.5billion, or 50per cent). Manifestly, the proposed CGT rate cut is unfair. Even worse it will impoverish Australia because rent-seeking behavior in the law and accounting and property and financial service industries will be encouraged at the expense of the productive activities the tax changes pretend to promote. According to one of the outside consultants to the Ralph committee, Professor Rick Krever, the changes will encourage more negatively geared investment in real estate, creating a drought for productive high-risk investment. The CGT reforms mean that real estate investors will be able to write off interest expense at 48.5per cent, and declare profits at 24.25per cent, says Krever. Trevor Boucher, who was the tax commissioner who implemented the 1985 introduction of the CGT, described the proposal to halve the CGT rate as "fiscal vandalism" which would entice tax avoiders "like bees to a honey pot". Opposition senators should ask why Australia is short of productive investment, when about $40billion a year is added to the $500 billion pool of superannuation funds aided by a subsidy costing revenue of about $9billion a year. The subsidy was originally put in place by the Menzies Government to ensure that 50per cent of superannuation funds were put into government bonds. The subsidy remains. The obligation doesn't. Superannuation is compulsory, so the subsidy does not encourage net savings. At the very least, superannuation funds should be required to put 2per cent of their money in pooled development funds to create new productive enterprise as a condition for the subsidy. There is no need to fiddle with company or capital gains tax rates to promote savings or real investment. Kenneth Davidson is a staff writer. His next column will appear on 21 October, on his return from leave. 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