The Abbott Government has promised a “comprehensive and inclusive” review of the tax system, but appears to have ignored a major issue: rising inequality of income and wealth, writes Mike Steketee.

The Abbott Government committed itself last week to a “comprehensive and inclusive” review of the tax system.

But the tax discussion paper it released to kick off the process does not find space in its 196 pages to canvass some of the major issues.

The rising inequality of income and wealth in developed nations has come into sharp focus in recent years but it does not seem to have made its way on to the Government’s radar, even though it is the tax system that potentially can play the largest role in influencing the trend.

Remember the Occupy movement that staked out Wall Street and spread to other countries? “We are the 99 per cent,” they said, pointing to the 1 per cent of Americans who held 40 per cent of the nation’s wealth. According to Nobel Prize winning economist Joseph Stiglitz, that was a rise from 33 per cent in about 1985.

The trend in Australia is the same, even if it is not as severe. On the latest figures available, the median net worth of Australian households – that is, their assets minus their liabilities – was 54 times higher for the top 20 per cent than for the bottom 20 per cent in 2011-12. That was up from 45 times higher in 2003-04.

If you prefer that in dollars, median household net worth increased from $27,508 to $29,600 over this period for those at the bottom, after taking into account inflation, while at the top it rose from $1.24 million to $1.59 million. That is a $2,100 increase compared to $350,000.

Bear with me for one more statistic: in 2003-04, 2 per cent of households had a net worth of $3 million or more – that is in current dollars, after adjusting for inflation. By 2011-12, that had risen to 3.1 per cent.

What we should do about such a trend is a value judgment. But hopefully the debate will go beyond declamations about class envy.

In his landmark study on inequality, Capital in the Twenty-First Century, French economist Thomas Piketty shows that the rate of return on wealth over most of history has run ahead of world economic growth. Although two world wars and a depression reversed the figures during the last century, he argues that all the signs are that wealth is increasing significantly faster than economic growth during this century and will continue to do so. He estimates 4-5 per cent for the rate of return on capital, versus barely 1.5 per cent for world economic growth.

It is a system that feeds on itself: the more wealth accumulated, the more that can be re-invested at relatively high rates of return. Piketty says world wealth per adult grew at an average annual rate of 2.1 per cent between 1987 and 2013 but at the very top it grew by 6.8 per cent. Bill Gates increased his fortune from $4 billion to $50 billion in the 20 years to 2010, according to estimates by Forbes magazine, while the French heiress Liliane Bettencourt saw her wealth increase from $2 billion to $25 billion.

Piketty calculates that if the top one thousandth of wealth holders achieve a 6 per cent annual return, compared to average growth of 2 per cent, the top’s share of wealth would more than triple over 30 years and represent 60 per cent of the world’s wealth. That is, not the top 1 per cent owning 40 per cent, as in the US now, but the top 0.1 per cent owning 60 per cent of global wealth. Such disparity, he argues, is hard to imagine under existing political systems “unless there is a particularly effective system of repression or an extremely powerful apparatus of persuasion or perhaps both”.

It may be that Piketty’s projections turn out to be inaccurate, as economic forecasts and projections often do. But he has documented in great detail a clear trend in rising inequality and there is little reason to think it will stop in the short term.

Back in Australia, the tax discussion paper argues that our income tax system is highly progressive – more so than most other developed countries and particularly when government payments are included. This is mainly because of Australia’s mean tested welfare system, compared to the flat rate social security contributions levied in many countries.

However, income tax has become less progressive in recent times, due mainly to the succession of income tax cuts during the Howard boom years. According to The Australia Institute’s Matt Grudnoff, only 3 per cent of taxpayers are in the top tax bracket now, compared to 13 per cent 10 years ago.

Nevertheless, the effect of a progressive income tax is to moderate the trend towards rising inequality of incomes. But it is a different story when it comes to rapidly rising wealth inequality. This is an area that is taxed very lightly in Australia.

The capital gain on the family home is not taxed at all, while that on other assets is taxed at half the rate of savings such as bank interest. Superannuation is taxed at a concessional rate that provides the largest benefit to higher income earners. The combination of the 50 per cent capital gains tax and negative gearing makes investment housing an attractive option for many, particularly higher income earners, while lower income earners are increasingly shut out of the market.

Unlike other developed countries, Australia has no wealth tax, inheritance tax or gift duties, although they potentially provide the most direct means of curbing rising wealth inequality. These options are given short shrift in the discussion paper – two paragraphs in 196 pages. “These taxes generate relatively little revenue,” it says. “…Furthermore, such taxes can be difficult to administer effectively.”

Piketty argues that the risk is that inequality in wealth will continue to rise unless there is some kind of global tax on capital. He says that a progressive annual tax on wealth at modest rates – for example, 1 per cent on wealth of between one and 5 million euros and 2 per cent above 5 million euros – would affect only about 2.5 per cent of Europe’s population but raise significant revenue – 300 billion euros, equivalent to about 2 per cent of total European GDP.

He concedes that the risk of evasion is high unless countries share bank information – something governments at least are talking about. But a progressive tax on capital would make it possible to avoid “an endless inegalitarian spiral” that he argues ultimately would undermine democracies.

If governments in Australia are not prepared to contemplate such a move, at least tackling the gross inequity of the superannuation concessions would be a start. Something approaching a political consensus appears to be emerging on this issue, although that is not to say it could not easily be derailed by the inevitable backlash from those affected.

Even agreement that superannuation should be used to fund retirement, rather than as a wonderful way to minimise tax and accumulate wealth to pass on to the kids would be a step in the right direction.

Mike Steketee is a freelance journalist. He was formerly a columnist and national affairs editor for The Australian.

This article first appeared in The Drum on 6 April 2015.

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