The federal budget is just seven days away. On May 12, the government will tell the nation how they plan to reduce the budget deficit. That’s the same deficit that Deloitte believe will blow out to $47 billion by 2019.
Yesterday was another sign that things are about to get worse for Aussie households. That’s because The Australia Institute (TAI) think tank released its new report. The study outlined how TAI believe the government could go about managing that deficit.
Any time a think tank produces models, you should be cynical. Ask yourself what the purpose and timing of the report is. The budget is mostly done. Releasing economic models a week before a budget isn’t going to influence policy makers.
What makes the timing suspicious is that TAI is a self-professed left leaning think tank. Its current director Richard Denniss previously worked at an organisation with strong links to the Labour party. And in 2008, TAI’s recommendation to filter internet access became part of the Labour Government’s policy.
So it’s no surprise that TAI is telling the Liberals to go after the rich. They know that the government has no choice but to do so. Otherwise that deficit is only going to grow.
You know that saying, ‘Repeat something often enough, and people will believe you’? That’s what’s happening here. Both sides of parliament have long had wealthy Aussie investors in their sights. The institute is just the latest ‘independent’ body to chime in on the issue.
And what advice did they have for Treasurer Joe Hockey? They want to see ‘progressive revenue sharing’ opportunities to make sure everyone pitches in.
That’s a fancy way of saying ‘take from the rich‘. These proposals would save the government $19.5 billion, according to TAI. Of that, $14.1 billion would come from the top 10% wealthiest households. TAI know this kind of advice wouldn’t go down well with the Liberal’s wealthier supporter base. And that’s exactly why they’ve released the report so close to the budget. They know what’s coming, and they want to tell the whole of Australia why the government should punish wealthier Australians.
If the government doesn’t act on their proposals, they’ll be favouring the rich while hurting the poorest. If they do, they’ll hurt their popularity with their core supporter base. That’s exactly what TAI intended, and it explains the cynical timing of the report.
Why investors stand to lose the most if the government accepts TAI’s proposals
I want to run you through some of the key proposals here.
The main recommendation from TAI would see superannuation tax breaks scrapped for wealthier Australians. TAI claims that 41% of tax concessions go towards the top 10% of households. They also say the top 20% receive the majority of tax concessions. TAI say scrapping this is fine because those households never claim a pension anyway.
And they go one step further. They think that anyone earning up to $37,000 shouldn’t have their superannuation taxed. Workers earning between $80,001–180,000 would pay 22% on their super contributions. Currently their tax rate is 15%. Anyone earning over $180,000 would receive no super tax concessions. That would hit high income earners where it hurts. Someone on $180,000 would be $5,000 worse off every year.
Their other key recommendation was to restrict negative gearing for new property investors. This is when the cost of an investment property is more than what it generates in income. In other words it’s a loss maker. But some investors use it for tax breaks. If the interest on a property is more than the income it generates it becomes fully deductible.
TAI recommend scrapping that tax discount. That would save up to $7.4 billion every year according to TAI. You can see how this would affect many property investment strategies.
Another proposal was to scrap the capital gains tax. Say you sold a property for less than what you paid. The amount you declare on your tax return is the total of your capital gains for the year. If the property sold for less than what you paid, it would offset against your tax.
Those are just three of their recommendations that would hit investors hardest. On its website, TAI brands itself as the country’s most influential progressive think tank. ‘Progressive’ has long been a byword for left leaning policies. Taxing the rich and income redistribution is the pillar of ‘progressive’ thinking.
TAI did make one good point. They say that attacking the rich is the easiest thing to do for the government. It’s an easy political victory. And they think the Abbott Government is wrong to want to raise GST taxes. They think that it only hurts the poorest. That’s why they want to scrap tax breaks for wealthier Australians. The budget next week may give us another clue that this is exactly what they’re going to do.
Contributor, The Daily Reckoning
PS: The superannuation industry is rife with abuse. Many Australians get affected by hidden fees that steal money from your retirement fund.
The Daily Reckoning’s Bernd Struben has a free report to help protect your money. He’ll show you how to safeguard your superannuation fund. To find out how to download of copy of ‘The Hidden Fees Gouging Your Retirement Money…and What You Can Do About It’, click here.