By MILLIE MUROI, Economics Writer
If I told you someone, especially a politician, wasn’t acting their age, you might safely assume that’s a bad thing. What childish behaviour have they indulged in this time, you might ask.
But this week, it’s a compliment. The fountain of youth still evades us, and there’s no great anti-ageing commission – AAC, not to be confused with the ACCC – on the way. But the focus in Canberra has switched, at least for a minute, to something that’s flown under the radar for too long.
Treasurer Jim Chalmers on Thursday – at last – said something a lot of us, especially young people, have lived and known well: “there is an element of intergenerational unfairness in our economy”.
The culprit? A three-letter word that sends most of us to sleep, but here it is: tax. No one really likes it, but there’s a collective understanding – served with a hearty side of grumbling – that it’s a necessary part of our economy.
A good tax system, however, is supposed to be fair. And it’s meant to make our country fairer, too.
Tax as it stands now stacks the cards against young people: the very people we need to be supporting to become the backbone of our economy – including hospitals, aged care homes, and schools – as the rest of the country ages.
What’s unfair about our tax system? Didn’t generations before us get put through the same wringer? Well, not really.
If our economy is a board game, the rules have changed. So has the starting point for our newest players.
Young people today graduate from university or TAFE with bigger study debts than their parents had, face house prices more than 16 times the average household income (rather than nine times the average household income 25 years ago) and wages that have only started clawing back losses from inflation in the past year.
To then have a tax system that pulls the ladder out-of-reach of young people is bad – for all of us.
Grattan Institute chief executive Aruna Sathanapally, in a speech last week, put it like this: “Intergenerational equity is not a zero-sum game.”
We may never have it perfect, but it needs to be fair. Who wants to play or work hard in a game where your winnings are constantly whisked away?
But that’s what’s happening. Our tax and spending policies are leading to “unprecedented transfers from younger households to older households”, Sathanapally says.
Analysis from Grattan in 2019 showed a working-age household earning $100,000 would pay about 2½ times as much tax as a household over 65 earning the same amount.
While households over 65 have grown their income, they’ve also been shielded from paying their fair share of tax. That’s thanks to a bunch of policies that have ground down taxes for some types of income but not others.
If you’ve held an asset – such as an investment property – for at least a year, you could sell it and get 50 per cent off the tax you pay on its capital gains. If you bought the property before 1985, you’d pay no tax at all on your (probably very handsome) profit.
And if you’re drawing down on your super, it’s tax-free to withdraw after the age of 60 (after being taxed at a concessional rate of 15 per cent while you’ve been contributing to it).
But most young people don’t own a property they can sell – or even live in – and would have missed out on the windfall gains of the past few decades that have seen house prices shoot through the roof. And withdrawing from super isn’t really an option.
A bulk of young people’s income comes from wages that attract no tax discounts. And as our population ages, our reliance on taxing wages will probably worsen.
Why can’t young people just work their way up to things such as home ownership? Well, it’s a tough ask to save for a deposit when, on top of income tax, young people are paying off huge study loans and facing rents that have risen much faster than inflation or wage growth.
Income taxes have ballooned as a share of our economy – from about 8 per cent of gross domestic product (GDP) in the early 1960s to 14 per cent in the 1980s, and more than 18 per cent in 2023. And while in the 1950s, income from “personal exertion” – or wages – was subject to lower tax rates than income from investments, there’s now no such distinction.
In fact, those who invest in housing can be negatively geared, meaning if they make a loss on their investment property because the rent they earn on it is less than the costs of owning the property (including interest they pay on their mortgage), they can reduce their taxable income. That’s even if the property is quietly growing in value.
At the same time, zoning rules are pushing young people to the edges of our cities, further away from their work and study, and pushing up house prices in leafy suburbs.
The upshot of all this is that young people are having a harder time than older generations – so much so that the generation born in the 1990s, aged between 25 and 34 today, are the first not to enjoy higher incomes than their predecessors.
And according to Grattan, the wealth disparity between older and younger Australians has worsened. In 1994, those aged 65 to 74 had about three times the wealth of those aged 25 to 34. By 2020, that gap had increased to nearly five times.
While not all older Australians are wealthy, it was mostly older, wealthier households that continued saving and spending on discretionary items as inflation and interest rates spiked in the past few years. Younger Australians mostly cut back on spending and drained their savings.
It’s only recently that politicians have paid more attention to the plight of young people. That’s probably because, despite nearly 40 per cent of our population being aged under 40, fewer than 10 per cent of our federal MPs fit that bill.
Independent MP Allegra Spender this week launched her green paper on tax, pointing out that younger Australians were being left behind, unable to grow their financial security in line with other generations. “This creates a society of haves and have-nots, where your family wealth, and access to the bank of mum and dad, is essential to get ahead,” she said.
If we want a society that gives everyone the chance to work hard and get ahead, and move away from a game determined by a roll of the dice on who our parents are and how much wealth they can pass on to us, we need to shake up our tax settings.
It’s been a long time coming, but if our policymakers can step into the shoes of younger Australians and speak for their interests – as they’ve started to do – we’ll all be better off.O
