Jack Mintz: Affordability trumps productivity in Australian budget

Australian Prime Minister Anthony Albanese and Treasurer Jim Chalmers arrive at Parliament House on May 13 in Canberra, Australia. Photo by Hilary Wardhaugh/Getty Images files

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For finance ministers these days, affordability trumps productivity. Tuesday’s Australian budget is a perfect example Canadians need to pay attention to. Australia has a resource-based economy like ours and our two countries tend to learn from each other in framing economic and tax policies.

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Unlike the U.S., with its booming business investment climate, Canada, the EU and the U.K. face a dearth of non-residential investment. To boost productivity, we should cut the taxes that most discourage investment, work and risk-taking. Corporate taxes, capital gains taxes and high personal tax rates, including those arising from income-testing benefits, affect productivity most and should top the tax policy agenda.

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Affordability focuses on quite a different tax agenda: reducing taxes on the most vulnerable. Many voters facing tight budgets are demanding their governments help them deal with rising prices, especially for necessities like food, gasoline and housing.

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As a result of the Iran war, many governments have introduced temporary fuel tax reductions. The effect on gas prices and productivity is modest but at least they provide some relief. As for housing, tax cuts focus on cheaper houses or new homebuyers even if they draw capital away from non-residential investment. Several governments are also providing personal tax relief for lower-income taxpayers, though likely with only minimal effects on work and saving.

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Australia is in many ways our southern hemisphere mirror image. Our two countries often seem to follow parallel courses. So it’s worth noting that this week’s Australian budget focuses on affordability, though it does add some virtue-signalling about productivity — since Australian productivity growth has slowed to just one per cent a year, which is at least better than Canada’s. To help with affordability, the budget combines cuts in personal taxes with tax increases on investors.

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The Labour government argues that people earning labour income pay more tax than investors with the same income. That’s actually not true, since investor taxes are systematically under-estimated. For instance, no account is given for taxes paid before companies’ profits are distributed, while capital gains taxes may involve taxation of purely inflationary gains. With profits taxes being ignored in these ways, it’s not surprising that investors seem to be taxed less than workers.

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On a lifetime basis, investors certainly pay more than consumers. Earnings that are consumed are taxed only once; saved earnings are taxed twice — when they’re earned but also when the income generated by saving them is taxed. Investors, including many workers who save for the future, are more heavily taxed than workers. The budget should have acknowledged all this. But what would you expect from a Labour government?

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The biggest tax hikes are on net capital gains, rental income, discretionary trusts and employer-provided benefits for electric cars. On capital gains tax, the cost base of assets will be indexed by inflation and net capital gains will now be fully taxed (instead of only partly, as in this country). Many governments have tried indexation but it encourages tax minimization: investors delay disposals when they expect their marginal tax rates to be lower and sell at a loss when they’re high. To try to curb tax avoidance, a minimum tax of 30 per cent will be imposed. This will be unfair to investors whose taxable capital gains are taxed at rates below 30 per cent (typically below AU$45,000).