Tax deductions are mostly a swindle for the rich. Time to do something for the poor

Every year, Treasury releases a tax expenditure statement telling us what various tax concessions cost the federal budget. This year’s is the first to feature distributional analysis showing who gets the benefits.

Since its release on February 28, the media has focused on the two most expensive areas: superannuation and housing. The report showed such concessions flow overwhelmingly to those in the highest income brackets. And with bursting super accounts in Labor’s firing line, they have understandably hogged the limelight.

But there are other inequitable and expensive tax breaks which deserve more scrutiny, many of which are also costly, growing and increasingly inequitable.

A new ute on the taxpayer

The next most expensive tax giveaways after super and housing are work-related expenses, which are expected to hit a record $22.6 billion this financial year.

People with higher incomes claim more deductions of higher value, which sees them disproportionately benefit — 86% of work-related tax reduction went to people with above median taxable incomes, and 26% went to the top 10%. Men received 65% of the total tax reductions in this category because they make more claims, of higher value, and have higher incomes than women.

Work-related tax deductions 2019-20

A similar and growing area is asset write-offs and depreciation for businesses. The Morrison government loosening associated rules has supercharged these items. Crikey’s Jason Murphy recently bemoaned the growing presence of ultra-massive utes on our roads. This is, in part, driven by tradies (many of whom operate as small business owners) deducting the cost of a new ute off their tax bill — under Morrison’s rules, many could deduct the whole cost in the same year they purchased it. This new concession alone has catapulted into the top 10 for total cost.

Managing your tax avoidance

Once your accountant is done shaving off as many automotive monstrosities from your liabilities as possible, you can then deduct the cost of their services. Given the affluent engage the most expensive accountants, almost half of the total tax reduction for this item goes to the top income decile.

Cost of managing tax affairs and other deductions, 2019-20

Labor decided against taking a $3000 cap on such deductions to the 2022 election, after including the proposal in its 2019 platform. But staring down a revenue hole and fresh from a super victory, Treasurer Jim Chalmers should be emboldened to re-pitch the cap.

Another reasonable proposal he ought to resurrect is Labor’s dumped plan to tax family trusts at a minimum rate of 30%. Trust income is taxed at the recipient’s marginal rate, so wealthier people are incentivised to channel money through trusts to their lesser-taxed relatives.

Treasury’s report shows those on the highest tax rates declared the highest amounts of trust income, but the highest number of recipients did not pay tax at all, strengthening concerns it is merely a tax avoidance scheme for the rich.

A spirit of giving (away much-needed revenue)

Even relatively benign sounding concessions mostly benefit the wealthy. Deductions for charitable donations, for instance, disproportionately reduce the taxation paid by the richest.

Deductions for gifts and donations, 2019-20

For instance, Gina Rinehart has given millions to tax-deductible gift recipients including conservative think tank the Institute of Public Affairs and the SAS Resources Fund, which pledged to pay the legal fees of returned servicemen caught in the fallout from the Brereton inquiry into alleged SAS war crimes in Afghanistan.

Capping such donations for high earners would not just save taxpayers’ money on questionable ventures, but ensure NGOs aren’t overly reliant on mega-donors.

But surely the GST exemptions for food, health and education items are pro-poor, protecting the least affluent from a regressive tax? Not necessarily. Treasury’s report shows they skew towards the relatively well-off on a dollar-for-dollar basis.

Poorer households spend a higher proportion of their income on food, for instance, so benefit slightly more on an income-equivalised basis. But the forgone revenue still flows disproportionately to richer households, simply because they spend much more on food.

The government wastes a whole lot of money subsidising materially comfortable households’ private health insurance, private school fees and Sunday roasts so that a smaller number of poor households will live marginally cheaper, when it could just compensate those households directly through higher and broader welfare payments.

If Prime Minister Anthony Albanese doesn’t want to plug these holes in our leaky tax bucket one-by-one, he could use a Buffett tax — capping all deductions for high earners to a percentage of their total earnings. He knows this policy well, having proposed it himself at Labor’s 2015 national conference.

Most tax concessions siphon rich people’s money away from public services and those who rely on them — even the well-intentioned ones. The lower and middle classes are better served by alternative assistance. It’s time we deducted concessions from our tax system, so our schools and hospitals get a bigger return.