Tax Reform and Older Australians

Summary of COTA's Submission to Tax Consultative Task Force, February 1998

Tax reform is immensely important for Australia's future.

Its aim should be to strengthen our economy and ensure that our community has the services and infrastructure it needs.

COTA would not wish to see the tax reform process used by political parties to favour particular constituencies. This is more likely to result in social divisions and thwart the tax reform process.

A reformed tax system would need to meet the classic requirements of equity, efficiency and simplicity. It should operate:

• to ensure that those with the greatest resources make the greatest contribution: the aim should be a highly progressive tax system
  
  
• to encourage saving and investment and to foster the optimum use of the nation's assets held by households and firms.

The Council on the Ageing sees the following as the guiding principles for a new tax system:

• Tax reform should be of social and economic benefit to Australia.
  
  
• No older person in the low to middle income groups should be worse off under any proposal.
  
  
• Any proposal should make a positive contribution to provide governments with sufficient revenue for necessary social services over the long term.
  
  
• The progressive elements of Australia's present tax system should be strengthened.
  
  
• A priority for tax reform should be on closing loopholes, removing distortions and reducing evasion.
  
  
• Better revenue sharing between Commonwealth and the States without transfer of tax powers is needed.
  
  
• Income tax cuts should be excluded from tax reform.

Older people are unique stakeholders in the tax debate for the following reasons:

• Their incomes are relatively fixed and they have little capacity for changing the source or level of that income.
  
  
• They spend most of their income rather than save. They can be seen to be at the dissaving end of the life cycle.They tend to use interest and dividends from savings and shares for living purposes rather than capital accumulation.
  
  
• Older people have low incomes compared to the rest of the community.
  
  
• Most older people receive a full or part Age Pension.

For these reasons, tax reform can affect older people through changes in tax scales and through changes in sources of taxation. There will be great sensitivity to any changes in the tax mix that favours tax on consumption over tax on income.

Older people would be very disadvantaged if a GST was implemented to offset income tax cuts.

Older people do not stand to gain from income tax cuts because their incomes are too low to pay tax or otherwise they pay only a small amount of tax. Income tax cuts for middle to high income groups combined with a GST would hit older people very hard. They would receive no benefit from the tax cuts as well as suffer all the disadvantages of the GST including higher prices for basic commodities and uncertain compensation promises.

COTA has concerns that the Government's terms of reference for tax reform have put unnecessary and premature constrictions on the debate. In particular, we believe that the levels of the tax "burden" should be an issue for debate, as should the role of personal income tax cuts in any reforms.

We believe that Commonwealth-State financial relations should be addressed by better revenue sharing mechanisms rather than by allowing States to impose their own regressive taxes. We acknowledge the important role of State Governments in the delivery of services and their need for sufficient finances to run these adequately.

Finally COTA wishes to see two other issues included in the tax reform debate:

• review of retirement incomes: COTA believes that the present targeted age pension system, in which eligibility is assessed through the income and assets test applied by Centrelink creates significant distortions in investment decisions and is a source of immense stress for older people. We believe it should be replaced by a system in which the pension may be paid to everyone of pension eligibility age and targeted through the tax system.
  
  
• social security and tax: there are long standing problems in relation to the effective marginal "tax rates" applied to people on social security incomes who have some additional income from employment or assets.

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