MERCEDES-BENZ PARRAMATTA 14 ROI THE GREAT FAIRNESS DEBATE Commentary around the Turnbull Government’s FY18 budget has centred around fairness. Ross Greenwood asks, what is fair? WORDS Ross Greenwood Between now and the Federal Election (my betting is still on a May poll next year) you are going to hear two words used a lot: fairness and aspiration. These words will go to the heart of the debate about the alternative tax policies of the two major political parties. They will also polarise debate around the definition of what is defined as “wealthy” in Australia. The problem with this debate is that the definition of wealth is thoroughly arbitrary depending on whose eyes you look through. A person with a home and a million dollars in superannuation might be rich to many but, if their income from that superannuation pot is around $40,000 a year, they are technically poor. But a couple on a full age-pension, who own their own home and have $380,000 in other assets might be considered to have modest wealth. Indeed, they might be considered “poor” by some. Yet their income might be around $47,000 a year (because they qualify for the pension and earn 4% on their other assets) so they end up being “richer” than the family with $1 million and their own home. Do you see the problem? The system today almost encourages older Australians to divest their assets before they retire, so that they qualify for tax and pension benefits that those who might not have been so fortunate, or industrious, are able to qualify for. When it comes to tax, it’s the same story. Under the coalition plan, eventually anybody who earns between $40,000 a year and $200,000 a year will have the same top marginal tax rate – 32 per cent. Yet politicians, already, are screaming, and asking why a nurse should pay the same marginal tax rate as a CEO (yes, I know, most CEOs earn way more than $200,000). I didn’t say this argument has much sense about it, after all. So let’s have some common sense. A person on $40,000 a year (under the tax proposals of the Government) by 2024 will not pay the same tax as a person on $200,000 a year. Far from it. Professor Bob Deutsch from the Tax Institute crunched these numbers: A person who earns $40,000 a year pays $4,947 tax. The effective tax rate is 12.37%. A person who earns $200,000 a year pays $67,232 tax. Their effective tax rate is 33.6%. See the difference in actual tax paid — $62,000 — and the effective tax rate? From July 2024 (provided this Government gets elected twice and this passes through Parliament), it will look like this – even though both people will have the same marginal tax rate of 32%. A person who earns $40,000 a year will pay $4,492. The effective tax rate will be 11.23%.