National Observer Home > No. 43 - Summer 2000 > Editorial Comment

Mr. Costello's New Wealth Tax

And what of Mr. Costello's tax policies?

First, for the 1998 Federal election he championed the G.S.T. (the goods and services tax). On voting percentages, this should have cost the Coalition the election, but it survived only due to anomalous results in a number of marginal seats. Much of his argument in favour of a G.S.T. was seen as misleading, by for example understating the consequent rate of inflation, overstating anomalies in the sales tax system (which could have been readily corrected by amending legislation) and generally exaggerating the advantages of a widely applicable goods and services tax.

Secondly, it is only now becoming apparent to many business owners, taxpayers and consumers how great the burden of the G.S.T. will be, in terms of both compliance and financial detriment. The introduction of a G.S.T. was not the only reason for the reduction in the 1993 election in Canada of the Progressive Conservatives to a remnant of only two seats, but it was an important factor. In Australia the position will not be improved by the fact that the effects of the tax have been substantially misrepresented.

Thirdly, Mr. Costello's choice for the Ralph Committee of Mr. John Ralph was particularly unfortunate. Mr. Ralph was not a tax expert, and he is perceived to have been "snowed" by various A.T.O. and Treasury personnel appointed by Mr. Costello to "assist" him. It is perceived that many parts of the Ralph Report were influenced by the same A.T.O. officers who have been so influential in advising Mr. Costello.

Fourthly, many of the policies of Mr. Costello and his A.T.O. advisers, which were generally foisted upon Mr. Ralph, will affect very severely small businessmen and farmers. Amongst many the following may be noted:

� Many independent contractors will be adversely affected, by being treated in the same way as employees.

� Farmers and small businessmen with trusts will be adversely affected, for trusts will (without any sound reason) be taxed as companies, even although all trust income is currently assessable to either beneficiaries or trustees under the present system.

� Many burdensome and anomalous rules will apply to companies (and trusts): for example, many distributions of capital will be taxed as income.

� Under a new system of taxation it is proposed that all receipts will be taxable, with specified exceptions.

It is perceived that in Mr. Costello the A.T.O. has found a ready ally of a kind they have not been able to find even in the Labor Party and that Mr. Costello's policies strike directly at many farmers, small businessmen and others who � they may now believe, inadvisedly � voted for the Coalition in 1998, with no real understanding of what Mr. Costello's policies portended.

As noted above, Mr. Costello's policies ought already to have cost the Coalition government, and but for anomalous results in 1998 in certain marginal electorates would have done so. It may be expected that Mr. Costello will prove an even greater asset to the Labor Party in the future.

It is not yet generally appreciated that Mr. Peter Costello's recently announced tax changes include a new wealth tax at a high rate (the rate on the taxed component for the many people on the top marginal income tax rate will be 24.25 per cent).

By removing tax indexation for inflation, Mr. Costello will tax the capital value of assets. If an asset doubles in nominal value purely by reason of inflation, and is sold, the nominal "gain" (not in truth a gain at all) will be taxed at 24.25 per cent.

The seller will lose 12.125 per cent of the total capital value of his assets.

Further, the longer an asset is held (and the longer the period of inflation), the higher the rate of the effective wealth tax. For very long holdings, the rate will approach 20 per cent or more.

These changes in capital taxation favour short-term investment � the wealth tax effect is least if a sale takes place shortly after one year (there being a speculative rate of tax for sales within a year).

Long-term investment will incur an extremely substantial wealth tax.

The removal of indexation is alarming, and provides an example of the harmful and ill-advised nature of Mr. Costello's "reforms". Indexation should be restored urgently. This will doubtless be resisted by Mr. Costello and his A.T.O. advisers.

National Observer No. 43 - Summer 2000