Tax reform critical to tackle wealth inequality, research reveals
The Australian tax system has contributed to the increase in inequality within society by widening the “rich-poor” gap, according to research by The Australia Institute.
Research conducted by The Australia Institute (TAI) demonstrated that Australian society is becoming more unequal due to the tax system and capital gains.
The report highlighted wealth has become more unequally distributed than income.
This is demonstrated by the wealth of the richest 200 Australians, as their wealth has risen from the equivalent of 8.4 per cent of the nation’s GDP to 23.7 per cent of GDP between 2004 and 2024.
“If wealth inequality is to be reduced, the tax system would need to shift from taxing wages and other earned incomes towards taxing unearned income wealth and capital gains,” the report said.
“Although the political barriers to making this change are likely to be substantial, failure to confront the problem will consign the nation to ever-increasing inequality.”
TAI suggested to tackle rising wealth inequality, tax reforms should focus on capital gains and the accumulation of private wealth as they favour a minority in society while negatively impacting the majority.
Capital gains and wealth are “lightly taxed” or completely untaxed in Australia, resulting in the overall percentage of tax paid falling more heavily on the bulk of wage-earners whose income is more visible.
TAI said up until the 1980s, capital gains were not taxed at all but are now taxed on realisation, though many assets are exempt from capital gains tax.
“For example, the accrued value of a house is only taxed when it is sold and not at all if it is the main residence of the household,” the report said.
“For the assets that are taxed, only half of the realised capital gain is added to the taxpayer’s assessable income, yet the capital gains tax discount means that only half of the accrued value of assets is taxed.”
Tax arrangements related to the ownership of assets have become integral to the wealth accumulation process.
“Most discussion of inequality in Australia ignores capital gains and their interaction with wealth, even though capital gains have been the major factor driving huge increases in wealth for the rich.”
To help tackle wealth inequality, the report suggests three types of tax reform which include the reform of capital gains taxation, the establishment of an annual wealth tax and the introduction of a wealth transfer tax.
“Any of these reforms would make a big difference; all three would be transformational,” TAI said.
The report said the current capital gains tax at half the rate of wage incomes has neither an ethical nor economic justification.
As proposed by the Labor Opposition’s 2019 election policies, TAI believes changing the capital gains discount amount from 50 per cent to 25 per cent would result in 75 per cent of capital gains being taxed.
According to the report, this would aid in helping close the rich-poor gap.
Due to capital gains not being taxed fully, it was estimated the foregone revenue in 2023–2024 was $19 billion.
TAI also suggested a wealth tax should be implemented to charge a person annually on their total worth.
“In Australia, if a simple wealth tax was levied annually by the Commonwealth Government it would be potent, efficient and equitable,” the report said.
“Introducing such a tax would be a significant innovation, redressing the current imbalance between the taxation of incomes, expenditure and asset ownership.”
Taxing wealth transfers, also known as inheritance taxes, would raise revenue from people with substantial wealth.
This process is common in other countries worldwide and involves a tax being included in the nation’s tax base when an asset is transferred to someone else, often following a death.
Enforcing this would help to distribute wealth, and TAI said if Australia wants to fix the drastic wealth inequality, the tax system must be reformed.
“To counter the dystopia of ever-more concentrated wealth driving ever-increasing inequality will require bold policy actions.”
“Both capital gains tax reform and wealth taxation will need to be priorities in creating a more equitable and sustainable tax system.”
