Former Treasury secretary Ken Henry reveals why the tax system is rigged against young Australians

A former chief of finance has criticized Australia’s tax system for being rigged against young people, arguing that they fund the lavish lifestyles of a wealthier, aging population.

Ken Henry, himself a baby boomer who headed Treasury from 2001 to 2011, blamed negative tax breaks for investors, low tax rates on pensions and shareholder postage for worsening generational inequality.

“At some point, perhaps even now, the intergenerational social pact must definitely break,” he said at The Tax Institute’s Financial Services Conference last week.

Australia’s public gross debt will cross the $1 trillion mark in 2023-2024, as a result of the coalition spending $300 billion on Covid welfare measures in 2020 and 2021.

Despite this burden of debt, baby boomers, who already have much more wealth, still get tax benefits.

They were able to buy back homes when they were much cheaper compared to their income, and are therefore much more likely to benefit from negative gearing, no matter how many investment properties they owned.

Dr. Henry took over as Chancellor of the Exchequer two years after John Howard’s coalition government introduced a 50 per cent rebate on capital gains tax in a bid to boost the ability of the wealthy to buy second and third homes and to increase the supply of rental housing.

The resulting increase in the capacity to spend on real estate meant that housing in Australian cities is now some of the most unaffordable in the world.

That made it even more difficult for the young to buy their first home, along with paying off their student debt – something many baby boomers never had to deal with when college was free and many more jobs didn’t require a tertiary qualification.

“This generation of young workers, weighed down by Higher Education Contribution Scheme (HECS) debt, burdened with the responsibility of paying back a mountain of government debt and coping with the costs of climate change, are finding it increasingly difficult to buy a home, ‘ he said.

Dr. Henry was also critical of the favorable 15 percent tax rate on pension contributions, which costs the budget more than $50 billion a year in lost revenue.

Money put into super is taxed at that lower level, rather than the much higher rate it would get if it were simply considered income.

That meant that young workers, and others who couldn’t afford to pay pension contributions above the minimum, paid income tax on a much higher percentage of their money than the wealthy.

In addition, older Australians who sell their principal residence – their primary residence – do not pay capital gains tax on the windfall and continue to be eligible for the pension.

“Those sitting on tax-free capital gains in homes exempt from the pension wealth test, those receiving repayable postage credits on stock portfolios, and a mix of government-funded and tax-free private pensions from assets accrued in lightly taxed self-managed pension funds,” he said.

Baby boomers, who were able to buy homes when they were much cheaper relative to incomes, are more likely to benefit from negative gearing, no matter how many investment properties they owned (pictured is a stock image)

Prime Minister Anthony Albanese’s Labor government has announced that it will double the super-contribution tax rate to 30 per cent from 1 July 2025, but only for the very few with more than $3 million in retirement savings.

That measure would be intended to save the budget $2 billion per year.

Former Labor leader Bill Shorten lost the 2019 election after promising to scrap negative gearing for future purchases of existing homes and cut the capital gains tax credit in half from 50 percent to 25 percent.

Mr Shorten had also proposed limiting postage credits – these are tax credits for stock dividends if the company had already paid corporation tax on its earnings.

Mr Albanese had distanced himself from Mr Shorten’s tax policies before winning the May 2022 election.

Dr. Henry said more younger workers and their taxes will fund older people’s lifestyles in decades to come.

“In stark contrast to the post-war period, the aging of the population will mean that a smaller proportion of the population, made up of relatively young workers, will have to take on a rapidly increasing share of government funding,” he said.