The former chief of the Australian Reserve Bank has called for a VAT hike and income tax cuts in a speech aimed at reigniting a war between baby boomers and younger generations.
Philip Lowe, whose seven-year term as governor ended in September, is now free to speak out on financial policy after years of silence as a government official.
And on Thursday he outlined his blueprint for a tax overhaul in a keynote speech to Future Generation Australia before he becomes chairman next month.
“Australia taxes wealth generation too highly compared to other countries,” he said.
‘In other words, the GST is too low and the income and wealth tax is too high.
‘Politicians can’t say that, but that is the advice.’
An increase in consumption taxes, such as the GST, is likely to hit younger, low-income workers harder than older workers with higher disposable incomes, who are also more likely to benefit from income tax cuts at higher rates.
The former Australian Reserve Bank chief has called for a GST hike and wants capital gains to be applied to the family home, reigniting a war between baby boomers and younger generations (pictured are swimmers at Sydney’s Bondi Beach )
Capital gains tax on a family home
But in addition to the changes to VAT and income tax, Dr Lowe, himself a 62-year-old baby boomer, suggested that capital gains tax should be extended to the family home.
This would particularly harm older home sellers when selling their primary residence, as existing capital gains tax only applies to investment properties and holiday homes.
“Another thing these reports highlight is how concessional the treatment of housing is in the Australian tax system,” Dr Lowe said.
‘The treatment of a family home in the asset test, in the pension test, the absence of capital gains tax, negative gearing arrangements.
“There’s a lot of things that people have drawn attention to that could help.”
Those who bought their family homes since the mid-1980s, when prices were much cheaper compared to incomes, would suddenly have to declare taxable income that would put them in the millionaire class.
Any gain from selling a home means that someone who bought decades ago would be in the top 45 percent marginal tax bracket for that financial year if they made more than $190,000 on their income and sold the property.
With the median house price in Sydney now at $1.4 million, those who bought a home in 1986 when the median price was $98,325 would now face a heavy tax burden as Dr. Lowe’s idea of retroactive capital gains taxes would be applied.
Someone selling the family home would pay the capital gains tax, but at a 50 percent discount, such as a landlord selling an investment property or a millionaire selling a holiday home.
This means that only half of the capital gain from the sale of the family home needs to be declared in the tax return for that financial year.
This would still leave baby boomers with less money to spend on retirement, but their Generation X, Millennial, and Generation Z children would also suffer because it would reduce their inheritance when their parents died.
Dr. Lowe has also questioned the exemption of the family home from the pension assets test, which would particularly impact homeowners aged 67 and over who qualify for the $1,020.60 fortnightly age pension for singles.
His call for a fresh look at negative gearing for investors who lose rental income has also put him at odds with both major parties, who have vowed to leave the tax break intact.
Neither party in politics is calling for a capital gains tax on the family home, with the Greens only calling for an end to the 50 percent capital gains tax credit and negative gearing.
Philip Lowe, whose seven-year term as governor ended in September without being renewed, is now free to advocate tax policy ideas that he could not do as a government official
Increase VAT
Dr. Lowe also wants the GST to be increased from its current level of 10 percent, which would allow the proceeds to be used to fund more income tax cuts.
Dr. Lowe, who received a total pay package of $1.038 million while leading the RBA, is calling for an increase in a regressive tax that is more likely to hit the poor and young who missed out on a generous income tax cut because they earned less.
Australia’s GST rate has remained unchanged at 10 percent since its introduction in July 2000.
But its introduction 24 years ago doubled annual inflation from 3.1 percent in the June quarter of 2000, before the consumption tax came into effect, to 6.1 percent in the September quarter of 2000, during the Olympic Games. Playing in Sydney.
It took another year for inflation to fall back within the Reserve Bank’s target of 2 to 3 percent.
Dr. Lowe, himself a 62-year-old baby boomer, has suggested that the capital gains tax, introduced in 1985, should be extended to the family home (pictured are a couple in Cronulla in Sydney’s south)
Dr.’s call Lowe’s support for a VAT hike came after inflation eased to 4.1 percent in the December quarter last year, down from a 32-year high of 7.8 percent at the end of 2022.
He is proposing to hike the GST even though the RBA he once led does not expect inflation to fall back within its 2 to 3 percent target until December 2025.
The former Reserve Bank governor’s call to increase the GST comes nine years after then Labor Prime Minister Jay Weatherill of South Australia and his Liberal counterpart Mike Baird of New South Wales announced an increase in the GST.
Former Liberal Prime Minister Tony Abbott backed their call in July 2015, but Malcolm Turnbull installed him as leader two months later.
However, New Zealand increased the GST from 12.5 percent to 15 percent in 2010, and former National Party Prime Minister John Key was re-elected the following year.