30 March 2020
The young and poor have little say in society but they are incurring the bulk of the costs from the shutdown.
Whether it’s their incomes, their schooling or their ability to enjoy life, the sacrifices that students and so-called generations X and Y are making for the over-75s are very significant. Unlike the Spanish flu 90 years ago, it seems coronavirus is of little threat to the vast majority.
The $320bn the government and Reserve Bank have allocated so far to staunch the self-imposed economic carnage will have to be paid for. The plunge in tax revenues could well be as significant as the increase in outlays, leaving a gap that will test governments’ ability to borrow. There’s already $400 trillion of debt sloshing around the world.
And the bill will come long after those whom the younger generations have tried to protect have died. It’s reasonable to give some thought now to how the costs will be shared.
Policies that were thought fair and reasonable only months ago will start to look unfair, even absurd. The government will face stark choices about how to allocate the burden. Will it crush the productive sector of the economy with even more income tax?
Everyone will suffer in degrees during this crisis, but it’s only fair that those who are being saved, especially if they are financially equipped, pay a disproportionate burden of the cost.
(It’s true retirees have seen huge falls in their superannuation balances, but once a vaccine is found in a year or two, their accounts are likely to roar back to life.)
The Commonwealth Seniors Health Card, which is a benefit for retirees who are too well-off to quality for the Age Pension, should be immediately dumped.
How can we have people queuing up for soup in Sydney’s Martin Place (as was the case on Sunday night), while taxpayers fork out hundreds of millions of dollars a year to ensure cheap medicines and transport for those who can easily afford them anyway?
Scrapping the seniors and pensions tax offset, which provides a tax-free threshold of about $33,000 for over-65s and about $58,000 for couples, is also a no-brainer. Naturally, these two changes will cause some discomfort for those affected, but nothing compared with the chaos recently foisted on millions.
It’s obvious the superannuation guarantee should be suspended for the rest of the year, as I’ve argued repeatedly. The government is forgoing almost $20bn a year in tax by keeping it when it needs the revenue urgently.
Coronavirus: Economic bailouts
|USA||$A3.2 trillion||+ $A810bn for layoffs|
|Germany||$A1.3 trillion||+ $A89bn for layoffs|
|UK||$A627bn||+ 80% of salaries up to $2390/month for layoffs|
|Japan||$A437bn||+ cash payments and travel subsidies for layoffs|
|Australia||$320bn||+ workers and sole traders can access $10,000 tax free from superannuation, + $1500 per fortnight for workers|
|Canada||$A121bn||+ $2000/month for 4 months for layoffs|
|Norway||$A15.2bn||+ 100% of salary for 20 days / 80% if self-employed for layoffs|
|New Zealand||$A11.5bn||+ wages covered for people who need to self-isolate|
As of March 31, 2020
Rather than taxing younger generations or workers to oblivion, it’s best to curtail generous arrangements, at least temporarily. These tax increase would have relatively little or no impact on disposable incomes; indeed, in the case of suspending the super guarantee, take-home pay would increase for millions of workers.
Other options might include a significant inheritance tax imposed, say, for the next 20 years to help defray the gargantuan tax burden that has just been put on everyone who is not going to die in that period.
Tax-free earnings on superannuation in the retirement phase should cease, at least temporarily. Currently, the earnings of superannuation funds for retirees face zero taxation.
Everyone else pays 15 per cent tax. It should be the same for everyone (as the Henry tax review recommended, by the way). Fifteen per cent is still a lot more generous than marginal income tax rates.
Cancelling the refundability of franking credits — for everyone, not just self-funded retirees — is another option.
To be sure, this would cause real pain, given some retirees quite reasonably have structured their affairs around them. But this is a crisis.
There are some economic bright sides for younger people. If a house price crash eventuates, those with jobs and to obtain credit will be more easily able to afford a home.
Whether house prices fall for long remains to be seen, though. In times of uncertainty, gold and property tend to be relatively attractive assets and immune from inflation.
And significant inflation may well be on the horizon. The borrowing lobby in society is much more politically powerful than the lending lobby. That is, the constituency that benefits from inflation (anyone with debt) is greater than those who wouldn’t.
What’s more, a niche group of economists reckons the central bank can give us all money directly — say, $10,000 each straight into our bank accounts — without undermining the economic system.
It’s known as Modern Monetary Theory and, understandably, it is becoming popular.
“There’s no such thing as a free lunch” was branded into me through years of economics study. It’s hard to imagine that we can just make new money out of thin air without serious long-term costs to the economic system, or certainly respect for it.
Why would anyone bother working or saving?
The fiscal situation is looking so dire a future government might well give MMT a try. It’s so seductive. They should be wary, though. A great inflation has unpredictable consequences, which history suggests can be terrible.
Nevertheless, if inflation does break out, the burden of the economic shutdown would play out very differently. It would remove the government and private debt burden, obviating the need for the various tax increases suggested above. Anyone with significant cash or deposit holdings would be wiped out.
For now, however, this is all academic.
As in an ordinary war, the young are doing the heavy lifting and face a massive tax burden. It could be a bit less burdensome if reasonable, temporary tax increases were imposed for the over-65s to help defray the costs.
It’s important to keep perspective. Roughly 165,000 people die in Australia each year; about 3000 from influenza.
Meanwhile, the economy is being destroyed — real and permanent damage — for uncertain benefit.
If we totally shut down the economy, as many are advocating, when does it reopen? And if it reopens and the virus emerges again, is it shut down once more?
It’s patently not possible to keep turning an economy on and off every few months without destroying civilisation.