It was US Senator Everett Dirksen who once said: "A million here, a million there, pretty soon, you're talking real money".
And his humorous quote about the dangers of how seemingly insignificant amounts of government spending can quickly amount to quite massive sums is just as relevant today—although we should perhaps use billions in the current Budget context.
One of the most overlooked but often most significant costs to Australia’s Federal Government Budget is tax concessions, which have a habit of quickly mounding up into really serious money.
While everybody loves claiming a tax concession, new figures from the Federal Treasury show that the forecast opportunity cost of tax concessions has soared by an astronomical $50 billion in a single year.
Once again this shows the compounding power of in this case tax income foregone and what a difference it could make if tax concessions were tightened or abolished through tax reform.
Income Tax, Not Capital Gains
Capital gains taxes are an important element in equalising the tax burden between income and capital.
Otherwise, ordinary workers end up paying for this revenue gap through income taxes and the task of repairing the Budget falls too narrowly on too few shoulders.
Just the cost of forgone tax through the capital gains tax concessions on the family home, investment properties and shares on their own are expected to reach a record $81.8b this year.
Taking the largest concessions in order – super, capital gains, the GST, rental deductions, and work-related expenses claimed by workers – together they will add up to a hefty $184.1b cost to the Budget this year.
That is up by 8% or $13.4b, on what Treasury last year forecast for 2025-26.
Between 2024-25 and 2027-28, Treasury has increased its estimate for the cost of these concessions by an impressive combined total of $50 billion.
CGT Concession Keeps Growing
One of the biggest culprits in that rise is the cost of the CGT concession, which Treasury has revised up by $20b on last year’s forecast.
With property and share prices growing quickly, that has forced up the value of the various CGT concessions, which include a total exemption for the family home and a halving of the CGT payable for assets held more than a year.
The same forces have pushed up the cost of the lower tax on superannuation by $8.9 billion by 2027-28 and rental deductions used by landlords to reduce their taxable income have grown by $3.2b.
Senate Committee Reporting Soon
At least some of these concessions will be coming under the microscope in the coming months with a Senate committee due to report in March on the current CGT concessions, their impact on the housing market, the size of the concessions and whether they draw money away from more productive parts of the economy.
The concession that has drawn the most attention is the 50% concession on capital gains tax for assets held more than a year.
This was introduced by the Howard government in 1999 and many critics point to it as having played a big part in the rise in house prices compared to wages ever since.
House Prices Outperforming Shares
One of the submissions to the inquiry by the Grattan Institute highlighted the fact that since the concession was introduced, house prices had climbed by 6.4% a year compared to a 4.3% annual lift in the ASX 200.
Over the same period, inflation had averaged 2.9%, meaning that both shares and property have more than kept up with rising prices.
Grattan argued that the concession should be cut to 25% over a five-year period, raising an extra $6.5b a year to reduce the tax burden on younger Australians or increase rental assistance for those on low incomes.
Concessions Too Generous?
Tax expert Bob Breunig, director of the Tax and Transfer Policy Institute at the Australian National University, also said the current concession on CGT might be too generous.
He said any change would have varied impacts across the economy, increasing the overall tax rate on household savings and reducing pressure on income tax collections.
The latest Mid-Year budget update showed that income tax on workers is on track to account for 69% of federal income taxes compared to 66.5% last year.
That rise would have been even more dramatic but for the legislated tax cuts due to continue on July 1 and in 2027.
Is GST off the Table?
Treasury’s report also reiterated that the cost of excluding certain goods and services from the GST continued to grow, reaching $32.7b this year.
Between 2024-25 and 2027-28, Treasury has revised upward the cost of that concession by $4.1b.
The GST exempts fresh food, financial services, childcare, health, most education services and utilities like water.
That not only leads to strange examples, such as GST applying to cooked chickens but not uncooked chickens but also adds another layer of costs for business.
While the Government has ruled out changes to the GST, which raises about $100b a year paid to the states and territories, many economists support reducing or eliminating these GST exemptions entirely.
