Improving aged care doesn’t justify tax

The report of the Royal Commission into aged care released this week has already been widely accepted to have made a case that many more billions of dollars need to be spent. Debate has quickly moved on to where those billions would come from, with personal income tax the prime candidate.

None of this is surprising. In making recommendations that involve vastly more public expenditure, this commission has acted in the tradition of royal commissions into any failure of public policy. And it is not unusual for income tax to be the first port of call for more taxpayer money.

But increased funding should not be the starting point. The government first needs to examine the commission’s recommendations, decide which are most worth pursuing and ensure that existing levels of public expenditure on aged care are put to most effective use before adding more.

If, as is likely, more funding is needed, there should not be a presumption that this will come from personal income tax. Imposing a levy on personal taxable income is just dressing up an income tax increase as if calling it a ‘levy’ makes it something else.

A 1% levy for aged care is indistinguishable — in its effects on disposable income and incentives — from a one percentage point increase in all marginal rates of personal income tax. The same is true of the Medicare levy, which renders the true marginal rate faced by the largest number of taxpayers 34.5%, not the 32.5% politicians like to claim.

Reducing personal income tax has been a centrepiece of the current government’s platform, and they have economic logic on their side. Imposing an aged care levy would be a clear reversal of this strategy, which is legislated to be fully implemented in 2024-25. A 1% levy would negate more than one-third of the full tax cut.

The Royal Commission has no special contribution to make on the matter of financing its recommendations. Its terms of reference did not even specifically invite recommendations on funding. This is a matter for government, which should dismiss any notion of increasing income tax and examine other options including larger user contributions.