What would you change if you were Treasurer for a day?

The Federal Budget is now done and dusted for another year. The key takeaway for investors is that inflation could be back within the RBA's 2-3% target range by the end of the calendar year despite the Albanese/Chalmers administration bringing forward billions in new spending measures. It's good news - if it can materialise. And based on the Bank's forecasts, that's not likely to occur. 

This Budget comes amid increased migration, record-high rents in the capital cities, soaring insurance costs, and a rates market that still can't decide whether the next move from the Bank will be higher (by August, if at all) or lower (if not now, when)?

Well, given everyone's an expert (or at least thinks they are), we're putting that axiom to the ultimate test in the form of a bonus episode of Signal or Noise. 

The panel of Diana Mousina, Deputy Chief Economist at AMP, Luci Ellis, Westpac Chief Economist, and Johnathan McMenamin, Barrenjoey Senior Economist have returned to answer one last question just for fun. 

You are given the chance to make one change to fiscal policy as a guest Treasurer for a day. What do you choose to change and why? 

Their extremely interesting answers are the subject of this bonus episode of Signal or Noise!

Diana's change: A death tax

A death tax (sometimes called, an inheritance tax) is a levy on the person(s) who receives a property in a deceased person's will or the estate that pays the tax before transferring the inherited property. While Australia does not have one at the moment, it did have one until the late 1970s. 

If she was Treasurer for a day, Diana would institute the return of a death tax as she believes it is the root of a lot of the wealth inequality we now experience in Australia.

"I think a death tax is better than a wealth tax because a wealth tax would cause people to not want to progress and not to build up any wealth. They may find ways to avoid paying it," she says.

It may also help alleviate the housing crisis. As of the last Census in 2022, an estimated one million homes were unoccupied - or 10% of the national supply. Of that 10%, an estimated 1.3% showed no sign of recent usage - that's 10,000 homes that are owned and could be used!

"A death tax could help with reducing home prices, which is better for the long-term housing affordability debate which we just can't seem to solve," she adds.

Johnathan's change: Retiring the transfer duty

Given most Livewire readers own at least one home, I suspect you're all going to be very familiar with the stamp duty (or transfer duty, as it's known to NSW residents). 

Johnathan's change would be to create an agreement between the states and the Federal Government to end stamp duty in favour of a land tax. At the moment, first-home buyers have a choice between paying stamp duty or the land tax. But if he was Treasurer, that choice would be taken away.

"The important thing is you need the Federal Government to be involved here because the cost to the state governments in the upfront component will be significant," he says. 

Luci's change: Implementing tax indexation

Luci's offering is relatively similar to an answer offered by former RBA Governor Phil Lowe recently. Luci argues that the tax system should be overhauled to include a constant 2.5% indexation rate. For those not in the know, indexation would factor in the effects of inflation, cost of living, or input prices over time. 

Indexing the tax system is not a novel idea - the Americans, Austrians, Belgians, French, and Brits all have some element of indexation built into their existing system. 

"It would go into tax brackets, all the various charges including HECS and welfare, and into the capital gains tax. Instead of having a half-marginal rate on nominal capital gains, we'd go back to a simplification of the pre-1999 system," she says. 

It's also not the first time Luci has brought this up. As a former official at the Reserve Bank, she campaigned for this change.

"I think the fact we don't have indexed tax brackets has the advantage but the fiscal system is leaning against inflation surges in a way you're not seeing in the US. But, on the other hand, we have a situation like the one we are now in where, periodically, the government ends up with this incredible creep of higher tax burdens on the household sector and then periodically gives some of it away. This becomes very politicised and distributional."

"I think retaining that leaning against high inflation, cementing everybody's minds on 2.5%, and removing the incentive to prefer capital gains over income-producing assets would remove a lot of the distortions we see," she says.

Now, we want to hear from you. If you were a guest treasurer for a day, what would you change and why? Leave your answers in the comments.