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To fix the budget, apply the Medicare levy to high earners who use negative gearing

Peter Martin
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Ten weeks out from budget night, the Treasurer needs more money. It's not what he expected. Asked on taking the job 18 months ago whether he would need to raise more money in addition to winding back spending, Scott Morrison replied: "I'm not in that camp".

He is now. Two measures he is considering are imposing a royalty on the mining of offshore gas to top up the less effective resource rent tax, and raiding the Future Fund as soon as he is allowed to, in 2020.

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He needs to get more from us without annoying us.

Jean Baptiste Colbert described the task more elegantly. He was the French minister for finance under Louis XIV. The art of taxation, he said "consists in so plucking the goose as to obtain the largest possible amount of feathers with the smallest possible amount of hissing".

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I've come up with an idea, one I am prepared to share with the Treasurer and Finance Minister Mathias Cormann for free. History suggests it will work.

It occurred to me while examining a proposal from the Australian Council of Social Service to slap the 1 per cent to 1.5 per cent Medicare levy surcharge on all high-income earners regardless of whether they have private health insurance.

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At the moment those with private insurance are exempt, but if it was applied to the lot of them it'd raise a phenomenal $4 billion a year. Which is probably why Morrison and Cormann won't do it. It'd be so big it'd be noticed.

But in examining the surcharge and the Medicare levy itself, I noticed something odd. The levy is straightforward. It's 2 per cent of "taxable income".

But the surcharge is different. It's 1 to 1.5 per cent of "income for Medicare levy surcharge purposes", which is something else altogether.

It's a measure of total income, regardless of the form in which it is paid, and regardless of fiddles such as negative gearing that are used to reduce it.

That's right. Negative gearing is disregarded when it comes to calculating income for the purpose of calculating the Medicare levy surcharge. High earners are entitled to lose as much as they want renting out properties, but they are unable to use those losses to cut the income used to calculate their Medicare levy surcharge.

Labor made the change in 2008 but, perhaps significantly, the Coalition hasn't wound it back. For all of its talk about how banning negative gearing would hurt investment, in three years it hasn't tried to reinstate negative gearing in those places where it is not allowed. And there are many.

632 very high income Australians on more than $250,000 paid no Medicare levy whatsoever.

Separated parents can't use negative gearing to cut their obligation to pay child support, the unemployed can't use it to cut their income to the point where they get Newstart, families can't use it to cut their income in order to get childcare and family tax benefits, seniors can't use it to get the health card, high earners can't use it to avoid the higher income superannuation surcharge, and former students can't use it avoid repaying higher education loans.

Many of us wouldn't want it to be used for these things. Deliberately losing money in order to avoid supporting children or repaying a loan, or to get a benefit to which you would not otherwise be entitled, seems abhorrent.

So why do we allow people who do it to avoid paying the Medicare levy? Here's my idea: treat the Medicare levy the same as those other programs.

The latest tax stats show 632 very high income Australians on more than $250,000 paid no Medicare levy whatsoever. Many more, at least a million more, paid less than they would have because they used negative gearing and other devices to cut their taxable, although not their actual, incomes.

My rough calculations suggest that if negative gearing was disregarded for the purpose of calculating the Medicare levy, the government would raise an extra $240 million a year. If income for the purpose of calculating the Medicare levy was determined in exactly the same way as for other programs, the government would raise much more, because that calculation also includes fringe benefits, tax-preferred personal superannuation contributions, foreign income, and superannuation income streams.

I am not suggesting calculating all income tax in this way, merely the Medicare levy, which would at least ensure people didn't minimise their obligation to pay for their health.

If history is any guide, it would encounter next to no opposition. Geese didn't hiss when the student loan rules were tightened in the 1990s to prevent graduates escaping repayments, and they were as good as silent when a footnote in the 2008 budget removed negative gearing from the calculation of other obligations.

Supporting Medicare is something that no one on a reasonable income should be able to escape. If Morrison doesn't take the plunge, but goes after other less certain sources of income, it might start to look as if he is not serious.

Peter Martin is economics editor of The Age.

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