Tax reforms for millennials

It’s no secret that in order to win future elections, the Liberal Party must win over the votes of millennials.

There’s been much speculation on how to achieve this, but I think the answer is actually quite simple: like any voter group, the best way we can win them over is to show that we are on their side. And, like working age generations before us, it’s the hip pocket that really counts.

Unfortunately, when it comes to tax relief Liberals have become known as the party that stands for the interests of retirees and property investors. Of course, we must advocate for the interests of all Australians including these groups, but what we desperately need are signature policies that make a real difference for young families.

I’m proposing two such reforms that would actually shift the dial and demonstrate to millennials that when we tell them we are on their side, we are willing to back it up.

The generational bargain is close to breaking-point

Many young people feel like they’ve been neglected by the coalition. Decades of inflationary housing policy has put home ownership out of reach, making the older generation wealthy and leaving a generation of renters whose taxes will be paying off their debt and funding their services and tax breaks.

People often describe the experience of buying a house as climbing onto a ladder, however for many millennials in Australia a more accurate analogy would be chasing a train that has already left the station. That is the feeling of watching the median house price rise by more than your salary in a single year.

It should be anathema to Liberals that the Australian sense of egalitarian aspiration is currently giving way to a new class system where home ownership is determined not by one’s willingness to work hard but by the wealth of one’s parents.

In light of this, when young people see the Liberal Party fighting tooth and nail to oppose measures that would rebalance the tax system in favour of young people, it’s no wonder they don’t think we’re on their side.

We must do more than one-off handouts like homebuilder or similar grants. We must focus on changes that make a substantial difference to the take-home pay of young families.

Reform 1 – End compulsory HECS repayments (pay it off when you’re dead)

For many young people, HECS seems to go up faster than they can pay it off. For someone with an average salary and loan balance, they face the prospect of losing 5-10% of their income for more than a decade. Even worse, they are losing this income at the exact time when they need it most: while saving for a deposit or paying down a large mortgage and dealing with the growing expenses that come with starting a family.

The solution is simple and costs the government nothing: make HECS repayments non-compulsory and deduct the balance from the person’s deceased estate. With a lifetime of superannuation accumulation, almost every person will die with assets greater than their HECS debt, so it is virtually guaranteed that the debt will eventually be paid. There is no substantial change to net debt because the HECS loans are an asset on the treasury balance sheet that grows with CPI. The only change is the difference between the bond rate and CPI (which has actually seen the government make a profit from HECS in recent times).

Some may be concerned about this policy impacting their ability to leave an inheritance for their children, and those people are free to choose to repay their HECS early, at a time that suits them. And while it is true that the HECS debt will grow substantially over the course of a lifetime, its real value will not change because it is indexed to CPI.

Ultimately, this policy is about giving young families access to more of the money they earn when they need it most, and that’s something every Liberal should support.

Reform 2 – Make rent and home loan interest tax deductible

There is a deeply unfair problem at the heart of our income tax system: a family that owns their home outright currently pays the same tax as a family that has the same gross income but pays thousands of dollars a month in rent or home loan interest.

This flies in the face of the well accepted principle that those with greater means should pay more tax. Clearly the family who owns their home outright is of greater means - their disposable income is likely to be upwards of $30,000 higher.

To put it another way: if I inherit a share portfolio, I pay tax on the dividends. If I inherit an investment property, I pay tax on the rental income. Yet, if I inherit a house and choose to live in it, I receive the full economic benefit and don’t pay a cent more tax.

The current system may have made sense last century as a way of encouraging people to own their own home, but at a time when home ownership is simply not an option for many young people, it is just further advantaging those who got on the housing train before it left the station.

There is a simple solution that would level the playing field: make rent and mortgage interest tax deductible up to an annual cap (e.g. $20,000).

By reducing their tax by $5-$10k per year, this policy will help mortgage holders to pay off their mortgages earlier and therefore pay less interest overall, and it will help renters to save for a deposit. In particular, it will help to address the growing divide between those fortunate enough to have bought a house 20 years ago, and those who feel left behind, or are struggling with mortgage stress. Importantly, it does this not by raising taxes but by lowering them. This policy is in keeping with the fundamental Liberal principle of a lower, fairer tax system.

Of course, this policy will come at a cost to the budget. There are about 6 million households that would benefit, and if the average tax benefit is $5,000, that equates to $30B of lost revenue per year. But to put it in perspective, the cost of the Stage 3 tax cuts is expected to grow from $20B to $40B over 10 years. We could simply swap the Stage 3 cuts for these ones, which would do much more for the young families we are trying to win over.

Our party desperately needs some big ticket, signature policies to win over young people at the next federal election. The two policies I’ve put forward here will firmly establish us as a party that stands for not just the old, but the young as well.