Boasting glittering skyscrapers and label-clad youth, Singapore is the new jewel in the capitalist world's crown.

The city state is home to the third-highest density of millionaire households in the world after Qatar and Switzerland: one in 10 households.

It is also home to super-low income taxes and a cut-price corporate tax rate of 25¢.
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How do they do it?

"I can tell you in a nutshell why taxes are low here," says Annette Beacher, an Australian economist based in Singapore with TD Securities. "Scant welfare, no free health or pensions here. Unemployment, aged care, disability and illness are all the responsibility of the individual or extended family."

When it comes to taxes, citizens get what they pay for, Beacher says.

"It's very sad to see the elderly still working, but that is the reality here not to expect government support."

It's a reality Aussies have proven loath to accept, despite Treasurer Joe Hockey's clarion call to "end the age of entitlement" through deep cuts to pensions, health and education spending.

The Coalition's first budget failed the fairness test. It also failed to fix the books.

In the past six months alone, the plummeting price of Australia's major export, iron ore, has wiped another $30 billion off the bottom line.

Cabinet's razor gang continues to search for new spending cuts to fund new promises on childcare and families.

But a growing chorus of economists is pointing out the obvious: Australia has a revenue problem, not just a spending problem.

"The problem we have is a long-term mismatch between what people expect government to spend on them and what they're willing to pay in taxes," says Saul Eslake, the chief Australian economist at Bank of America Merrill Lynch.

Eslake says government spending is now 1.75 percentage points above the Howard government era average. But revenues are about 2.25 percentage points below the Howard era average.

"If you take the Howard era averages as benchmarks there is a strong case for reducing government spending and there is a strong case for increasing government revenue."


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The chief economist at BT Financial, Chris Caton, agrees: "It is inevitable that taxes as a share of the economy do have to rise."

"I think we clearly have a medium-term balance problem that needs to be fixed and it would be silly to rely only on one side or the other. We are not a high tax country."

The chief executive of the Grattan Institute, John Daley, says the history of budget repair suggests a need for a higher tax take.

"There are very, very few governments that have ever done that on the expenditure side, invariably it happens on the revenue side." The Kennett government cut public servants and closed schools but it also introduced a $100 tax on all households to share the pain. It's about equity, says Daley. "If you try to fix on the spending side, you only hit the bottom half. If you fix on the tax side you more or less hit the top half."

Higher taxes are inevitable, says Daley, because Australians have made some clear choices to spend more money on health and disability support.

"That's the choice we have made as a community and I don't see us as a community about to walk away from that. I just don't think you're realistically going to bridge that gap in the foreseeable future on the spending side. ."

And higher taxes are coming anyway. Even under a "do nothing" scenario, economists point out that Australians will end up paying higher taxes on personal incomes through bracket creep – when rising incomes push more people into higher tax brackets.

Either way we pay. But some methods are better than others, economists say.

Broaden the base

Eslake says the way to go about increasing the tax take is not to raise tax rates, but to broaden the base .

Similarly, spending cuts should not be about cutting payments to those who rely solely on government support, but about reducing the proportion of citizens who get handouts from government.

"The objective of all of this should be the same philosophy as Howard in 2000: to broaden the base and lower tax rates," Eslake says.

Taxes on personal incomes remain the biggest contributor to government coffers.

And yet, many loopholes apply. Most economists agree that tightening up on these loopholes in the income tax system is the simplest and fairest way to restore the tax base.

Cut superannuation concessions

The flat taxation of super at 15¢ in the dollar delivers the biggest benefits to those on high incomes, Daley says. Australia's trillion-dollar superannuation system is now a significant drain on the tax base – about as big as the Age Pension itself. It has also failed to bring about a significant fall in the number of retirees reliant on the Age Pension. Super contributions and earnings should be taxed at a rate that better reflects a person's ability to pay.

Tax family trusts as companies

Family trusts are used by high income families to distribute income to low-earning family members to minimise income tax paid. They offer a way to reduce income tax not available to low income earners and result in much lower income tax collected. Eslake says taxing trust incomes at the company tax rate of 30¢ in the dollar would be better than the current situation where income splitting allows families to pay a much lower marginal rate.

End the discount on capital gains

Investors are currently entitled to a 50 per cent discount on any capital gains they enjoy on shares and property. Taxing gains at the full amount would boost income tax collections and help to cool the investor frenzy in Australian property, particularly in Sydney.

End negative gearing

Property investors are allowed to use losses on investment properties to reduce the personal income tax they must pay. Millions of landlords use the deductions every year. Ending this loophole could raise billions of dollars in personal income tax.

End dividend imputation

Under this unique system, Aussie shareholders get a tax credit for any tax paid by companies on their dividends. Shareholders can reduce their personal income tax paid by the equivalent amount. The aim is to avoid double taxation. But it is a significant drain on revenues, particularly thanks to former treasurer Peter Costello's decision to not only allow the credits to offset personal income tax, but to be claimed as cash back from the government if they have no tax bill to offset. According to Eslake, the revenue raised from ending this could fund a cut to the company tax rate to 25 per cent.

Land tax is something we need to introduce, but only if stamp duty on property transfers is cut back to more reasonable levels. A reasonable level of stamp duty allows the cost of the property transfer to be paid for in full, plus a modest increase based on the value of the property. The extra revenue is raised by an annual land tax on all properties. This spreads the tax burden much more evenly by broadening the base so it is as large as possible, and so doesn't hit anyone too hard.

One problem with stamp duty is that it only hits people who are moving house, and it hits them hard. Conversely, people who live in the same home for decades are not contributing anything.

Another problem with stamp duty is its volatility. People are less likely to buy houses if the economy is struggling and this hits the budget hard. Land tax stabilises revenue.