Comment

John Hewson
Fix for a broken tax system

As the major parties compete for the title of best economic manager, they are still ignoring the elephant in the room. Their future spending commitments, and voters’ expectations for further support, are not adequately funded by the prospective tax base. Many tax concessions, given initially in good faith, are no longer appropriate in light of today’s policy challenges. Many wealthy individuals and corporations are not meeting their tax obligations, indeed paying little or no tax. There is still too much reliance on income taxes, especially via bracket creep in personal tax, and the tax system is too complicated and is deepening inequality.

Our political leaders know what needs to be done to genuinely reform our tax system. Indeed, tax is one of the most analysed areas of public policy. The most recent review, conducted by Ken Henry in 2008, unfortunately provided a list of reform initiatives, rather than recommending a complete, integrated package. This allowed the Rudd government to cherrypick from the list and to attempt partial reform. The resulting ill-fated mining tax became an emotional issue in that industry and more broadly in public discourse. That said, it was an attempt, in the national interest, to deal with an area that was conspicuously undertaxed.

Tax reforms are easily plagued by scare campaigns. This was the case with the goods and services tax (GST) that was finally introduced in 2000. It was much needed to replace the complicated and inefficient wholesale sales tax – which had six rates as high as 45 per cent, with varying incidence – and also as a mechanism to move the burden of tax from income to expenditure. It allowed a cut in personal taxes and the abolition of other dubious levies.

A similar scare surrounded prime minister Julia Gillard’s climate tax on polluters in 2012. It became the basis of Liberal leader Tony Abbott’s election campaign the following year, despite the overwhelming support by economists for such a price on carbon as the most efficient way to lower emissions and to drive the inevitable transition to clean energy. Many feel it was Labor leader Bill Shorten’s attempt to remove negative gearing and capital gains tax on housing investments that cost him the 2016 election against Malcolm Turnbull – again as the result of a hyperbolic campaign. To this day, eliminating these concessions remains essential to effective housing policy.

Unfortunately, this run of experiences, mostly with only partial tax reform, has made our political leaders gun-shy of advocating for any more. They suspect there is “reform fatigue” in the electorate and are simply kicking it down the road for a future government to do.

The public debate on tax has been misdirected at times by political leaders who have equated reform with tax cuts and ignored the benefits of restructuring. This has raised expectations among the business community and households – generally what they seek would be unsustainable in the longer term.

The corporate sector has argued that our headline corporate tax rate, at 30 per cent, is globally uncompetitive. This is deliberately misleading. If concessions are taken into account, the effective corporate tax rate is roughly 16 per cent, which is very competitive. Such arguments also ignore the significant number of companies reported by the Australian Tax Office to have paid no tax – the latest data suggest this applies to almost a third of companies. Many multinationals exploit accounting loopholes to pay no tax in Australia, and there are gas giants paying a dwindling amount of the petroleum resource rent tax (PRRT) despite record production and exports. In recent years, gas companies have paid less tax than students have paid under the HECS/HELP schemes.

The need for tax reform in this country has never been as great as it is today, and especially as global trends and uncertainties are driving Australia to dramatically improve both national productivity and global competitiveness.

The trade and financial market chaos created by United States President Donald Trump’s tariff policies – which seem likely to result in a global recession and a rekindling of inflationary pressures – will probably be the most challenging economic and geopolitical circumstances we have faced since World War II. This should be a focus of the current election campaign. The opposition will clearly need to do more than attempt to propagate the myth they are better economic managers – one that ought to have been dispelled by the failings of the Howard–Costello years, when they squandered the revenue windfalls of the first China resources boom by promising tax cuts that we couldn’t afford and causing the initial blowout of budget deficits. This was all compounded by the Morrison government pumping billions into the economy in response to fears of the pandemic’s impact. That stimulus basically blew up the construction sector, particularly housing, and created a build-up of inflation that, together with record government spending (rising to 31 per cent of GDP), created both the cost-of-living and the housing crises.

The key point here is that to drive a significant turnaround in our national productivity and to further diversify our trading and other relationships, Australia’s economy will require much more competent and nuanced management than the opposition has demonstrated any capacity for in recent memory. By comparison, this government’s fiscal management has been praised by the International Monetary Fund as world-leading, and the OECD has ranked Australia’s performance on energy inflation as the best. The Albanese government has pulled this off while navigating what the former governor of the Reserve Bank regularly described as the “narrow pathway” to a soft landing – that is, without precipitating a recession. Any significant further cuts in government spending would be sure to tip the country into one.

However, both parties will inevitably be confronted with the tax reform challenge.

Meeting it will require a review of the extensive list of concessions granted to particular groups or industries that may have had some initial – likely political – rationale but are no longer needed. The three that spring to mind are in relation to housing, superannuation and the GST. On housing, the capacity to negatively gear properties and then enjoy a 50 per cent discount on capital gains tax upon selling them has been a windfall to investors but detrimental to housing affordability. As to superannuation, Australia must be the only country that offers three-way concessions, with a tax break when people transfer funds into their super account, then on the subsequent investment earnings and also when cashing out those funds. The GST concessions, which exempted fresh food, education and health, were offered by former prime minister John Howard to Democrats leader Meg Lees to buy her parliamentary support for the proposal. Collectively, these breaks cost billions annually and should either be abolished or limited in any genuine tax reform.

Starting with the GST, it can be argued that changes to our sales tax are fundamental to any genuine reform. Another major weakness of the way Howard introduced the tax was his decision to buy the support of the states, by directing all the GST revenue to them. While a clever political move, it simply guaranteed an annual shit fight with the states over the distribution of that revenue – which in turn precipitated the outrageous and indefensible guaranteed annual payments to Western Australia. These should be abolished, saving billions from the forward estimates and freeing up funds for other reforms.

The option of raising the GST rate, in addition to any broadening of its base, must also be on the table. At just 10 per cent, Australia has one of the lowest sales tax rates globally. Raising it would further enable the desirable shift in the focus of our tax system from income to expenditure. It would also raise considerable revenue to better address those structural budget deficits that stretch well into the future, as well as allowing a restructure of the personal tax scales and eradication of indefensible levies such as payroll tax and financial duties such as stamp duty.

One obvious case for reform is to address bracket creep. For this there are two clear options: adjust the tax scales, as was intended by the Morrison government with its three-stage tax proposal to abolish the 37 per cent rate, or index all the scales to inflation (consumer price or wage inflation). Under the Fraser government in the 1970s, some of us working with the Treasury argued strongly, and were successful in our case, to get the Fraser government to index all tax scales. This averts the situation of a taxpayer simply being pushed up the scale as their income increases. While the technical arguments for what we did were sound, the cabinet never saw the political benefits, as voters didn’t realise they were getting a tax break.

I remember facetiously saying to Malcolm Fraser that, from a political point of view, it may have been better to keep collecting the tax as per the unadjusted scales – then to send every taxpayer a Christmas cheque with the benefit.

More broadly, I believe voters, especially those with children, are increasingly concerned about our longer-term economic outlook and are therefore becoming desperate for an honest and deliverable vision for the country. They want strong leadership, by politicians prepared to tell them honestly what needs to be done. Leaders need to concede the difficulties but challenge all to pitch in to share a better future. Sure, there may be some short-term political fallout from such a decisive approach, but after all, isn’t this what our leaders are elected to do? Namely, to take the big decisions on behalf of their constituents on the issues that really matter.

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