Don’t call for a tax review if you don’t know the answers

tax review

  • Professor Judith Sloan, THE AUSTRALIAN   27 Feb 2016

There is a cast-iron rule in politics: don’t bring on a review unless you know the answers. I’m not sure what former treasurer Joe Hockey was thinking when he set in train a review of the tax system.

It was to be the full kit and caboodle — position paper, submissions, green paper, more submissions, white paper.

If there were ever a process that would set lots of crazy hares running,it was this.

When Malcolm Turnbull became Prime Minister, he quickly closed down the process part of the exercise but strangely declared that everything was on the table. This undid the work of former prime minister Tony Abbott to constrain the debate by ruling out changes to negative gearing and superannuation taxes.

And while Hockey privately may have endorsed a higher GST, he made it clear this would happen only with the unanimous co-operation of the premiers — something that looked very unlikely.

But read my lips: putting everything on the table is an extremely foolish way to make policy.

It completely lacks discipline and structure, and leads to all sorts of stupid and impractical ideas to get an airing.

And, let’s face it, the table has pretty much collapsed, with a big mess of ditched policy proposals now strewn around the ministerial wing of Parliament House.

To allow the debate about the GST to continue for so long, assuming there was never the strongest possible commitment to the option of raising the rate by 50 per cent, was sheer political madness.

My guess is that the recent deterioration in the polling results for the government is partly a reflection of the lingering impact of the on-off debate about the GST.

The question remains: what was Hockey hoping for when he initiated the tax reform process? Did he have a view that, in some sense, the Australian tax system was fundamentally broken and needed urgent repair?

Had he even bothered to read through the lengthy Henry tax review, Australia’s Future Tax System, which was released in 2011? Had he made that effort, he would have realised immediately that many of its recommendations were political poison, which was something Wayne Swan, then the treasurer, clearly appreciated by selecting only one recommendation — the mining tax. (And that went well, didn’t it?)

When it comes to Australia’s tax system, it’s really a case of ­selecting the glass half-full or half-empty.

There are many reasons to think the Australian tax system performs reasonably well. We raise about $190 billion in personal income tax and there is a high degree of compliance. We should not forget that even in several developed countries, tax bills are never paid or are paid years after their due date.

We also collect large sums in company tax — about $70bn a year — making us a country with one of the highest company tax to gross domestic product ratios in the world.

Again, there is a high degree of compliance, with the issue of multinational companies’ failure to pay more tax a side issue. Even with stronger laws, the taxation of multinational companies will never raise serious additional ­revenue.

One point of view is that we rely too much on these direct forms of taxation — personal income and company tax — and that there would be efficiency gains if we could shift to a greater reliance on indirect taxes, such as the GST.

While the theory might be right, we would still need to get from A to B. This is when the troubles become apparent, as we have seen in the debate about raising the GST.

As long as the compensation bill associated with increasing the GST is substantial, any gains we may achieve in terms of higher economic growth are relatively small.

And while the greatest economic benefit would result if the additional revenue were used to lower significantly the rate of company tax, the politics of such action are extremely tricky.

It was hardly surprising the Turnbull government decided to scrap the idea of raising the GST; the only surprise was that it took so long to do so.

A key point is that the case for imposing the GST in the first place was much stronger than raising the rate.

The problem for the government now is that without the additional revenue of having a higher GST — an eye-watering $35bn-odd a year — its options are very limited, particularly if the aim is to offset the impact of bracket creep.

It’s hardly surprising there has been mixed messaging from the government on the topic of bracket creep, which is not just about taxpayers being pushed into the next tax bracket. It is just so darned expensive to do something about it, at least at the first and second tax thresholds.

And bear in mind that the fiscal repair outlined in the budget papers, modest though it is, is heavily dependent on the extra revenue generated by bracket creep.

In the meantime, a sort of Steve Bradbury event has taken place. With the government ministers thrashing around on the ice, Bill Shorten has taken the pack on the inside with his own tax reform package.

That Labor’s policy is economically irresponsible, the figures are rubbery and parts of the package are impossible to implement are almost irrelevant at this stage; at least the Opposition Leader is standing.

On the face of it, Labor’s policy looks bold and ambitious.

No offsetting tax cuts or compensation are being proposed, just higher government spending — on health and education, in ­particular.

Fleecing smokers looks like a plan, even though the revenue ­figures are based on increasingly overtaxed smokers not quitting their habit.

Imposing a higher tax burden on multinational companies is always good politics, although the dollars attached to Labor’s dubious initiative are just made up.

Cutting the capital gains “discount” in half will seriously ­damage investment, but is anyone paying much attention to the ­details?

Restricting negative gearing to new properties is completely dippy. (Would we restrict negative gearing on shares to the initial float of companies?) But, again, it does sound like a plan.

The new policy leaves a large number of questions unanswered: Will neutral gearing of existing properties be allowed? What happens to the accumulated losses? Are these set against capital gains?

But at least there is a policy, even if there are unanswered questions.

The key to the short-term ­success of Labor’s tax policy is the deliberate conflation of aggressive redistribution with purportedly sound economic measures.

If Labor’s package of measures were pitted against a well-argued and measured tax policy set out by the government, it wouldn’t stand a chance.

The challenge for the government is to outline its policy on the basis that it will improve the integrity of the tax system while avoiding the real dangers of Labor’s policy.

It can argue our tax system is based on sound principles but there are several adjustments that should be made to improve its efficiency and equity.

But the Prime Minister cannot wait until the budget before he releases the proposed measures, lest the Steve Bradbury of politics crosses the finishing line in the meantime.

Original article here

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