Features Australia

Gimme a break

Talking tax reform

26 February 2022

9:00 AM

26 February 2022

9:00 AM

For professional reasons, I have a digital subscription to the Australian Financial Review. It’s not cheap – around 60 bucks per month – and sometimes I wonder why I bother (apart from reading Joe Aston and our own esteemed editor, Rowan Dean).

For a newspaper that is supposedly aimed at the business reader, it’s is fearsomely anti-business a fair bit of the time. It is also deep-green and on the side of the environmental rent-seekers. And almost without fail each week, it bangs on about tax reform.

You know the sort of thing. We must increase the rate of the GST; we must increase the coverage of the GST; we must get rid of stamp duty and introduce land taxes; we must scrap negative gearing and reduce the discount on capital gains tax. A little inheritance tax might be worth a look.

Our reliance on income and company taxes is too great. We must therefore reduce these taxes but increase others to cover the revenue lost. Unless Australia reforms its tax system, the future is not bright.

In order to prosecute this agenda, the Fin regularly wheels out its tax reform champions; most notably, former Treasury secretary and NAB chairman Ken Henry (who can forget his memorable performance at the banking Royal Commission?). The editors can’t get enough of him.

After all, Henry chaired a panel looking into the whole tax system commissioned by Labor Treasurer, Wayne Swan. Titled Australian Future Tax System and released in 2010, the final report went on for hundreds of pages about the weaknesses of our tax arrangements and came up with 138 recommendations, ranging from the trivial to the transformational. Not quite knowing what to do with this Rolodex of mostly politically poisonous suggestions, the Rudd Labor government finally decided on just three of them, while ditching the others.  (I wonder whether this is some sort of record?  Governments generally agree to most recommendations of reviews they have commissioned, in part because the authors understand ‘political sensitivities’.)

Swanny concluded that the Minerals Resource Rent Tax looked like a winner, particularly given the millions of dollars that were predicted to flow to Treasury coffers. According to his view of the world, he could split the business community – he did know the mining companies would not be fans – and the community would go along with it because some big business leaders supported it.

How naive could he have been? While there are many reasons to loathe big businesses, they are not complete dummies. Swanny might have been going after the mining companies this time around. But how long would it be before he targeted the big banks – super profits tax, anyone? – or any other highly profitable business? The result was that all big businesses joined the anti-mining tax campaign.

Apart from the fact that neither Swanny nor Henry ever seemed to fully understand how the MRRT was going to work, it set the scene for one of the most successful campaigns to kill off a new impost ever witnessed in this country. At the end of the day, the tax raised very little in additional revenue and was dumped in the early days of the Abbott Coalition government.

That’s tax reform, for you.

But let me get back to the current campaign for tax reform. Here are two important principles that readers should be aware of. The first – and one used by Abbott himself – is that countries do not tax themselves to prosperity. The second is that an old tax is a good tax.

The first principle is obvious but the second requires some explanation. The thing about taxes is that they inevitably create compliance costs; they also condition expectations about the future. Once the upfront compliance costs are met (and some taxes are ridiculously complex, such as the fringe benefits tax), the ongoing costs are often quite low.

But, more importantly, people’s behaviour in relation to savings, investment, asset allocation and the like are influenced by the current configuration of taxes and the expectation that it won’t be altered significantly or any changes will be grandfathered. The fact that some taxes aren’t very good at raising revenue is, in my opinion, a good thing. It was one argument against the introduction of the GST, although the exemptions have meant that it’s not as good at raising revenue as many consumption taxes imposed in other countries. It is one way to limit government spending – eventually, when the cost of debt becomes too high.

It is interesting to observe that many European countries with high rates of consumption tax – up to 20 per cent – also have very high rates of overall tax takes. In other words, the idea that having a consumption tax, which efficiently raises revenue because it is so difficult to avoid, leads to lower income taxes, for instance, is not actually borne out in practice.

This is the key to understanding the calls for tax reform, including by the Fin. They are not really about making the tax system more efficient, but pleas from special interests to tax their activities less – hence the call for lower company tax rates.

At least Ken Henry admitted this when he wrote that ‘it also makes sense to overhaul our antiquated tax system now so that if there is a need to lift the tax take at some future time, which today looks very likely, this can be achieved with minimal economic damage’.

It’s passing strange why the Fin doesn’t run a campaign for expenditure reform and to lower government spending. Considering the vast amount of waste, the dubious projects that are funded and the disincentive effects created by the welfare system, amongst other things, it’s a wonder that the editors don’t decide to fill up the pages with stories about government spending and the need for reform.

As for those commentators who declare any government that fails to reform taxes – according to the preferences of said commentators – is not worth voting for, they should take a hard look at themselves. Given the current and likely configuration of the Senate and the division of opinion between the two major sides of politics, any prime minister – at least a conservative one – would have to be insane to attempt tax reform any time soon.

For state governments, Dominic Perrottet talked the big talk when Treasurer of NSW. He was going to ditch stamp duty and replace it with land taxes.

Unsurprisingly, he seems to have gone cold on the idea now he has the top job.

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