I recently visited the website of the Federal Senate Standing Committees on Economics. If that doesn’t sound like the most rewarding use of time, let me explain…
I was in the middle of writing an article about the amount of money that accountants and lawyers are going to make if the tax reforms currently before Parliament become law (the answer: lots!). My aim was to have something in print before the Senate Economics Committee finished its brief inquiry into the proposed changes. But things were going slowly, and in search of inspiration, I decided to trawl through the submissions to the inquiry that the committee staff had already published online.
That turned out to be a terrible mistake.
I started reading at about eleven in the morning, whereupon I was quickly overwhelmed by a tsunami of confusion. I ended up sitting there for hours. I was mesmerised by the madness of the mumbo-jumbo masquerading as public policy. Things eventually took on an ethereal, almost dream-like quality. I was transfixed. At one point some dribble ran down my chin. Picture the victim of a minor stroke, or perhaps a serious car crash, and then imagine leaving this person sprawled over an office chair, and you will start to get the picture. I remember experiencing, at about four-thirty in the afternoon, the surreal sensation that I was standing over my own shoulder, watching helplessly as I disappeared, all too willingly, into a black hole of nonsense. I would have been unable to stand up from my computer even if I had wanted to.
The strange part is that everything started off fine. I read an eminently sensible submission from Professor Stern at the Australian National University, who points out that the proposed changes ‘disincentivise the risk-taking, innovation, and investment that help drive productivity growth’. There is a submission from a financial adviser named Mitchell Lodge, who suggests limiting the proposed changes to residential property rather than all assets. There is another from Dexter Cousins, the founder of executive search firm Tier One People, who points out that ‘our data suggests the changes may accelerate the movement of both capital and professional talent to jurisdictions offering more competitive tax treatment of risk capital and personal income’.
Pleasantly surprised, I found my way to the submissions in favour of the tax reforms. At this point you should recall that in the lead-up to the hearings, the committee staff decided not to publish tens of submissions critical of the proposed changes. I know this because one of those submissions was mine, and when I asked why my submission had initially been left off the website (and presumably thrown into a bin somewhere), I was told by the committee staff that they had ‘received a large number of submissions which will take some time to process and publish’. Curiously, the committee found the time to publish plenty of submissions from authors who support the changes, even though almost all of them were submitted days after mine.
No matter. I had an open mind. Perhaps I had overlooked some genuine arguments for reform.
I first read a submission by a tax specialist in Melbourne. The professor provides a glowing endorsement of the proposed changes. We are told that the reforms present ‘a coherent set of reasonable and fair policy choices’ that will achieve the ‘important goal of rebalancing the tax system, generating some revenue, and taxing workers and investors more fairly’. Never mind that the changes are contrary to the recommendations of almost every economist in Australia, or that they will force Australian companies to pay the second-highest tax rate on retained earnings anywhere in the world, or that they actually encourage investing in residential property, as ex-Treasury boffin Geoff Francis has recently explained. Details like these go unaddressed.
A few paragraphs later there is the triumphant claim that doing away with the CGT discount is long overdue, because it ‘delivers most benefit to the top 10 per cent of taxpayers’ by ‘halving the tax rate to 23.5 per cent for those taxpayers’. Yes, taxpayers who start at the highest tax rate will benefit more from a reduction in their tax rate than those who start at a lower rate. That is just a statement of the obvious fact that we have a progressive tax system. Yet removing the CGT discount on all assets is said to ‘deliver much-needed tax reform to rebalance the Australian income tax law and … shift to a more coherent system of taxation for capital gains’. Why these changes are ‘much needed’ is anyone’s guess, although repeated numerous times over the following pages is the claim that our tax system urgently requires ‘rebalancing’. That just goes without saying.
Like every other proponent of the changes, the professor points to the need to tax capital at the same rate as labour. The problem is that none of the authors bothered to defend this idea. None of them explained why capital gains from productive investments should be taxed at the same rate as income from ordinary work. Perhaps the reason they didn’t bother is that the idea is indefensible. Investing in someone else’s business is much riskier than working for a salary, yet without people doing the former, we will quickly run out of businesses capable of paying the salaries needed for the latter. That is why capital gains are taxed at a much lower rate than income from labour in virtually every developed economy on Earth. This is tried and tested orthodoxy.
The professor also says that reforming the CGT rules is necessary to ‘respond to the ability to plan the realisation of capital gains through deferral of realisation until a low tax rate applies’. Here we come perilously close to the paranormal. Until the asset is sold, the taxpayer has no capital gain capable of being taxed. On what basis can one object to a person deciding to sell an asset once he or she is no longer earning an income from his or her labour? Do we not wish to encourage self-funded retirement? It is unthinkable that such a taxpayer should pay tax at anything other than the rate that would otherwise apply. We would never dream of making this mistake in respect of tax paid by a worker on his or her ordinary income.
There is another submission along similar lines which recommends that the senators be ‘sceptical about claims of impending economic catastrophe’ from opponents of the changes. A noble battle, perhaps, were he not tilting at windmills. There are no claims of impending economic catastrophe, merely warnings that these changes will worsen our seemingly inescapable economic malaise.
The submission then says that the location ‘where a founder decides to start a business is rarely the result only of tax settings that affect their payoff on exit’. True, no doubt, but hardly to the point. What the submission misses is that all the other reasons he gives for investing in Australia, like ‘availability of talent’ and ‘personal factors, like lifestyle and the cost and quality of healthcare and education’, are made possible by increases in productivity. The proposed changes will plainly decrease productivity.
After reading countless more submissions like this, I was just about ready to quit, but I was persuaded by my infinitely patient wife (‘stop behaving like a child, for Christ’s sake’) to give it another shot. I downloaded a submission written by a Victorian expert on tax law and distributive justice.
Resisting the urge to panic, I started reading. The submission opens by declaring that ‘[A] capital gain is income. Under the traditional economic benchmark used to measure income, an increase in the value of an asset increases an individual’s economic resources just as earning a salary does’. I put my head in my hands. Then I found the author’s email address online and typed out a message – written in the slow, measured tone of the sort used by hostage negotiators – in which I suggested that perhaps only realised profits increase one’s economic resources in the same way that earning a salary does. After I had finished typing, I highlighted the text of the email, pressed delete, and carefully removed the now-blank email from my drafts folder. I felt much better.
The same author argues that in a ‘first best world’, capital gains should be taxed ‘when they are made not realised’. Exactly how an idea as bizarre as taxing unrealised gains would work goes unaddressed, but the author seems unconvinced by the claim that it would all be too difficult. Any issues can be solved ‘with advances in technology’. Albeit reluctantly, the author says that if we are to exist within a ‘second-best world’ where capital gains are taxed only when realised, we must certainly remove the 50 per cent CGT discount, given that it has ‘contributed to revenue, fairness and economic concerns, including for housing affordability’ and continues to ‘undermine progressivity and redistribution within the Australian tax system’.
These might be interesting ideas, were a modicum of evidence offered in support of them. But for most of these claims there is not even an attempt at proof, much less anything approaching reasoned argument. The author goes on to say that the reforms will ‘close loopholes that reward tax planning over genuine productivity’. There is no defence of the idea that these reforms will increase productivity, and nor could there be, for the claim is patently absurd. We are being asked to believe that removing the CGT discount on productive assets, such as ownership of a small business or shares in an Australian company, will increase productivity.
That was more than enough for one day. I came back the next morning and eventually made it to the end of the submissions. The whole exercise was rather depressing. Most of the time I had no idea what these people were talking about. When I did know what they were talking about, it was obvious that they were wrong.
Whether that will be obvious to the Treasurer is another matter. May he have mercy on us all.
I am a postgraduate in law at Oxford University in England and a Fellow at the University of Western Australia. I have previously worked as a litigator in Western Australia.
