Courageous stance on tax reform needed
Australia’s last great hope for decent economic reform appears to have gotten cold feet at the eleventh hour. As a result, I fear the modest lift in business sentiment that has been perceived across the country since Malcolm Turnbull assumed the Prime Ministership last year could be punctured somewhat in coming months.
That said, at least as reported in the National Australia Bank Business survey, there has not been a huge lift in either business confidence or sentiment since Turnbull took over in September last year. Indeed, as seen in the chart below, much of the rise in this survey happened in the first half of 2015, and seemed to reflect the two rate cuts, a strong housing sector, weaker $A, and a better received Federal Budget. If anything, business sentiment has been slowly dissipating since its recent peak in June last year.
The tax back down won’t help all that much. Indeed, in his first months in office, Turnbull raised hopes that he could usher in a recharged “innovation nation”. The whisper campaign was that he would pursue a great “tax mix switch” in which higher revenue from the goods and services tax (GST) would be used to cut high rates of individual and corporate income tax.
Alas, that’s now not to be. As Treasurer Scott Morrison conceded in a speech at the National Press Club last week, there only seems to be scope for “modest” tax reform. Chances are all we’ll get is a lift in the second highest income tax bracket from $80,000 to say $100,000, to prevent the 300,000 or so “average” income earners face a lift in their marginal tax rate from 32.5% to 37% over the next few years.
There may also be a cut in the corporate tax rate but only if the Government can find the courage to tackle some corporate tax breaks like the diesel fuel rebate. I won’t hold my breath.
Of course, it’s easy to understand the Government’s reticence. As it turns out, because there’s so many households that now escape the income tax net altogether (thanks to a high tax free threshold and tax free super for those in retirement), the benefits of lower income taxes are relatively less widespread than they used to be. As a result, there’s a lot more who would need to be compensated should a rise in the GST be used to fund income tax cuts, assuming the Government would cling to the cherished aim of making “no-one worse off.” Scott Morrison estimates that around half the revenue raised from an increase in the GST tax haul would need to be used to fund compensation.
Then there’s the States. While a rise in the GST to fund income tax cuts sounds nice in theory, the reality is that all States must agree to a GST lift – and they will likely demand their pound of flesh in terms of higher spending on health and education. To my mind, were the GST raised to simply throw even more money at these State sinkholes it would be a retrograde step, and the Turnbull Government was right to reject it. To my mind, health and education don’t simply need more money thrown at their problems – rather we need root and branch reform to improve efficiency and accountability and learn from world’s best practise.
In just the education sector alone, for example, there’s little relationship between spending per student and educational outcomes among developed nations, with Finland a standout performer in terms of value for money.
Due to the problems of heavy compensation and State demand, with hindsight the great hope of a “tax mix switch” seemed just wishful thinking. I suspect Turnbull may have been initially intrigued by the idea but thought twice as these uncomfortable facts were laid before him. It also didn’t help that the Labor opposition was preparing an almighty scare campaign against changes to the GST which made many coalition backbenchers in marginal electorates understandably nervous.
Turnbull also knows that Abbott is still waiting in the wings and (contrary to his claims otherwise) ready to pounce should he make a fatal misstep.
So where does that leave us? Not very far from where we were. Scott Morrison has now fallen back on his old rhetoric of spending being the real problem, suggesting that decent tax cuts will only follow decent spending cuts.
We’ll see. But it strikes me that Australia is already relatively frugal in its spending, with most (but not all) welfare tightly targeted. As a result, it allows us to maintain a reasonable generous social safety net while also having among the lowest tax burdens in the developed world.
The problem is that we rely relatively more on direct income taxes when raising revenue (with narrow bases and high marginal rates) than indirect taxes on consumption and wealth. In today’s globalised world where income, business investment and skill labour are especially mobile, high direct income taxes hurts us a lot in terms of attracting international business. Taxing less mobile consumption and wealth makes more sense.
Indeed, given Australia’s relatively tight spending (despite what the Treasurer says), I think we have a golden opportunity to have world beating low taxes on highly mobile income (comparable to that of Ireland or Singapore) provided we’re prepared to accept at least close to developed world average levels of indirect taxation (if not a bit higher) on less mobile areas such as consumption and wealth.
It would transform our nation to have income taxes at world beating levels, but it would take far more skilled and courageous politicians that we currently seem able to produce.
Published: Monday, February 22, 2016