The Opposition has promised to give some tax relief on interest earned on savings. The details are unclear, but Opposition Leader John Howard said it would involve a tax break of about 25 per cent and would be means-tested. He was immediately attacked by the Government which said it would cost at least $1 billion a year.
Tax was neutralised early in the campaign by both major parties. The Coalition said there would be no new taxes and Labor said the total tax take would stay the same. After that tax has only featured as an issue briefly, when Prime Minister Paul Keating asserted the Government would be able to find an extra $800 million by chasing the very rich for tax they had avoided through complex trusts. This was met with justified scepticism. And without a concurrent announcement of retrospective remedial action the avoiders were warned and could move their money.
In short, both parties have only sniffed at the edges of what should have been a fundamental issue. The tax system needs significant change. The relief on interest is but a small step in the right direction. To date, saving money in the bank has been a mug’s game. After allowing for the tax on interest and inflation, you go backwards.
The tax system should encourage saving, long-term investment and exports. It should discourage consumption. In fact, it does the opposite. It was unfortunate but understandable that the Opposition pledged no new taxes. The political legacy of John Hewson after failing in 1993 is that a consumption tax is off the agenda for decades. However, there is no reason why the same result could not be achieved by reforming wholesale and sales taxes, granting full rebates on exports and imposing taxes on services. The last would be politically difficult, but with a little political will and commensurate reductions in income taxes it could be done.
For too long the popular view has been accepted that consumption taxes are regressive and unfair to the poor and that a progressive income tax makes the rich pay more. Experience has proven otherwise. The higher the marginal rate of income tax, the greater the incentive for avoidance. Logic tells us that consumption taxes on both goods and services will make the rich pay more because they consume more and use more services. Moreover consumption taxes are less avoidable. No system of tax will eliminate tax avoidance, but if people are required to pay as they consume they will find it harder to escape; if they want to enjoy their riches they must pay tax. Mr Keating and Treasurer Ralph Willis, having told us about how the rich have been avoiding tax, should have had the courage to tell us how they intend to make them pay their fair share. Experience tells us that income tax is a singularly weak way of doing it.
Over the past 25 years the tax system has been made very complex, largely because it has been geared at eradicating avoidance. It has resulted in large compliance costs and economic inefficiency. A review has been under way, but without political leadership in the field, which has been conspicuously absent this campaign, it can only tinker. Sadly, the repercussions from the 1993 campaign will flow long after the 1996 one.