Prime Minister John Howard thinks Australia should have more tax changes. Treasurer Peter Costello thinks that non-investment housing should not be part of the tax system and so has ruled out an industry proposal to make interest payments on principal residences tax deductible.
Costello said this week that mortgage interest on the principal residence had never been tax deductible. But in fact was deductible for a period in either the late 1960s or early 1970s. It was means tested and eventually eroded by the high inflation of the Whitlam period.
Yes, Australia does need tax reform. But you have to wonder whether either side of politics is capable of doing a reasonable job. It may be that our tax system, so laced with perks and favours, is beyond change because it would mean stripping some of those away with obvious electoral consequences.
A lot of the Costello-Howard tax changes have been economically inefficient but politically very effective.
The political targets have been people older than their mid-50s; mothers, particularly stay-at-home non-single mothers; and the self-employed.
The lurks and perks make a dismal list for the ordinary wage slave. Money and tax rebates are available for those who contribute to a non-working spouse’s superannuation; low-income individuals who can afford to contribute to super themselves (usually those supported by a well-off spouse); entrepreneurs who get a 25 per cent tax offset; people who use a lot of medical services, usually those living in well-off suburbs; women who have babies; women who have children and do not work; people with large superannuation funds approaching 60 or past it; self-funded retirees.
Most of these people are richly undeserving. Nearly all the perks involve means testing and eligibility requirements and the expensive bureaucracy needed to examine them.
It is a Santa Claus tax system. Mum gets a cheque and is forever grateful. The states do it to. They are probably worse than the Commonwealth. Pardon a personal anecdote, but I saw magneted to the fridge of my daughter (mother of two) a cheque from the NSW Government for $5.38. I t was some ridiculous vote-inducing, child-benefit prank that cost far more to deliver than it was worth.
A lot of these perks have had distorting effects in the economy. For example, in the lead up to the end of last financial year people liquidated whatever they could to stuff into superannuation to take advantage of Costello’s absurdly generous “reforms”. People sold businesses and investment houses to put into super. The super funds put the money into the sharemarket, inflating it like a balloon that would pop at the slightest jitter.
That said, the great tax success of the Howard-Costello period has been the unpopular GST. It’s almost axiomatic that if a tax measure is popular it is bound to be bad. When you see the Packer and corporate empires paying little or no tax at least you can take comfort that the individuals in them are occasionally paying some GST.
It was a broad based, efficiently levied system
It took courage and was electorally costly in the 1998 election. The only faulty parts of the scheme were the Democrats-inspired exemptions and the promise to hand all the GST revenue to the states.
What needs to be done? We should get away from the incessant fiddling with tax thresholds which are mendaciously called “tax cuts”. Usually, inflation and bracket creep have already increased a person’s tax burden by as much as the “cut”. Invariably the rates are fiddled with according to the political agenda rather than the economic one.
Income tax rates should be indexed to put an end to this nonsense. Then any cuts to the rates would be genuine cuts.
The three tough ones are: superannuation; capital gains and the principal residence. In a way they go hand in hand.
The housing affordability crisis is making young couples despair of ever owning their own home. If the save for a deposit, the ever-increasing prices make their efforts worthless. Moreover, the interest on the savings is taxed. They watch while the oldies get unwarranted gifts on their superannuation. Superannuation is now a vehicle for tax minimisation. People over 50 are salary sacrificing or putting in personal contributions and cutting their tax to just 15 per cent from between 30 and 40 per cent. A few years later they get it out tax free.
But there’s votes in them there baby boomers.
Personally I like it, but there were enough tax concessions on superannuation at the lower end. The concessions should not have been given to people with superannuation accounts in the millions. It was an impetuous Costello grand gesture to wipe out tax on superannuation withdrawn by those over 60.
Another ill-thought-out Costello grand gesture was the change to capital gains tax. His cut of the tax by half for assets owned more than a year was a step in the right direction, but it was too blunt. The tax should have been tapered, rather than cut in one large step.
Also, the removal of adjustments for inflation means that assets that are held for a very long time, for example a farm over a couple of generations, will get little benefit from cutting the nominal rate in half. And bear in mind the present system requires record keeping that would be the envy of the Australian National Archive. Some farms and businesses handed down might need records for a century or more.
With a bit of thought the capital-gains-tax system could better balance the encouragement of long-term investment against reasonable taxation of short-term speculative gain.
A tapered system, over say 10 years, would see the tax reduce by 10 per cent a year. So that after 10 years there would be no tax. But there would be greater tax than at present for people who sell between two and five years.
Maybe the baby boomers would cop a reinstatement of some superannuation tax and the imposition of capital-gains tax on the principal residence if in return the capital gains tax tapered to nothing after, say, 10 years.
Yes we need tax reform. But spare us the grand gesture. Spare us the vote-buying.