Another tax policy from the jack-in-a-box

by on March 23, 2018

OVER the past week we have seen, yet again, the depressingly deficient way our political parties are dealing with what amounts to about half of their job – raising revenue. It was yet another jack-in-a-box policy. Out of the box suddenly and noisily popped Bill Shorten and Chris Bowen. They blurted out a line-item proposal to change to Australia’s complicated tax system. There appeared to be no consultation with even the partyroom, let alone the wider public which contains deep academic, industry and think-tank knowledge.

The trouble with this jack-in-box approach is that it is all over in no time with Jack slumped over the box or wholly or partially pushed back into it.

It may be that the party about to announce the change is so scared of fear campaigns, leaks or some other manipulation by the other side that they think they must keep the policy secret until the big jack-in-a-box announcement. But it is a misguided approach because the fear campaigns will happen anyway.

In this instance, Labor announced it would end cash rebates under the dividend-imputation scheme. In future rebates would be limited to offsets against tax actually payable.

There is nothing wrong with occasional tweaks to the tax system. Indeed, they should be encouraged as responses to changing conditions. But in the past decade and a half we have had so little necessary time-to-time tweaking to earlier big changes that the whole tax system is now in dire need of major overhaul.

The genesis of the problem lay in the far-too-generous concessions in the early years of this century while Peter Costello was Treasurer.

Costello was blind to the candle effect of some of his policies. It is almost a rule of nature that taxpayers and their accountants are attracted to a new tax concession like moths to a candle. The candle effect is not confined to the wealthy. Wage earners have been flocking to the “work deductions” sections of their tax returns with creativity that stretches credulity. And youngsters begged, borrowed and falsified to get free housing grants in such numbers that the extra demand pushed up prices so much as to make the grant schemes worse than self-defeating.

In the case of cash dividend imputation the costs to the Treasury have gone up 10-fold from $500 million to $5 billion a year.

As Costello dished out new tax breaks for people who were already doing very well, the accountants milked them. Worse, most of the Costello tax breaks operated in concert, amplifying the effect of each other, ultimately causing a toxic concoction of inequality.

His tax-free superannuation for the over-60s; the halving of capital-gains tax; the extra grants for first home-buyers which ramped up demand; the cash rebates for people on low taxable incomes who were paid dividends from companies; the three-babies policy; and the higher immigration policy combined with existing tax breaks on superannuation, negative gearing and the untaxed family home to create a huge divide between the asset-poor young who pay more than their share of tax and student loan repayments, on one hand, and asset-rich older people, on the other.

The latter bought their first dwelling for around three times annual earnings and watched its value soar in a tax-free bubble. Now a first-home costs around 10 times annual income.

This divide cannot be unwound with a piecemeal approach. In any event, the jack-in-box piecemeal effect inevitably leads to the policy being picked over for obvious things that would have been dealt with if there had been a broader more consultative approach in the first place. This happened this week with Labor’s proposed abolition of the cash rebate for individuals with low taxable incomes receiving dividends from companies who had already paid tax on their profits.

The vast majority of those rebates go to high-wealth people with lots of “franked” dividends who have low taxable incomes because they have reduced their real income through tax avoidance. But a significant number of people on genuinely low taxable incomes get small cash rebates from the imputation scheme.

A proper consultative approach would have identified them early on and the scheme capped in some way to leave them unscathed. As it is, Labor will now have to do that anyway and it will be seen as a “backdown”.

The Coalition’s company tax cut is similarly flawed and piecemeal.

So in Australia today, we have two half-baked tax policies which, alas, do not make a properly baked whole.

The astonishing thing is that since Costello laid the foundations for this tax imbalance, the ability to find out what is really going on has improved dramatically through the capture and analysis of vast amounts of data by the Australian Tax Office and the Australian Bureau of Statistics.

The trends over the years were ignored by both sides – until recently. Labor has now put up a couple of small proposals which may do a little bit to reverse the trend. The Coalition’s proposal bit makes the trend worse.

But if one side or both did a major tax revamp, the deficit could be wiped out very quickly and there would be enough to more than properly fund health and education.

As it is labour is taxed too highly whereas consumption and capital (particularly property) are taxed too little. Corporations escape a lot of tax liability though off-shore havens. Governments cannot keep up with the infrastructure demands caused by excessive immigration over the past decade (250,000 plus a year instead of the former average of about 70,000 – a target which former Foreign Minister and NSW Premier Bob Carr rightly says we should return to, and no-one could ever accuse him of racism).

These things could be changed. My guess is (and it would be great if someone had the resources to check it) that the data would show that the fresh-food, health and education GST exemptions so piously imposed on the Howard Government and therefore on the people at large by the Australian Democrats overwhelmingly favour the well-off through GST-free school fees and GST-free high-end optional “health” spending. It would be much better to impose the GST across everything and apply the proceeds to improving public health and education.

Politicians used to look at the evidence and make decisions. Now only independent institutes – like Grattan and the Australia Institutes – do that, leaving MPs – drawn from a narrow gene pool of lawyers, lobbyists and apparatchiks – to play point-scoring.

We should be mining this income and tax data to make better and fairer policies, and not leave data-mining to shadowy corporations using social-media information to exploit the irrational fears of people to persuade them to vote against their own interests.
This article first appeared in The Canberra Times and other Fairfax Media on 24 March 2018.

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