Labor’s Moth-effect trouble

I CALL it the moth effect. Australian Federal parliamentarians more than any anywhere should be aware of it and take it into account, but they don’t.

Thirty years ago in the first spring after the new Parliament House opened in Canberra Bogong moths in their tens of thousands were attracted by the new powerful light of Parliament House as they flew from the coast to the mountains. Previously they had relied on the moon to guide them.

The moths were everywhere in Parliament House. They have since apparently learned better, but not the parliamentarians and government within.

When the Government enacts a tax break, or a subsidy or a grant, it disrupts the natural order and attracts the moths to the activity which generates the tax break, subsidy or grant. On the other hand, when it imposes a new tax or removes a tax break, subsidy or grant, the moths fly away from that activity. 

Examples abound. The Howard-Costello first home-buyers grant caused extra people to rush into the housing market while the free money lasted. The net result was that prices went up by probably more than the grant was worth.

For a long time people have been allowed to deduct expenses (especially interest) incurred when buying property or shares against not only the income those assets produced but also against their other (usually wage and salary) income. The moth flew in. Now it costs the Budget about $4.5 billion a year.

In 2001, the Howard-Costello Government gave cash rebates to people and superannuation funds for franking credits on shares if they had little or no taxable income to deduct the credits against.

Franking credits are credits for tax paid by the company before dividends are paid.

The moths flew in. Every financial advisor and his dog told clients to buy shares which paid fully franked dividends, that is, shares in companies that had paid the full 30 per cent company tax.

As a result lots of people and funds who have low taxable income (but might have other untaxable income) bought these shares and in total now get about $5.6 billion a year from the Government.

The Howard-Costello Government also brought in the capital gains tax concession which in these days of low inflation almost halves the amount of capital gains tax people have to pay. The wealthy moths have moved in. They in effect move money from income taxed at up to 50 per cent to capital gains taxed at 25 per cent. They buy property, wait for the gain and then sell. It now costs the budget around $6 billion a year.

But the moth effect makes the task of undoing some of these expensive gifts to mainly fairly wealthy people very difficult. Labor has promised to unwind the three tax hand-outs.

The result has been gathering resistance, particularly on the shares issue. Taking any benefit, let alone usually fairly precise amounts of money, is a dangerous political move, whatever its policy merit.

It not only invites a scare campaign, but one that is well-grounded, however richly undeserved the removed handout was in the first place.

This one may be a vote changer, in that people will change the way they vote based on this single issue.

The question is whether enough usually Labor-voting moths swing on this issue to change the election result. Is this the equivalent of John Hewson’s Fightback! manifesto which cost him the unloseable election in 1993?

Remember, Governments often come from behind. Oppositions rarely do, but they do lose after being in front. 

The other difficulty for Labor is that the shares policy stands in contrast to its negative gearing policy. With gearing, Labor decided to “grandfather” the changes so that people with property and shares bought on borrowed money could still deduct the interest against their other (usually wage and salary) income as long as they held those assets. Interest on newly acquired assets could only be deducted against the income those assets earned and not against other income.

Clearly Labor felt it would be hard on people who had arranged their affairs around the bad policy. But surely the moths who flew to the bright light of shares and cash rebates have similarly become dependant on that bad policy.

A better approach on both policies would have been to deal with the moths by neither grandfathering nor extinguishing. It could have phased them out, along with the capital gains tax rebate out over, say, 10 years.

But then it would have no money for promises this election.

The interesting test is whether an electorate that says it is sick of unfairness, scare campaigns, bickering and slogans will listen to the detailed rationale for the change.

And there are two sides to this. One side says no other country has the scheme and you should not get a cash tax rebate unless you pay tax in the first place. The other says that company tax is a mere withholding tax like PAYE deductions from pay packets and all company tax should go back to shareholders in proportion to their shareholding.

So Labor has a hard sell on its hands. It seems to have accepted that people who get cash rebates will never be persuaded and that a lot of Labor voters among them will change their vote. So it has to persuade an equal number of others to vote for it on the basis of fairness and the value of health and education.

The question should not only be how well is a political party managing an economy, but who is it managing it for.

If Labor is elected, which still seems the most likely outcome, a later difficulty arises. Just as the moths flew in to, so they will fly out when the light is extinguished.

They will move to other investments – to companies that pay (often higher) unfranked dividends or out of shares altogether. And the new Government might not have all the money it hoped.

As an aside, one of the reasons I think Labor will win is because the Morrison Government is increasingly behaving like Billy McMahon’s doomed Coalition Government in 1972. McMahon made a lot of appeasing moves to public sentiment, especially withdrawing from Vietnam, but it was too insincere and too late, like PM Morrison with the children on Nauru and Treasurer Morrison on the banking Royal Commission.

CRISPIN HULL

This article first appeared in The Canberra Times, The Sydney Morning Herald and The Age on 9 February 2019.

3 thoughts on “Labor’s Moth-effect trouble”

  1. As for the argument that “you shouldn’t get a refund unless you pay tax”, consider the case of a casual worker who has PAYG tax withheld from her wages (you can only claim the low income threshold from one employer). At the end of the financial year are you going to deny her a cash refund of the PAYG tax if her total income is below the taxable minimum? By all means, if Chris Bowen thinks imputation credits are “bad” let him abolish the system altogether, but it is grossly unfair to take the credits away from one group of people only; indeed even if the Senate didn’t reject the proposal I suspect the High Court would on equity grounds. As you say, Crispin, a blatant attempt to grab quick and easy revenue for an incoming government, but a gift to the Coalition campaign managers.

  2. I agree, another announcement like the cash refund one might be enough to lose Labor the election. Low income voters are disenchanted with the ALP. Grandfathering the negative gearing and failing to do anything about salary scarificing – the other tax benefit to higher earners – clearly shows they are pandering to the better-off middle class who will swing back to the Coalition on a last-minute whim.

  3. Superannuation, negative gearing, capital gains, managed investment schemes, Pitt-Collins Street farmers… these represent the real “middle class welfare.” Howard, Abbott, Turnbull (everything on the table) and Morrison used the “middle class welfare” argument to attack education (particularly tertiary), health (Medicare), welfare safety nets (DSP, Newstart) and consumption (GST). In the meantime, the real tax welfare has continued unabated. The current franking credit fiasco lays it all bare for the punters.

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