Tax is such a dry subject, but with incendiary consequences. Perhaps more than anything it determines the sort of society you have. After last week’s tirade against Labor for agreeing not to oppose to the Coalition’s cut-taxes-for-the-wealthy proposal, a perspicacious reader reminded me of a little history.
In the early 1360s, John of Gaunt, then in his early 20s, had become the richest nobleman in England.
John was a son of Edward III, whose eldest son, the Black Prince, had died of dysentery (the Covid of its day), leaving a 10-year-old son, Richard, who became Richard II. John was Richard’s regent. Between them, John and Richard imposed such oppressively regressive tax regimes to pay for wars and other executive follies, that the peasants revolted in the famous 1381 Peasants Revolt.
Their tax system was a flat one. Everyone over the age of 14 had to pay one groat (fourpence), whether rich, poor, working, or carer.
Everyone paid the same. How fair could you be? John, the richest man in England paid the same amount of tax as the poorest peasant. No wonder they revolted.
Now let’s fast forward 600 years to the early 1980s. Has anything been learnt. No. Then Prime Minister Margaret Thatcher introduced the poll tax. Everyone, rich or poor, had to pay a flat poll tax.
There was rioting in the streets. Ultimately, like the groat tax, the poll tax was removed.
The lesson is that there is only so much the peasantry or the workers will tolerate.
Trouble is, the average Australian, who will be dudded out of $184 billion in public services in the next decade, may fail to revolt. No manifestly unfair groat tax has been imposed upon them. Their tax stays the same.
Indeed, they may revolt the other way. If by some lack of miracle Labor is elected, the peasants may revolt shortly thereafter because Labor will find it near impossible to live up to their expectations having squandered the wherewithal to do so with last week’s decision.
As it happens, the day after last week’s column, the Australia Institute published a paper on tax. It tested which taxes satisfied a range of worthwhile criteria: difficulty of avoidance; simplicity of administration; reduces inequality; not change behaviour unless the tax is designed to do just that (tobacco, alcohol and carbon come to mind).
No government is going to apply such a rational way of taxing, but the paper indirectly offered Labor a way out of its self-imposed strait-jacket.
Among the taxes that rated highest on the Australia Institute’s list was the Buffett tax. The Buffett tax applies a 30 per cent tax rate to all income over $1 million a year, BEFORE DEDUCTIONS.
Too often the very wealthy pay little or no tax because their smart accountants find deductions for all or nearly all of their income.
Squllionaire Warren Buffett, who has a social conscience and who is embarrassed at how little tax he has to pay, proposed the tax in the US, and President Barack Obama flirted with it for a while, but did not impose it.
But Australian Labor could implement it after the election as The Millionaires Tax – the tax where millionaires would have to pay the same level of tax as the tradies.
It would sail through the Senate as the right-wing populists (Lambie and Hanson et al) could not object. Neither could the Greens.
It should not be indexed, and the $1 million threshold could be brought down over time.
Subtly, this would bring an end to the worst of negative gearing – people with dozens of properties off-setting the outgoings against their incomes elsewhere, while leaving the small-scale negative-gearers alone. Incidentally, small-scale negative-gearers usually turn positive before long, especially as they hit retirement.
The Millionaires Tax is unlikely to cause a peasants’ revolt and would yield revenue to provide better government services.
Subtlety is critical in changing tax policy without outrage. Several examples (on either side of the progressive divide) prove the point,
Property investors used to be able to deduct one trip a year to their investment property. In many cases, it was a tax-deductible holiday to another capital or some holiday destination. The populists in the Senate agreed to end it.
Very high-income earners used to be able to claim whatever their accountants charged to rig up their tax-avoidance schemes. No longer. The deduction has been capped. Again, the populists in the Senate agreed.
On the regressive side, people used to be able to claim for net medical expenses (after Medicare and insurance payments) – a perfectly reasonable and just deduction. Its slide to oblivion was grandfatherly and surgical. It began with a limitation that the maximum you could deduct was what you deducted the previous year.
So, a few chronic cases thought they were being looked after. But the overall effect was to remove the deduction altogether. There was nary a whinge or a campaign against it, when they would have been more than justified.
If a wholesome deduction like net medical expenses can be painlessly whipped out like a healthy appendix, why can’t some of the more egregious deductions disappear like a rotten gall bladder.
The cash rebate payments to non-taxpayers on share dividends is a case in point. When the Howard Government introduced the scheme, it cost $500 million a year. Then every self-funded retiree and their budgie hopped on to the scheme and it now costs $7 billion plus a year.
Do not announce its abolition. Promise its retention. But do what was done to net medical expenses. Limit the deduction to what you claimed last year. The mad policy would quickly die off with its present beneficiaries.
You could do the same with negative gearing. Let negative gearing continue. Commit to its continuation, but down the track, cap it to what you claimed last year.
The trick with tax reform is never announce it in advance. Commit to maintaining existing deductions but subtly ensure bad taxes and bad deductions fade away by limiting each taxpayer’s deduction to what they claimed the previous year and no more.
It worked with the end of deductions for net medical expenses (a perfectly wholesome deduction) it should work for the more unwholesome ones, too.
It would be a lifeline to Labor if it wins the next election faced with many demands and little cash to meet them.
There are many ways to skin a cat, and slowly, slowly catchy monkey.
Crispin Hull
This article first appeared in The Canberra Times and other Australian media on 7 August 2021.
Clever proposals, Crispin. Is there thought leadership in the ALP capable of absorbing and acting on your ideas? The whole column reminds me of Jean-Baptiste Colbert’s words: “The art of taxation is to pluck the goose in order to obtain as many feathers as possible with the least hissing”. It worked for Louis XIV.
OK, there wouldn’t be a Peasants Revolt but there sure would be a Millionaires Revolt – remember what happened to the proposed tax on supernormal profits from mining?
There is some confused logic on the “cash rebates for non taxpayers”. A rebate is a rebate whether it leads to a cash refund to a taxpayer whose taxable income is below the taxable threshold or an increase in the cash refund of excess tax deducted from income of a taxpayer above the threshold. The imputation rebate should be abolished altogether; the argument that it was necessary to avoid “double taxation” was always spurious: the GST and its previous incarnation, sales tax, are taxes imposed on after tax income. However, when the only way to protect savings from inflation losses (other than real estate) is the share market, there is no way abolition is going to happen.
One tax “lurk” that rarely gets a mention is so-called salary sacrificing for cars, private school fees, private health insurance and some other things which allow high salary earners to make purchases in a way which reduces their taxable incomes to a lower tax bracket.
I hope all politicians on the red side of the political spectrum read that and none of those on the violet side read it.