The Australian government is holding a two day tax summit, starting today in Canberra. Hundreds of tax experts and policy wonks from universities, corporations, accounting firms, lobby groups and unions will gather to discuss the structure of Australia’s tax and transfer system and the possibilities for reform.
There have already been a large number of submissions made. One of the most interesting is that the government implement one of the Henry Review’s recommendations (number 134) to fund a full-time academic research centre that will generate non-partisan taxation research.
Tax is a perennial issue in any political discussion. This tax summit is itself a recommendation of the 2020 Summit in 2008, and just last year former Treasury Secretary Ken Henry delivered a massive report into Australia’s "future tax system". That report turned out to be a vastly impressive and politically improbable blueprint for reform; Kevin Rudd and Wayne Swan promptly ruled out most of the important reforms almost immediately.
This time around, the Treasurer has taken a proactive approach and ruled out most of the useful areas of discussion before the forum even convened. The Government is not interested in hearing about changes to the GST, to the carbon tax, the mining tax, or even to alcohol excise. Moreover, any recommendations must be revenue neutral, so the debate is not going to address the really important issues around the adequacy of Australia’s revenue base.
The truth is that Australia is a low tax nation. The Howard government delivered hundreds of billions of dollars of personal income tax cuts on the back of elevated corporate tax takings at the height of the 2000s boom. The Rudd government followed suit, promising to match Peter Costello’s huge tax cut commitment at the 2007 election and continuing to deliver tax cuts in the years afterward. Under Wayne Swan, the federal government still brings in less revenue as a percentage of GDP than during the last term of John Howard’s government (not that you would know from the chorus of critics charging that Labor is addicted to increasing taxes).
But Australia can’t stay a low tax nation and maintain the sorts of public services we take for granted. Health costs generally rise faster than those in the rest of the economy, so even though Australia’s world-beating public health system is highly cost-effective compared to more privatised health systems in other countries, Medicare and the PBS will continue to cost more and more.
Australia’s aging population also poses big challenges for healthcare, not to mention government spending in areas like pensions, aged care and community services. And if we want our economy to keep growing, we’re going to have to invest in enhancing our dwindling productivity levels through more spending in research and development and higher education. None of this comes cheap.
On the other hand, Australia’s current tax system contains vast concessions, carve-outs and special perks for various interest groups and activities. Many of these loopholes are hugely unfair. Superannuation is a case in point: superannuation contributions are taxed at 15 per cent, so low-income earners earning below the tax-free threshold actually pay more tax on their super than they do on their ordinary income. By contrast, super-rich executives earning millions get a big discount, as they would normally pay 45 per cent on their salary.
The other area of vast inequality is housing. Australia’s tax concessions to landlords for negative gearing encourage them to record a nominal loss on their rental income in order to gain a tax offset. According to a submission to the tax summit by the Equality Rights Alliance, negative gearing does little to help low-income renters, but represents more than $5 billion in annual subsidies to landlords. The value of the concession accrues disproportionately to high-income earners, as it can be used as an income tax offset — hence, high-income earners in the 45 per cent bracket get a larger tax offset than middle and low income earners.
The Equality Rights Alliance’s submission puts its finger on one of the big problems of Australia’s tax system. "The underlying problem is that capital gains are only lightly taxed," they write. John Howard’s government slashed rates of capital gains tax in the 1990s, for instance, meaning that income from investments or money in the bank is taxed much more lightly than income from wages. And yet, quite obviously, poorer people have fewer assets and earn the majority of their income in wages.
Another obvious example of our inequitable tax system is the family home. Baby boomers have routinely enjoyed 200 and 300 per cent capital gains on their houses in recent decades, owing to the asset price bubble in Australian housing. You may well think that your mum and dad shouldn’t have to pay any tax on their family home simply because it happens to go up in value, but the reality is that if they owned shares or other forms of equity, they would have to pay CGT. There are also tax breaks for housing investors in terms of land tax. According to Australia’s leading academic expert on home affordability, Judith Yates, the value of tax concessions across the entire housing sector was more than $50 billion in 2005-06, of which $45 billion went to owner-occupiers.
The benefits of tax concessions for houses are highly skewed towards the wealthy. In her submission to the tax forum, Yates writes that "households in the top income quintile receive an average benefit of $161 per week (equivalent to over $8,000 per year) for … the exemption of the family home from the CGT. This is more than seven times the average net benefit received by households in the lowest income quintile." Removing this exemption would not only help to address housing affordability, it would give the government tens of billions extra a year with which to make the tax system fairer.
Negative gearing has become its own industry and the property sector has many zealous defenders. But some taxes and charges have few friends. Stamp duty, for instance, represents one of the largest revenue sources for the states and territories, and yet most economists agree it is inefficient and economically damaging. The Henry Tax Review wanted to radically reform the entire state-based stamp duty system altogether, replacing it with a broad-based land tax which would have been far more efficient and more equitable. But the Rudd government took fright and immediately ruled it out. Land taxes are still off the agenda for this summit.
It’s no wonder that much of the media discussion leading up to the tax forum has been disappointed, even negative; this column by Alan Kohler is typical. If you can’t talk about the GST and you can’t talk about housing tax concessions, there’s not a great deal of hope that the big picture issues will be addressed.
And that represents a lost opportunity for a government which desperately needs to grasp every opportunity that comes its way.
Perhaps talking down expectations is the way Labor governs these days, burnt by the vaulting — but undelivered — ambitions on display early in its first term. But the tax forum should have been a chance to frame Labor’s governing philosophy, to win back the intellectual initiative, and to present a grander vision for the future of our society.
A bold government might have seized the chance to advocate for reforms that would broaden the tax base while reducing taxes for the middle class, much as John Howard and Peter Costello were able to do in the run-up to the 1998 election. And the Henry tax review is only a year old, and remains full of worthwhile ideas ripe for adoption.
But bold ambition (except in regards to meeting Labor’s surplus target) has never been Wayne Swan’s forte. He might be Finance Minister of the Year, but he still struggles to explain Labor’s success story in managing the economy. It could be because no-one is listening anymore. Or it could be, as I’ve suggested before, because he doesn’t really try.