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Election 2013 – let’s talk tax reform!


Chris Weinberg

By

August 26th, 2013


Chris Weinberg explores why tax reform has been missing from the election campaign and outlines the case for three fundamental tax reforms that would make the tax system simpler, fairer and more efficient.


This article forms part of an ongoing series looking at economic issues as Australia heads into the Federal Election. More coverage can be found on the Election 2013 page of ESSA’s website.

This election campaign has already seen its fair share of gaffes, negative ads and costings claims. Perhaps it’s time we debated the pressing need to reform our tax system, starting with the GST.

The Problem

As I watched ABC’s Q&A Monday episode, The National Economic Debate, I sat despairing at yet another missed opportunity to talk ambitiously about policy reforms in Australia. After an excellent question from the crowd about the merits of reforming the Goods and Services Tax (GST) to broaden its base and potentially increase the rate (whilst concurrently reducing and eliminating other inefficient and distortionary taxes), both Treasurer Chris Bowen and Shadow Treasurer Joe Hockey manoeuvred their way out of discussing what is a sensible reform. It was arguably the most disappointing element of what was a very entertaining and substantive debate between Bowen and Hockey that covered the breadth of economic issues facing Australia.

Ultimately this has typified a lacklustre election campaign, in terms of talking about big picture policy programs. In a campaign endlessly defined by gaffes, negative ads and the relentless pursuit of costings from each party, there’s been no meaningful talk about the most fundamental of economic policy proposals: tax reform.

Now tax reform isn’t the sexiest topic to bring up on the hustings, but it’s the hope of this idealistic policy wonk that there may come a time when our political leaders give the people enough respect to talk honestly about the most crucial reforms we need to undertake if we are to retain a dynamic and competitive economy into the future as the benefits of the mining boom abate.

Enough of the politics though, let’s consider some of the benefits that would come from an extensive reform of the tax system to make it simpler, fairer and more efficient – as well as why we aren’t talking more about it.

Broadening the base and increasing the rate of the GST

Put simply, reforming the GST is one of the most productivity-enhancing pieces of public policy we can enact, as John Freebairn outlined in The Conversation last year. As Freebain explains, a more efficient GST (with a broader base and a higher rate more in line with other economies) “used to fund replacement of other more distorting and inefficient taxes would result in a significant increase in national productivity and incomes.”  The Grattan Institute quantified the economic benefit at upwards of an extra $20 billion in GDP year-on-year.

To elaborate about the mechanics of the tax, broadening the base refers to removing the current exemptions placed on what can and can’t be taxed by the GST; currently items such as fresh foods and beverages, health, education, child care and water, are not covered by the tax. The counter-argument to this, as ratcheted home by Prime Minister Kevin Rudd of late, is that broadening the base harms income equality and harms lower income earners who would have to devote more of their discretionary income to these higher-taxed essentials. But as Freebairn and others counter, including the IPA’s Chris Berg, reforming the GST wouldn’t occur in isolation but would rather be in conjunction with the removal of other inefficient taxes, cutting income taxes for lower income earners and more effectively targeting social security payments to the poor.

Further on the note of increasing the rate, as Freebairn goes on to explain, moving to a rate such as New Zealand’s of 15%, could be utilised to offset reductions in income taxes across the board and would ultimately lead to “a less distorted and more productive mix of investments across housing, different businesses, financial deposits, and other options.” In addition, such a reform will place more revenue in the hands of the states so that they can act more flexibly in their policy programs.

All told, reforming the GST is a way to unlock Australia’s productivity in the years to come, but it’s not on the politicians’ radar. One suspects that maybe if Julia Gillard was still Prime Minister and the election wasn’t as competitive, Opposition Leader Tony Abbott and Shadow Treasurer Joe Hockey may have mooted a possible change, thus giving them a mandate to reform, if elected on September 7th.

Eliminating Negative Gearing

Whilst not necessarily a specific tax ripe for reform, negative gearing is still a major drain of federal finances and ineffective at promoting home ownership in Australia. Put simply, courtesy of the Barefoot Investor, negative gearing is a policy that allows investors to purchase assets (almost always property), and then claim the loss (if a loss occurs) as a deduction on your tax return. As he goes on to state, “it’s one of the last great (legal) tax dodges.”

The policy costs approximately $5 billion a year and does little to increase the supply of new homes since the majority of investors buy established properties. And, yet again, there’s been no discussion of this potential policy change, something that was widely lamented when former Treasurer Wayne Swan delivered what would become his last budget in May.

Admittedly though, this is a policy reform that even in an ideal universe would be unlikely to see the light of an election campaign and would rather be the domain of a powerful, well-established government looking for ways to diversify its budget position.

Land Value Tax

Another property-based reform that could prove to be less distortionary to the tax system and open up a more stable source of revenue, particularly for the states, would be to eliminate inefficient stamp duties and replace them with land value taxes (LVTs) wider in scope. LVTs that are currently applied on investment properties could be extended to  principal places of residence. As MacroBusiness showed, LVT receipts have proven to be a remarkably stable source of revenue when compared against stamp duties, since they are not affected by transaction volumes and fluctuations in the housing market.

What’s more, by shifting to LVTs as the Henry Tax Review recommended back in 2010, infrastructure funding becomes more sustainable and appealing to policymakers as the government can capture more revenue from more valuable land after an infrastructure project is completed, such as the construction of new roads and rail links. Secondly, the supply of available land for future development, particularly for housing, is increased with an LVT as it penalises those who seek to hoard land and not develop on it.

Its absence from the campaign discussion is probably attributed to the fact that it’s more a matter for the states, and also the prevailing ill-will that exists amongst the federal and state governments nationwide.

Conclusion

So, whilst agreement may abound in the circle of Australian economists and public policy experts about what to do, our politicians continue to campaign on the small-ball issues of the prevailing media cycle, avoiding proposing ambitious and admittedly risky reforms during the heat of the election campaign.

As Chris Richardson from Deloitte Access Economics so neatly explained recently to the ABC, “The problem isn’t what needs to be done. The problem is getting Mr and Mrs Suburbs on board … Economists would broadly agree on many of the recommendations … The trouble is a lot of this is electoral dynamite or tabloid terror.”

The vitality of the Australian economy hangs on comprehensive reform of our taxation system. We already know what needs to be done and the smartest guys in the room all agree on the big things that need to be addressed immediately. Now it’s about time our political leaders stood up and did what we elected them to do: lead.

You can follow me on Twitter @CRJWeinberg.

The views expressed within this article are those of the author and do not represent the views of the ESSA Committee or the Society's sponsors. Use of any content from this article should clearly attribute the work to the author and not to ESSA or its sponsors.

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