Public interest versus political opportunism

There has been a large amount of public debate for months leading up to this week’s Budget about the need for tax reform, and what form that should take.

Over that time, I wrote six different pieces for my own web diary cataloguing a selection of the views being put forward, as well as floating some of my own thoughts. In following and contributing to this debate over a number of months, two things have stood out for me.

The first is the wide range of people and groups from across the political spectrum who recognise that significant structural tax reform is needed, even though they have different ideas on what form that should take.

The second and more surprising thing is that, despite the diverse philosophical origins of the many people contributing to the debate, there is really quite a lot of common ground on many aspects of what is needed.

That is why it is so disappointing the Federal Government - and to a lesser extent the Labor Opposition too - have shown so little interest in long-term structural tax reform, and are instead focusing once again on what votes can be bought from targeting tax cuts or benefits to specific sections of the community.

About the only argument against tax reform that has any credibility for me is the one that says that any available funds from the surplus should be spent on improving investment in things like education and training, health, the environment and infrastructure. However, even that ignores the reality that decent reforms could be done in a way that is revenue neutral, thus still enabling the same amount of funds to be spent.

Having said that, I don’t believe it is necessary for tax reform to be revenue neutral, and indeed the current sizeable surplus provides the ideal opportunity to significantly increase investment in social and physical infrastructure and sacrifice some funds to make our tax system fairer and more efficient for the longer term.

In any debate on tax issues, it’s worth noting just what the average earnings of Australians are. The figures usually quoted are the misleading mean average of full-time earnings, which is currently around $56,000 a year. However, the much more meaningful figure is the median average income, which stands at around $26,000 a year. This means half of all Australians earn less than this amount. The current median income of Australian households is around $66,000 a year.

So what do I think should be done? I believe the single most pressing thing is to give a big boost to the bottom, or tax-free, threshold. It is absurd that people can be paying tax on income before they’ve even got to the poverty line. This would also reduce pressure for wage increases at the lower end. This measure has been advocated by a wide range of people, including industry advocates such as the Australian Industry Group. A similar effect can be achieved through income tax credits. While there are some arguments as to why this is preferable, I don’t really mind how it is done as long as ongoing assistance is provided to the lowest income earners.

I also believe we should be providing the option for the average wage earner to not have to put in an annual tax return. It requires an enormous amount of administrative cost for a turn around of very small amounts of money. The Prime Minister’s response to this simple but significant reform was to make the irrelevant statement that “people like to get a tax refund”. This ignores the fact that people could still put in a return if they wanted. Approaches like these are taken in many countries, New Zealand being one. It would simplify the tax filing system, save many of us the hassle of pouring over the Tax Pack for a weekend, and save the public as a whole a big chunk of the $3 billion dead-weight cost of the personal income tax system that comes from compliance costs alone.

I would also like to see indexing of the tax thresholds to address bracket creep and to reduce the ability of governments to undertake annual vote buying exercises, where they try to put a veneer of largesse over the simple act of redistributing extra revenue that has been generated solely as a consequence of inflation and wage increases. There is an argument 100 per cent indexation could overly constrain government flexibility, and it is always possible to have partial indexation, which would reduce the impact of bracket creep, without eliminating it entirely.

The other measure, which I think is very important, is to wind back some of the huge number of taxbreaks and concessions which currently apply. These are so out of control that it is almost impossible to get a clear measure of how much they cost, although one estimate by the Centre for Independent Studies put it at $39 billion.

This act of “broadening the tax base” is the most fraught, simply because there are so many different concessions that there will always be controversies over which ones should be targeted. However, a few that I believe are ripe for targeting include the tax treatment of family trusts, fringe benefit arrangements for company cars, negative gearing entitlements on property investments and the tax concessions for commercial activities undertaken by religious and other charity bodies.

Not surprisingly, all of these (with possible exception of company cars) are political hot potatoes which few governments will go near (and even fewer Oppositions). However, it is precisely this that has allowed these tax expenditures to balloon out of control. They are often introduced for political reasons, and once they are in they are very hard to remove without political pain. Modern politics in Australia seems less inclined than ever to put public interest ahead of short-term political opportunism.

All of which means we’ll probably be back here again at the same time next year making similar arguments about the need for structural tax reform to make Australia’s economy and society fairer and more productive.