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Where was your courage, Treasurer?

By Neil Warren - posted Wednesday, 17 May 2006

This federal budget has some parallels with Dorothy's journey on the way to the Emerald City in The Wizard of Oz. Remember her confrontation with the lion?

Although it exhibited considerable aggression and noise, the lion lacked the courage of its convictions and was sternly reprimanded by Dorothy for its actions. But by no means was the lion cowardly: it simply lacked the conviction that would have given it courage.

True to form, the treasurer followed the script last week. Courage was only shown where the ground was familiar and the issues addressed uncontroversial. What resulted were benefits for the self-employed, high-income earners, middle-income families and the baby boomers, who all found themselves in clover. The rest - low-income families, singles and even aged people - gained only marginally.


Whatever way you look at the budget, it was one for the Liberal Party-Nationals heartland: compensation to those who were already believers. No courage was needed to convince them of where their allegiances lay.

The problem is that somehow we were all led to believe it was going to be so much more, that the lion had courage. After all, when Malcolm Turnbull entered the tax debate last year, everyone thought at last someone on the government side of politics was willing to stand up and say that tax reform is not over in Australia. Then Turnbull was sidelined as parliamentary secretary to the prime minister, with particular responsibility for water policy.

Costello then asked Dick Warburton and Peter Hendy to review the material the treasury had gleaned as part of its normal tax policy intelligence gathering. The task: to provide broad comment on how Australia compares with other countries and what areas might need attention.

The resulting report, International Comparison of Australia's Taxes, was somewhat underwhelming. Rather than identify what was best practice in Australia and internationally, it presented us with a wealth of broad observations on specific taxes but almost no insight into the direction of necessary comprehensive tax reforms.

The report merely allowed the treasurer to play catch-up in the tax debate, to gain some courage and reassert himself in the field of tax reform. The trouble was that such a weighty tome was bound to raise public expectations that something big was about to happen. The government now had the report it needed to get the courage to at last undertake broad tax reform, not just tax cuts.

A public debate subsequently raged about issues such as whether to significantly increase the tax-free threshold, about the treatment of capital gains and interest income, about the abolition of work-related expenses and a clamp-down on negative gearing on residential property. There was talk of reforms designed to remove many taxpayers from the obligation to lodge tax returns and about simplifying tax legislation and lowering tax compliance costs for individuals and businesses.


Which brings us to last week’s budget and what the government delivered after all this excitement and hard work. You guessed it: a failure of courage. With coffers overflowing and tax collections well above expenditure needs, the government lost its courage. Sure, the Reserve Bank had fired a shot across the treasurer's bow by increasing interest rates last week, which must have tempered the government's tax cutting zeal. With the exception of superannuation, it delivered a lot more of the same.

There is no doubt changes in the taxation of superannuation are a tax reform that will significantly affect Australia's savings. From July 1, 2007, savings into superannuation will be taxed at a flat 15 per cent. Previously, the rate was 31.5 per cent for average workers. For high-income earners, until July 1, 2005, the flat rate was 46.5 per cent. The trouble is that superannuation is now the most tax-effective savings vehicle next to the family home. It definitely knocks negative gearing into residential property off its pedestal.

But what about the rest of the budget? In fact, what we got was more of what the government is comfortable with. In 2003, those on low incomes saw their low income tax offset increased from $150 to $235 and this budget announced it would now rise to $600. Last year this group saw the lowest marginal tax rate reduced from 17 per cent to 15 per cent. For middle and upper-income groups, the budget also gave them more of the same.

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First published in The Australian on May 11, 2006.

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About the Author

Neil Warren is associate professor of economics at the Australian taxation studies program at the University of NSW.

Creative Commons LicenseThis work is licensed under a Creative Commons License.

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