Labor’s proposed tax reform only adds to complexity

Labor’s plan does nothing to reduce the complexity of the tax system which enriches only accountants and lawyers.

If all the tax raised from Labor’s plan to make imputation credits non-refundable were going towards cutting the company tax rate, or cutting the marginal income tax rates for ordinary workers, I’d be fully on board.

Australia’s tax system is shockingly tilted in favour of older, wealthier people, with little justification. Without a proper overhaul, in an era of stagnant wage growth and elevated house prices, that only fuels resentment.

Alas, it seems the extra $5.6bn Labor expects to generate each year, if it wins the election, will largely be hoarded. That means a looser budget constraint for future governments to mindlessly tip more money — sorry ‘‘invest’’ — into “health” and “education”.

True, about a third of the extra money ($1.7bn) will go towards allowing businesses to write off a chunk of any new investments immediately (a modest, beneficial cut to the corporate tax rate, in effect), but how long would that last?

Businesses don’t vote, whereas reversing personal income tax cuts is electoral suicide.

Yet Labor deserves credit for having the confidence to put plans on the table that will be prove unpopular with certain parts of the community. The government has been extraordinarily timid on tax.

It will at least force the government to start explaining how dividend imputation works. Hitherto, in its quest to equate a phased cut in the company tax rate to 25 per cent with a wage lift, the Turnbull government has glossed over the fact that for Australian shareholders corporate tax is just a withholding tax.

Labor’s plan would reduce the appeal of local blue-chip shares for Australians, but diversification out of banks and miners wouldn’t be a bad thing. And practically every country has moved away from dividend imputation to pay for a lower headline rate.

A better plan would have been to phase in taxation of super, as the Henry review proposed. Allowing well-off over-60s, the age when tax-free super becomes available, to, in effect, check out of paying income tax for the rest of their lives, which could be 30 or more years, is fiscally pretty dumb.

A retired couple living in a $2m house, with $3.2m in super, are classified as ‘‘low income’’. They have no income tax liability. They could also have an investment property and still wouldn’t have a tax liability because of the bizarre “senior and pensioners’ tax offset”, which lifts their effective tax-free threshold to about $58,000.

Another couple living in an $800,000 home, with a mortgage, earning $100,000 a year combined income will be classed as ‘‘high income’’. Being in the second-highest tax bracket, they will pay a 37 per cent marginal tax rate on every extra dollar earned.

Labor’s plan also does nothing to reduce the complexity of the tax system, either, which enriches only accountants and lawyers. Of course, in a perfect world government programs would be slashed too and the total tax burden would fall. It will take an economic crisis before any of this changes, though.