Don’t raise our taxes, slash the government’s big spending

Prime Minister Anthony Albanes and Treasurer Jim Chalmers speak to the media. Picture: AAP

If we had a dollar for every column written about the need for comprehensive taxation reform in Australia we would all be seriously rich by now.

No doubt the advocates think they have right on their side and that the suggestions they make should be implemented as soon as possible.

I think they are wrong, not least because most of these appeals are really just code for higher taxes.

Some politicians obviously think pushing the tax-reform barrel could have electoral appeal. Independent federal member for Wentworth Allegra Spender is using tax reform as a centrepiece of her political activities, even holding special forums to discuss the issues. A number of other teals are on the same bandwagon.

Independent Wentworth MP Allegra Spender. Picture: NCA NewsWire / Martin Ollman

Recently installed Liberal senator Maria Kovacic mentioned putting a cap on the number of negatively gearing properties taxpayers could have as a means of improving housing affordability, even though the net effect almost certainly would make life harder for renters.

Even before considering the need for tax reform, a more useful avenue of inquiry is to examine government spending, including the failure to achieve objectives as well as outright waste.

The trouble with most of the discussion about tax reform is the unquestioning acceptance that spending must rise to meet community expectations – a very ill-defined and woolly concept.

If we look under the spending hood, what we often find are ways of politicians seeking to win votes by offering “free” or highly subsidised goods and services as well as income support. But there is nothing preordained about the way we fund health, education, aged care, disability services and the like.

As a rule, the tax reform enthusiasts aren’t interested in this topic; according to them, big government is here to stay and we need to figure out how to fund it. The reality is that we would all be better off if thorough and detailed analyses of government spending were regularly undertaken with a view to limiting spending to areas with the highest net benefits.

It’s worth reminding ourselves of the key principles that should govern the design of tax policy: efficiency, equity and simplicity. Needless to say, these three elements are impossible to achieve simultaneously; there are always trade-offs.

Because income tax looks certain to form a higher proportion of the tax take in the future, the point is often made that the tax mix must change lest the disincentive effects of the income-tax schedule become too sizeable.

Where most advocates of tax reform turn next is to recommend a lift in the rate of the GST as well as extend its coverage. A common figure is 15 per cent and the inclusions of fresh food, financial ser­vices, water and sewerage services, education and health are often listed. But there is a range of reasons why this sort of advice is wrongheaded.

For starters, all the GST revenue goes to the states and territories but everyone agrees that an increase in the rate of GST would have to be accompanied by a very substantial compensation package for low-income earners and those dependent on government transfers. Such a change therefore would not generate any net revenue for the federal government but would involve a substantial political cost, even with the backing of the states and territories.

John Howard reading Daily Telegraph newspaper covering announcement of GST tax package in 1998.

There is also the vexed issue of the unsettled distribution of GST revenues among the states, with Western Australia the current recipient of a favourable deal that is not supported by Victoria and NSW, in particular. Increasing the rate of the GST would serve to rip the scab off this sore.

When it comes to extending the coverage of the GST, it is worth noting that value-added taxes imposed in other countries typically have exemptions and lower rates for particular goods and services.

New Zealand is seen as the cleanest example in this respect, but the Hipkins Labour government is planning to remove the country’s GST from fruit and vegetables if re-elected next month.

Apart from the inflationary impact of increasing the rate of GST and extending its coverage – the timing couldn’t be worse – there are also practical reasons for keeping most of the exemptions. Does it really make any sense to impose the GST on medical and hospital services when the government provides significant subsidies to them? The same logic applies to private-school fees. Would the advocates of tax reform want to see GST added to childcare and aged-care fees?

The point is that there are many barriers to altering the GST arrangements, so much so it’s not clear why it is even up for discussion. Neither side of politics supports any change.

But even assuming a higher GST and greater coverage generated net revenue to the federal government – state grants would have to be cut – it’s not clear to what end the money should be used.

Much is made of the fact personal income tax now makes up more than 50 per cent of all federal tax receipts. All things being equal, this percentage could be closer to 60 per cent in 40 years. But using the additional revenue to reduce income-tax rates, particularly at the top level, is particularly fraught. Just look at the controversy generated by the modest stage three tax cuts, and let’s not forget a lot of people don’t pay any income tax at all.

Another big-ticket item promoted by the tax-reform advocates is the switch from stamp duty to land tax, which is in the hands of the states and territories. The case is often made on efficiency grounds but also as a means of improving housing affordability.

The ACT experiment has provided little comfort in this context: across a long time, property taxes have been ratcheted up and stamp duties lowered. There has been no noticeable impact on housing affordability and Canberrans have ended up just paying more for the privilege of living in the country’s capital. NSW’s experiment with a limited form of switch has now been ditched.

Other taxes often mentioned include higher company taxes, super-profits taxes, wealth taxes, higher capital-gains tax, limits on negative gearing, inheritance tax and higher taxes on all superannuants, including in retirement. The list goes on.

The trouble with many of these taxes is that they represent significant disincentives to accumulate wealth and invest, which can be economically damaging. Note here that Australia’s company taxes are already high by international standards.

For those carrying the tax-reform banner high, the obvious conclusion is that they would serve the country better if they focused on reforming the spending side of the equation. In that way, we wouldn’t need to increase taxes; indeed, the aim would be to reduce the tax burden and this could be done in a way that improves the efficiency of the system. Now we’re talking.