Never say never to simple, efficient, fair tax system

How did we end up with a luxury car tax? First, by design, then neglect, followed by greed. When Peter Costello introduced the GST in 2000 he junked the annoying, often random wholesale sales tax that applied to goods. To help the local car industry — curtailing an expected rush to buy imported luxury vehicles, which attracted a much higher sales tax — the then treasurer created the LCT; it was a 25 per cent levy on vehicles costing more than $55,134. In 2008, the Rudd government jacked up the rate to 33 per cent. The current threshold is $67,525 (or $75,526 for fuel-efficient cars). It’s a dud tax, inefficient and discriminatory. Why cars?

In his 2010 review of the tax system Ken Henry called for the LCT to be abolished, noting the “truly absurd” tax had bipartisan support when it was introduced. In its 2014 review of the automotive manufacturing industry, the Productivity Commission said the LCT is a “higher cost and less efficient method of raising revenue than more broadly based taxes” and should be scrapped. It may have been a lemon, but successive governments made lemonade. From $175m in its first year, the LCT raised $675m last financial year and is projected to rake in $750m by 2022-23. It means buyers pay $6000 extra for a $90,000 imported vehicle.

With the end of local car production, there can be no justification for this tax, other than the capacity of the well-heeled to pay through the nose. Sure, Josh Frydenberg needs every loose coin wedged in the bucket seats to raise his “back in black” surplus, but the LCT’s days are numbered. Liberal backbench MPs and motor traders are putting pressure on the Treasurer to ditch it. On Wednesday, Mr Frydenberg said he had no plans to remove the LCT “but I would never say never in relation to that’’. Nudge nudge, wink wink. “We’ve got a series of taxes we’d like to remove, but we’re committed to keeping the nation’s balance sheet strong,’’ he said.

A government that spruiks its “lower taxes” credentials should aim higher, especially after so many reviews have told Canberra where the dead weights on the economy are. The nation needs a surge of business investment to lift our productivity growth rates, which lead to higher company profits and wages. A lower company tax rate, as well as one that does not discriminate between the size of enterprises, would be a spur to capital formation, job creation, innovation and skills development. It’s a battle for another day, given Labor’s predilection for spoiling and class war.

In his first budget last May, the Treasurer’s selling point was a surplus and “no new taxes”. As well, there was an extra $158bn in personal income tax cuts, taking the Coalition’s refund to $302bn over a decade. It was a genuine reform, with the goal of 94 per cent of taxpayers paying no more than 30 cents in the dollar (plus the Medicare Levy) by 2024. That flattening of the tax scales will aid workforce participation and aspiration, rewarding those who acquire skills. But the weakness in the plan is it simply hands back to workers the nasty theft that is bracket creep — and not all of it, either. The share of federal tax paid by individuals and companies will reach 75 per cent in 2022, up from 69 per cent in 2002, according to the Grattan Institute. Like other countries, we need indirect taxes, such as the GST, to do more of the heavy lifting in the years ahead. Scott Morrison, who once eyed such a move, has shelved that idea for the moment.

Australia needs a simpler, fairer and more efficient tax system. The options are theoretically straightforward, but the politics of reform are dire. As we wrote here on Tuesday, we support the call by NSW Treasurer Dominic Perrottet to revamp the federation. The states should have better control and responsibility for their spending. They should not be penalised for fixing their finances. States are reliant on stamp duties from property transfers; these taxes hinder workers from moving to growth areas and keep people in homes that don’t suit them. An annual land tax would be better. Payroll taxes are a job killer. Economic reform must focus on federal-state finances, reviving the GST (meant to be a growth tax), and making company tax globally competitive. The LCT is a relic of our protectionist past. Let’s wave goodbye. Tax reform carries risk, given Canberra’s dysfunction, and will test our leaders. But the pay-off from a better, more robust tax system — higher living standards, sustainable public services, security — is worth it.