Modest tax reform with an eye to election

LABOR'S tax reform package is driven by the fiscal deficit, the coming election and the resources boom, its aims being to protect the revenue base, guarantee no individual loses and stage a redistribution from rich miners to broader economic and social stakeholders.

It is a narrow conception of tax reform. No taxes are eliminated. The overall tax burden is not reduced. This is not a policy objective. The heartland areas of personal income tax, indirect tax, the welfare system, family payments and ineffective state tax bases are not confronted. This is a highly political conception of tax reform. The burden of higher taxes falls on companies and employers. No pressure is applied on the states to improve their tax arrangements.

The two main structural reforms are new taxes with politically effective justifications: the 40 per cent Resource Super Profits Tax on miners; and the impost on all employers that raises the superannuation guarantee rate to 12 per cent by 2020.

In principle, both these policy shifts are justified. With Australia facing another commodities boom from China's modernisation, Treasury's argument for a new resources rent tax is strong.

With the 9 per cent superannuation rate manifestly inadequate for retirement savings, a lift to 12 per cent coinciding with a corporate tax cut is warranted.

The problems, however, lie in the implementation, design, priorities and politics in this Labor strategy.

First, Wayne Swan has drawn down the curtain until the end of the second term. The Treasurer says that the Henry review recommendations are a 10-year agenda. But the joint Kevin Rudd-Swan statement on Sunday says the entire second-term agenda over 2010-13 is last weekend's package plus some future modest changes on tax-return simplification, better incentives to save and improved transparency.

The central issues in tax reform, therefore, are slated for the third term at the earliest. And governments are hardly famous for third-term courage.

This is a cautious approach. Rudd Labor offers no road map, no broad principles, no statement of intent on future reforms. The juxtaposition between the sweeping nature of Ken Henry's 138 recommendations and Labor's caution is conspicuous.

Second, with Australia having escaped a recession, Labor's new focus is to target the resources sector for a revenue redistribution. This is its chief tax priority.

This decision will define Rudd Labor. Its presentation is critical yet the government is unsure whether to depict its tax as an economic reform or a populist "soak the corporate rich" mantra.

Swan's choice is economic reform and he has a narrative to tell: that Australia must overcome "lucky country" complacency by managing commodity boom mark II better than commodity boom mark I under the Howard government. Swan's message is that the resources tax can lead to a better balanced economy, check the dangers of a two-speed economy and offer a more sustainable future. His personal brand is stamped on this argument; it is the only sensible way for Labor to mount its case.

But Rudd gave this case a populist twist by resort to foreign ownership, higher profits being sent overseas and pledging that Labor would deliver the Australian public its "fair share" of the mineral wealth. It sounded like a modern echo of Rex Connor, Whitlam's famous resource minister, and such language has deep foundations in Australia's political culture.

But this is also a moment of high risk for Rudd. He needs to avoid any impression of a high taxing, high-spending populist targeting the mining sector.

The emissions trading scheme retreat has cast fresh doubt over Rudd's policy nerve. It left the perception of a PM motivated not by policy belief but by mere electoral self-interest. If this impression - this contagion - shapes attitudes towards the new resources tax, then Rudd will face renewed criticism. Once this idea takes hold, it can run amok.

BHP Billiton says its effective tax rate on Australian operations will rise from 43 per cent to 57 per cent. Scare stories about lost projects are guaranteed. The Tony Abbott-led Liberal Party is now guaranteed to be funded generously by the resources sector.

The tax will start on July 1, 2012, after a long consultation and, post-election, there must be some prospect it will be watered down.

The government uses the resources revenue to fund lower company tax, create a new infrastructure fund and offer improved incentives for individuals with superannuation. Note that Labor accepted Henry's recommendation for a 40 per cent resources tax but declined his recommendation to cut company tax to 25c.

Swan left open the prospect of going further but there is no commitment.

Rudd and Swan should prevail in selling their new 12 per cent superannuation rate. Note, however, contrary to some statements made by Labor, that this is funded by employers, not by the resources tax. It enshrines a Labor icon, created by Paul Keating and Bill Kelty in the 1980s and 90s.

It will lift Australia's pool of superannuation savings by $85 billion over 10 years. It will strengthen retirement provisions and help to fund Australia's capital needs.

There is a powerful selling point: it privileges saving over consumption and is geared to future needs. But the impact on business is significant. Chamber of Commerce and Industry head Peter Anderson estimates that by 2020 the extra 3 per cent on all employer payrolls will cost about $20bn annually. "The super tax, in dollar terms, though spread over far more companies, is greater than the $9bn raised by the resources tax," he says. Anxious to limit the pain, the government has a long phase-in period from 2013 to 2020, offers a lower company rate and implies in its statement some wages trade-off to fund the "super". "This is a big hit, in effect, a 3 per cent payroll tax," Anderson says. "The government in this policy takes its steer from the superannuation industry rather than from the employers who fund it."

The government implies it has a wages policy to help fund the 3 per cent. In fact, it has no such policy, in a situation of collective bargaining where unions will expect both the 3 per cent "super" plus ongoing real wage rises.

The opposition is trapped between its two arguments: that Rudd is a gutless sellout and that he has done too much. So Abbott also needs to be careful. He will campaign against both the resources tax and the increased super. "I don't support the change," he said yesterday of the 12 per cent super. Expect fierce Coalition retaliation against Rudd's taxes. These are Labor icons to which the Liberals are deeply hostile.