Don’t be fooled by the chatter and false hopes. The prospect of meaningful pro-growth tax reform in this country has, if anything, gone backwards in recent weeks.
Jim Chalmers didn’t help in his National Press Club speech. By adding budget sustainability to the August reform roundtable agenda, he signalled it would likely focus on increasing, not bringing down, the public’s tax burdens.
His refusal to countenance any reduction in spending and his requirement that proposed tax changes be “preferably budget positive” made that a virtual certainty.
We should not be surprised that a host of special interests, not least the states, have come forward with new tax ideas, including a higher and broader GST, new levies for our fossil fuel exports and further hits on investors.
The policy debate, if we can call it that, has been confused, fragmentary and bogged down in technical detail, leaving the public largely disengaged. It’s timely, therefore, to consider what we can learn from the only two cases of genuine tax reform in this country’s history.
In 1985, Bob Hawke and Paul Keating cut the top marginal rate from 60 per cent to 49 per cent while broadening the income tax base to include capital gains and fringe benefits for the first time.
And in July 2000, John Howard and Peter Costello brought in the GST while significantly lowering income tax rates, getting rid of the old wholesale sales tax and eliminating inefficient state levies.
These initiatives were bitterly opposed at the time. Neither enjoyed overwhelming public support. And both appeared to violate basic principles of fairness, at least as understood by the political left.
Yet each was successfully implemented and endorsed in following elections. No serious person or economist today opposes the fundamental changes made.
Three lessons from these episodes stand out. First, they were informed by a single, clear and unambiguous policy objective: to raise the economy’s speed limit.
When announcing the 1985 reforms, Keating said the government’s overriding aim was “the achievement of sustained high growth rates”.
The GST package, Costello said in 1998, was “designed to achieve stronger sustainable growth, higher productivity, more jobs and rising living standards”.
For Keating and Costello, tax reform was about “the economy, stupid”; the idea of using it to pay for increased spending on public services was explicitly rejected.
They knew by lifting the economy’s sustainable growth rate our country’s financial position would benefit; a better budget position came from a strong economy, they argued, not the other way around.
The second lesson is that to secure support for controversial changes, governments must be prepared to spend money on them. The 1985 and 2000 packages were budget negative rather than budget neutral. Our reformist governments aimed big rather than playing a nickel-and-dime game.
They did not limit personal tax relief to the lower part of the income scale, understanding that the big economic gains came from easing burdens on middle to higher earners who carried by far the heaviest tax burdens, with the top 10 per cent accounting for 52 per cent of income tax paid in 2021-22.
No government since has been willing to face that fact. And they were generous in compensating potential losers. Assets purchased before 1985 were quarantined from Labor’s new capital gains tax, to the eternal displeasure of the Australian Taxation Office. And the Howard government ensured lower-income earners and welfare recipients were not hurt by the GST, even winning the support of the welfare lobby for this measure.
While the budget was in surplus in 2000, providing scope for Howard’s big-bang ambitions, this was not the case in 1985. Even so, Keating refused to pay for his personal income tax cuts with higher taxes elsewhere, pledging that they would be financed “by the most rigorous restraint on public outlays”. He was true to his word.
In each of the three years following 1985-86, federal spending shrank in real terms – helping to bring spending as a share of GDP down from 27.3 per cent to 23.2 per cent across this time.
The third lesson is that reform advocates must win the fairness debate. Our reformers in 1985 and 2000 stared down arguments from the left that the proposed reforms were unfair. They preached the gospel of equal opportunity rather than equality of outcomes, recognising that these principles pulled in opposite directions.
They appealed to working people who wanted to climb the economic ladder – to move into the higher income brackets – rather than those actuated by class envy.
Hawke and Keating reminded Australians the 60 per cent marginal rate was rarely paid by wealthy people who could plan their tax affairs.
Above all, our reformist governments rejected redistributionism of the left, offering instead the vision of higher growth and rising incomes for most people, with targeted safety nets for the vulnerable – US style-economic dynamism, but with a social conscience.
A popular constituency for pro-growth tax reform exists in this country. How can it not when our 47 per cent top marginal rate cuts in at only $190,000, less than twice the average annual income; and owing to decades of bracket creep, our reliance on income tax is as high as it was before the GST was introduced?
As our economic performance lags, the case for spending restraint, less expansive government and lower overall tax burdens is stronger than ever. But the cause of pro-growth, pro-aspiration tax reform appears to be friendless.
Chalmers and Labor are captive to a progressive ideology that calls for ever larger government, funded by higher tax burdens on middle-income Australians.
I hope I am wrong, but the roundtable is shaping up as a re-run of the 2022 jobs summit, a cynical exercise to achieve support for an anti-growth, anti-productivity agenda, this time on tax.
David Pearl is a former Treasury assistant secretary.
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