The reform challenge

The tax reform debate in Australia is being neutered by short-term politics, says John Hewson.

Last week we saw the unedifying spectacle of a past Australian Treasurer, Peter Costello, sparring with the current Treasurer, Joe Hockey, over the nature of the budget challenge and tax reform issues.

This came on top of the recent sledging between Western Australia and the other states over the distribution of the GST revenue.

I recognise that the Abbott Government is seeking a “conversation”, or what it also likes to call a “mature debate”, on tax reform, to be built around the recently released tax discussion paper. But surely this is not what they had in mind – cheap shots and defensive counter-shots, with options essentially being ruled out prior to any conversation.

Once again, as it has been with every review of our tax system since Asprey in the mid 1970s, substantive debate, and genuine reform, is being neutered by short-term politics.

Moreover, both major parties are still promising the world by way of additional expenditure on things like school reform, a national disability scheme, the National Broadband Network, and a host of infrastructure projects. They are also promising to reform the tax system, “no new taxes”, and, of course to also fix the Budget.

To point out that this doesn’t add up is an understatement.

Hockey is obviously struggling to climb out from under all of this. While the Rudd/Gillard/Rudd Government left much to be desired in terms of fiscal management, Hockey’s budgetary task was in fact largely inflicted on him by the excesses of Costello and Howard.

Unsustainable tax cuts to the benefit of the wealthy; discounts on capital gains tax; cancellation of fuel excise indexation; superannuation benefits to the wealthy, and so on. The sum total of which exceeds, annually, the declared budget deficit, and has compounded the sense of unfairness.

So, not only does Hockey need to find new expenditure savings, but he also has to face the reality of the need to increase tax if these large expenditure commitments are to be honoured in the medium term, but to be seen to be fair in doing so.

This process perhaps began last week with Prime Minister Tony Abbott announcing that large companies would not get the promised tax cut, although they will not have to pay the additional levy that would have been required to fund the paid parental leave scheme, now that the scheme has been scrapped.

However, Abbott did also promise to lower tax for small business, which probably means something like accelerated depreciation or cash write-offs, as many small businesses are not incorporated.

Also, after the recent, well-publicised, Senate hearings focusing on tax avoidance by major multinational companies, the Budget will probably also announce measures designed to increase the tax they pay in our country, promising considerable revenue, and addressing some of the inequity in the tax system.

Both these measures will probably get broad bi-partisan support, as would measures to remove the significant bias in favour of the wealthy in existing superannuation tax concessions. Similarly, there would probably be significant support for broadening the GST to cover overseas purchases, presently exempt if under $1,000.

However, while there will undoubtedly be further expenditure cuts, and I suspect these will be targeted very carefully, the Government will want to spend big on a family package, mostly childcare, and probably promise more infrastructure projects.

So, expect more or less ad hoc changes to the present system, rather than a broad-based reform package.

As with any change in policy, there will be winners and losers in all this. Given the difficulties and legacy of their last Budget, expect the Government to go flat out to gain the populist support of the potential winners, while claiming a “responsible”, longer-term strategy to still fix the Budget.