Why there’s little progress on tax reform
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Politicians on both sides of the nation’s ideological divide are failing to demonstrate the will, ability or political clout required to overhaul the tax system, experts warn.
Unless there is bipartisan agreement on the future of the nation’s tax system, an end to scare campaigns during federal elections or an inspirational leader prepared to fight the case, some of the nation’s top economists and policy minds say necessary reform will stay off the political agenda.
The political damage suffered in the past when pushing for tax reform is why Committee for Economic Development of Australia chief economist Jarrod Ball believes it is now considered too difficult to pursue.
Treasurer Josh Frydenberg and shadow treasurer Jim Chalmers have not raised any major plans on tax reform.Credit:Dominic Lorrimer
“I think it does require a degree of policy leadership and communication … the best leaders can do it and others may struggle,” Ball says. “The idea of big policy platforms for elections has been on the way out for a little while now.
“I think people have just realised that the political capital that you burn is not worth it.”
Burning political capital
Former Labor leader Bill Shorten took some of the biggest tax changes in years to the 2016 and 2019 elections, including a franking credit policy that would have ended up to $6 billion a year in tax refunds for retired shareholders who had not paid personal income tax. This was dubbed a “retiree tax” by the Coalition, which campaigned fiercely against Labor for proposing “higher taxes”.
The opposition had also promised to halve the capital gains tax deduction and restrict negative gearing to new investment properties as part of a plan to re-balance power in the housing market away from investors. But while many academics and economists were supportive of these proposals, Labor failed to drum up enough support.
Now, with Anthony Albanese as Opposition Leader, these tax changes are off the table as the 2022 election looms.
For several experts, including former Reserve Bank governor Bernie Fraser and former Treasury secretary Ken Henry, Labor’s decision to backtrack on these changes is fast closing the door on reform altogether.
“I have been rather disappointed, to put it mildly, with the Labor Party’s … walking away from the tax measures it took to the last election,” Fraser says. “This certainly dismays me. It will dismay a lot of people who cling rather flimsily, myself included, to having a better, fairer Australian society and tax reform has to be part of that.”
He says Labor is trying to make itself a “smaller target” at the next election by scrapping policies that opened the party up to scare campaigns by leaving some members of the public worse off. Some MPs on both sides privately say this is the right approach as the public has shown its lack of support for these policies.
The Coalition also appears unwilling to put itself in the firing line of accusations it wants to hike taxes. Prime Minister Scott Morrison has in effect ruled out major reforms ahead of the election, such as a carbon tax or GST changes, telling the National Press Club earlier this year he wasn’t interested in pursuing “vanity” projects.
But Fraser wants politicians to offer a package of tax measures while more clearly explaining to the public why they are critical even if some feel a financial pinch.
“We need somebody who is thinking about the future of the country rather than their own political short-term future, and being prepared to argue that case. The focus on the short term, the next election, has everything stymied.”
Henry says politics is currently “dysfunctional” and he has little hope tax reform will be a major feature at the upcoming election from either side.
“Today, it appears that too much of what goes on in the political world is populist and if it’s not populist it’s gratuitous and unnecessary arguments.”
The least economically damaging taxes, which are those that are difficult to avoid such as the GST, are not particularly popular, he says.
Former prime minister Malcolm Turnbull took a series of major ideas to the Council of Australian Governments in 2015 including increasing the rate of GST to 15 per cent and broadening it to health services, all food and water while hiking the Medicare levy to 4 per cent as part of a plan to reform the Federation. He later proposed states could control a portion of income tax. None of these proposals received the required consensus.
“It does take quite some political skill to be able to explain to the population and carry the debate, construct a compelling narrative on why the tax reform … has to happen, why it’s in the national interest. It’s a long time since we’ve had a government prepared to construct such a narrative,” Henry says.
“We need to get this debate, at least for the time being, out of politics into a more rational environment.”
Clive Palmer’s United Australia Party ad falsely claimed in the recent Queensland election that Labor would introduce a death tax. Credit:Screenshot
Exceptional national leadership from either side of politics is needed to lead reform and at the same time as Labor is dropping its public aspirations for tax changes, Henry says the Morrison-led Coalition appears to have little interest in pursuing change. Both Treasurer Josh Frydenberg and Labor shadow treasurer Jim Chalmers declined to comment for this series.
When Frydenberg was asked about tax reform at Citi’s investment conference on Wednesday he said the federal government had already made major changes with the upcoming abolition of the 37 per cent marginal tax rate. “We’ll continue to look for opportunities for tax reform. There’s no doubt about that,” he said. “But we’ve also been pretty focused on the economic recovery overall from this economic shock, which has been extraordinary.”
Winners versus losers
It is not a simple task to take a reform agenda to an election. Almost all experts agree this is because a change in the tax system divides the public into “winners” and “losers”. The financial losses can be easily seized on by political opponents and pushing the case for the benefits requires an ongoing and skilful campaign.
Former Liberal leader John Hewson knows this first hand, having lost the 1993 election with a GST proposed in his Fightback package.
“It is always difficult to get anyone to lead the debate [on tax reform]. Any big structural reform, it doesn’t matter whether it’s tax or anything else, it’s going to have winners and losers,” he says.
“You have to argue the overall benefit to the system … You won’t win the argument in the marginal changes, which is what Shorten found out. It’s easy to run a scare campaign against that.”
It is so difficult to win votes on a platform of major tax change that Corinna Economic Advisory founder Saul Eslake says one option for governments is to get elected without promising reform and then ask the public for a second-term in government with a change agenda.
“The lesson of history in Australia is that you cannot win an election from opposition on a platform of major reform,” he says. He highlights exceptions such as former prime ministers Bob Hawke, Paul Keating and John Howard who had the calibre to pull off difficult reforms.
Since the 1980s and 1990s, there have been fewer significant reforms in what a recent report for the Grattan Institute by John Daley describes as a “gridlocked” situation.
The report says these “golden years” had political leaders more willing to go against snap public opinion and more likely to engage with interest groups.
“Many of the reforms adopted in the 1980s and 1990s were unpopular at the time,” the report says. “Politicians never ignore public opinion, but Hawke, Keating, and Howard went out of their way to try to persuade key institutions and the public that unpopular policies were, in fact, in the public interest.”
Daley found there is now more concern about the high political price of pushing through unpopular policies, a greater focus on polling, a concentrated and less-specialist media, a less active role for the public service and more power sitting with vested interests.
He also warns a 24-hour media cycle has made unpopular policies harder to pursue. “There is now almost no gap between ministerial announcement and social media response, so it is harder for a minister to get clean air to lay out the initial case.” In the era of social media, which did not exist when major reforms were last made, several experts believe this issue has been exacerbated.
Henry also thinks the mainstream media, distracted by the coronavirus pandemic, is in part to blame for the lack of progress for not giving the issue enough attention.
Eslake says the rise of social media and news re-enforcing existing prejudices has made it difficult to push reform. “Probably Hawke, Keating and Howard couldn’t have achieved what they did in the era of social media,” he says.
The state of federation
Many taxes require other levels of government as well as the public to buy into the benefits.
The NSW government has been looking to switch from stamp duty on homes to a broad annual land tax and has publicly pushed for federal government assistance. But neither Labor nor the Coalition has indicated any plans to help states and territories shift away from highly inefficient transfer duties, which make up a significant chunk of their revenue, with more GST.
ANU professor Bob Breunig, a tax and transfer system specialist, says there is a lack of bipartisanship around tax reform at all levels.
“I think privately [politicians] understand what needs to be done. But there’s so much gain to be made by undermining tax reform proposals if you’re in opposition. Really, I think both parties are equally to blame here,” he says.
“I think we really have a problem with Federation,” he says. In his view, states typically handle their tax bases far more poorly than the federal government and there could be a case to reform which taxes are managed by different governments.
He says the federal government could implement a land tax, which it did 100 years ago, but notes trying to do anything on GST with agreement among governments is “nearly impossible”.
“I think there’s a dynamic in Australia where the states don’t find it terribly uncomfortable that the federal government raises most of the revenue and then gives it to them because then they can blame Canberra,” he says. “So it’s hard to think about how you fix it all unless you do some kind of reform around the Federation.”
“The states have not always used their tax bases very wisely, but the federal government is reluctant to take it away from them,” he says, suggesting the federal government could look to raise more revenue or tell the states to levy their own income taxes and pay for all the services.
Daley’s report disagrees that federalism is a major stumbling block for reform, with the notable exception of GST. Hewson is also concerned about the balance between the Commonwealth and state governments, with the GST ensuring a fight over the distribution of revenue each year.
He thinks state and territory leaders – emboldened by the coronavirus crisis – should lead the push for tax reform, especially on GST and get support among themselves before approaching the federal government.
The calls for an increase in the GST, however, often overlook the way federal-state relations were up-ended by Howard back when he argued the case for the new tax.
All revenue raised by the GST goes back to the states and territories. An increase in the GST would do nothing for the federal bottom line, but the federal government would have to cut personal income taxes and increase payments to the elderly, unemployed and other welfare recipients to offset the impact.
The GST pool is already being supplemented by taxpayers through a deal done by Morrison who, as treasurer, put in place a deal aimed at placating angry West Australians and their declining share of GST revenues.
Without a strong hold on seats in Parliament, any government would also have to be prepared to compromise on changes and would face tough negotiations with crossbenchers who hold more power than in the past. Since the mid-2000s, only the Rudd and Abbott governments have had significant majorities at a federal level.
But it has never been easy to get tax changes through Parliament and former treasurer Peter Costello thinks this fact is under-appreciated today. (Costello is the chairman of Nine Entertainment, owner of The Sydney Morning Herald and The Age.)
We need to change the conversation to be about what the legacy is that the older generation is leaving.
Sonia Arakkal, Think Forward
He says getting through an election on a tax reform agenda and convincing the public was “just when the fight started”.
“On the order of difficulty in Australian politics, tax reform is the hardest thing you can do,” he says, “because when you amend the taxation laws you have to legislate it. You have to get it through the House of Representatives, you have to get it through the Senate.
“People say it’s much harder these days as if it was somehow easy … Let me tell you, it wasn’t.”
He says introducing big, far-reaching changes to the tax system happened “once in a generation” and the last major package was the legislation he got through in 1999, including GST.
Sonia Arakkal, a co-founder of Think Forward, a lobby group for the fair tax treatment of younger generations, has been calling for governments to adjust tax and spending priorities to ensure future generations do not face an unfair burden.
“The electorate has the ability to have that conversation,” she says.
“It could be a determiner in the next election because young people have given up a lot over the COVID-19 years and they are now going to be looking for what this government is going to do,” she says.
She wants a federal inquiry into intergenerational fairness, which she says could become the start of a new discussion with the public about what needs to be done. She is also optimistic politicians will recognise the problems in the tax system are too crucial to ignore.
“We need to change the conversation to be about what the legacy is that the older generation is leaving through the tax system for younger generations and their own grandchildren,” Arakkal says.
“I have a lot of faith in our young parliamentarians on both sides of politics to … make it a federal issue for the next election.”
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