AFR: Tax Reform Needed in Rainbow Land

Last week’s national accounts that embarrassed the clowns warning of dark clouds on the horizon actually revealed continued falls in living standards and declining productivity growth. Yet as far as Treasurer Hockey is concerned this “terrific set of numbers” confirms all is well in Rainbow Land.

Soon workers will be told that they’ve never had it so good when a benevolent government extracts from them in bracket creep a rising share of their falling real incomes.

If incomes are to stop falling and eventually rise, the productivity revival that began in 2012 but has since faltered needs a fresh kick along. Productivity growth was responsible for 80 per cent of the increase in Australian living standards over the last four decades. With the China boom now over and the population getting older, productivity growth will again need to do most of the heavy lifting.

How can we lift productivity growth? As the government acknowledged in its first budget, wise investment in infrastructure is a source of productivity growth – so much so that Tony Abbott wanted to be known as the infrastructure prime minister. But those “terrific set of numbers” shows public capital formation falling by almost 12 per cent in the past year.  

Tax reform is the next port of call for lifting productivity growth. The government’s tax discussion paper released a few months ago mentions productivity 48 times. High rates of income tax on companies and individuals are said to stifle productivity growth. Widen the base to lower the rates is the standard economic policy prescription.

Instead, the Coalition is engaging in a little piece of base narrowing, taking the GST off tampons after putting it on 15 years ago. In economic efficiency terms it matters little whether the GST is on or off tampons, but it’s symptomatic that the only direction the government has taken on tax reform since releasing the tax discussion paper is backwards. To prevent further narrowing of the tax base the prime minister might consider prohibiting ministers from appearing on Q&A.

But then again, the prime minister is the leading advocate of the narrow-base, high-rates approach to tax reform. At the release of the tax discussion paper, Treasurer Hockey responsibly promised to consider “every worthwhile idea.” But just hours after ACOSS highlighted the large hole punched in the income tax base by generous tax concessions for buyers of investment properties Abbott ruled out any changes to negative gearing. Abbott’s veto was quicker than from Lateline to lunchtime, the time treasurer Peter Costello quipped that shadow treasurer Mark Latham took, at his leader’s insistence, to recant his view that something needed to be done about negative gearing.

Next on the chopping block were changes to the taxation of superannuation. Before the bells rang for the start of parliament early last Wednesday, assistant treasurer Josh Frydenberg was responsibly assuring a conference of the Committee for Sustainable Retirement Incomes at the Canberra Hyatt that he was open to sensible changes to the taxation of superannuation. If Lateline to lunchtime seemed quick, breakfast time to Question Time was a nanosecond. By the time Frydenberg had returned to the hill and eaten his humble pie for lunch the prime minister was on his feet in parliament ruling out any changes to superannuation taxes not only during the life of this parliament but for all time.

Australia needs a serious discussion about tax reform far away from the prime minister’s office. Treasury claims each additional $1 collected in company income tax reduces the living standards of Australians by around 50 cents owing to reduced investment. But the world is awash with investible funds searching for a destination. Should cutting the company tax rate be the top priority if the true competition is the zero rate applied in the Caymen Islands?

Broadening the base of the GST might seem economically efficient but would the necessary compensation for low-income earners further increase their high effective marginal tax rates, reducing their incentive to work?

State stamp duties are notoriously inefficient so should they be replaced with greater land taxes?

These are serious questions deserving serious answers but they won’t be forthcoming from a government that disparages we clowns who fear all is not well in Rainbow Land.

Craig Emerson, managing director of Craig Emerson Economics, is adjunct professor at Victoria University's College of Business.