The era of comprehensive tax reform is dead, replaced by the vested-interest politics of defending tax shelters used mostly by the better off. Tax reform was always hard, but the mainstream media’s support for the erosion of the tax base now makes it impossible. Disregard of the national interest is a further symptom of institutional indifference to the need for Australia to develop the economic resilience to cope with future global shocks.
Paul Keating’s big tax reform of the mid-1980s involved broadening the tax base to lower the tax rates. It had a compelling economic purpose and ended decades of erosion of the tax base by wealthy vested interests aided and abetted by conservatives in the Australian Parliament and the High Court.
Vested interests campaigned against Keating’s reforms and found a willing ally in Opposition Leader John Howard. Contrary to the myth that Howard backed in all the major Hawke-Keating economic reforms, Howard promised in his 1987 election campaign speech to “throw out Labor's capital gains tax and fringe benefits tax”, together with the assets test on pensions. But in contrast to the tabloid media, the serious media backed in the Keating tax package or at least refrained from campaigning against it.
Howard got his chance at reform around the turn of the century, replacing the wholesale sales tax with the GST and shortly afterwards implementing a set of measures designed to reform the business tax system.
Howard and Costello wanted to compensate self-funded retirees for the effects of the GST, so they threw into the GST package a personal tax refund for shareholders who didn’t pay personal tax.
Keating had introduced a dividend imputation system to stop the double taxation of company profits, once in the hands of the company as profits and again in the hands of shareholders as dividend income. As Keating explained on the weekend, the Howard government’s franking credit refund policy results in a select group of shareholders paying tax “not twice, not once, but nunce.”
While Labor opposed and campaigned against the GST, it supported the business tax package.
To fund the lowering of the company tax rate, the Howard government announced it would modify the family trust tax concessions. Labor’s Shadow Treasurer, Simon Crean, signed a letter to Treasurer Costello pledging support for the company tax rate cut and a more generous way of taxing capital gains, in exchange for a crackdown on family trusts. Costello confirmed their agreement by signing a letter in reply. Those letters were tabled in Parliament.
In the event, the Howard government reneged on family trusts and the Costello letter proved worthless.
When the franking credit refunds began flowing they came at a cost to the revenue of around $600 million per annum. They now cost $6,000 million per annum and are heading towards an annual cost of $8,000 million. This tax shelter serves no economic purpose.
Prime Minister Morrison defends sending cheques to retirees on the basis that they have worked hard all their lives. It’s great that they have done so, but does this warrant sending them cheques from the government paid for by other taxpayers?
Having doubled government debt, the Morrison government is calling on future generations to pay for the cheques it is sending to mostly well-off retirees.
Now, as Labor seeks to close down these shelters, for the benefit of future generations, the Coalition, true to form, is campaigning against these measures. While the Coalition would be entitled to propose using the proceeds of the reforms other than for health, education, dental care for pensioners and paying down debt faster, it cannot legitimately defend these shelters as being in Australia’s economic interest.
Part of the proceeds from restoring the dividend imputation system to its original design, together with the reforms to family trusts and negative gearing, is to fund Labor’s Australian Investment Guarantee. This accelerated depreciation policy would provide powerful incentives for new, productivity-raising investment. It means that Labor is offering a lower effective company tax rate than the Coalition for small, medium and large businesses.
But private self-interest is a powerful motivator. Those demanding that their tax shelters remain open have their usual allies in the Liberal and National parties. But this time they are joined by the once-serious mainstream media, which demands economic reform in the national interest while opposing measures designed to achieve it.