Since the Albanese government’s announcement that it will modify the Stage 3 income tax scales, there has been much gnashing and wailing that it is the death of tax reform. Yet the chattering classes of ‘they oughta’s’, fully supported by opposition politicians, are the first to condemn any reform proposal that adversely affects them personally.
A cameo of this cynicism was the hysterical reaction to the Albanese government’s announcement that earnings on superannuation balances in excess of $3 million would be taxed at the still-concessionary rate of 30 per cent, up from 15 per cent. Opposition leader, Peter Dutton, immediately promised to repeal the reform if elected to government.
The Stage 3 tax scales resemble those I advocated almost two decades ago in my policy book, Vital Signs, Vibrant Society. I argued for a reduction in the top personal rate to 39 per cent, but only if extensive base-broadening measures were implemented – a position consistent with Paul Keating’s.
Keating reduced the Fraser government’s top personal tax rate from 60 per cent – yes, that’s right, 60 per cent – to 49 per cent. And he reduced the company tax rate from 49 per cent to 33 per cent.
Further, in 1987 Keating introduced dividend imputation to ensure income earned by companies was taxed only once – not twice as company income tax and again as personal tax on dividends received by shareholders.
These reforms were made possible by applying the basic principle of efficient tax policy – broadening the base to lower the rates. Keating’s base-broadening measures included a capital gains tax and a fringe benefits tax, both strongly opposed by the Coalition.
Fast-forward to the 2019 election and the Shorten-led Labor opposition advocated denying cash refunds where the marginal personal tax rate of dividend recipients was lower than the company tax rate. This cash refunding of excess franking credits, introduced by a Coalition government, meant that tax on company income was taxed not once or twice, but not at all.
Shorten’s proposed reforms set off the mother of all scare campaigns, led by the Coalition government and its urgers in the business community and the media.
The moral of these stories is that, for all the high-minded demands for tax reform, an immutable truth is that, if it affects them, much (but not all) of the business community, together with the Coalition and their supporters in the media, will vociferously oppose any effort to broaden the tax base to lower tax rates.
Instead, they will advocate an increase in the GST rate to fund a reduction in the company tax rate and a lowering of the higher personal rates – a thinly disguised call to redistribute the tax burden from themselves and the companies they manage onto lower-income earners.
A cut in the company tax rate from 30 per cent to 25 per cent, argued for on the grounds that it is necessary if Australia is to be competitive in attracting global capital, would confer a windfall gain on all income earned from past investments made at the 30 per cent rate. Good for executive bonuses if they can persuade a government to hand over the windfall.
A pretty good tax reform program is that developed by former treasury secretary, Ken Henry. It includes a tax on mineral rents and a carbon price, both introduced by the Rudd government and repealed in 2014 when the Coalition came to government.
With the exception of prime minister Malcolm Turnbull, who also worked on tax reform proposals when we were both parliamentary backbenchers, and whose thinking influenced my proposed tax scales in Vital Signs, Vibrant Society, every Coalition leader from Tony Abbott through Scott Morrison and onto Peter Dutton has been a staunch opponent of broadening the tax base to lower the rates.
For the most part the business community has either followed the Coalition’s lead or has lacked the courage to jump ship in favour of genuine reform.
When the Coalition spends the remainder of the parliamentary term and the next election campaign screaming, with the backing of many in the business community, that the Albanese government will pull down tax shelters, don’t be surprised if comprehensive tax reform does not make it onto the political agenda.
Craig Emerson is managing director of Emerson Economics. He is director of the APEC Study Centre at RMIT University, a visiting fellow at the ANU and adjunct professor at Victoria University’s College of Business.