A hard, tough and brutal tax debate is brewing
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Tax is exciting — despite what they say. Last year the Rudd Government set up the Henry Tax Review and, for a while, shovelled all its problems on to Ken Henry. The final report is looming and the Rudd Government will soon be shovelling problems away from Henry. A hard, tough and brutal tax debate is brewing. Good. Tax reform shouldn’t be easy. Yet it is not clear that any reform will actually flow from the Henry Review. Too many observers have been carried away by the GST exemption. The argument that good tax reform requires a higher GST rate or a wider base is simply lazy. It is all too easy to gouge more money out of Australian consumers by ramping up the GST. That is the genius of the Howard Government’s implementation of the GST — the states get all the benefit, the Commonwealth all the pain from any increase. There is no incentive for Canberra to modify the GST and so any proposal or tax reform predicated on a GST variation is simply a waste of everyone’s time. Of course, the tax purists are up in arms. Yet tax debates are when the expression “We live in a society, not an economy” especially has merit. Australians have no interest in living in a theoretically purist tax system. Rather they want to get on with their lives while ensuring that the various governments are appropriately funded. The debate has bogged down with the tax tail wagging the dog. The best example of this is the notion of taxing the family home. Newspaper reports have suggested that owner-occupied housing is some sort of tax rort. A Henry Review consultation paper suggested that the Commonwealth foregoes about $25 billion per year. Remember not being taxed to live in your own house is a concession — home owners should be grateful. People who advocate taxing the family home are invoking a “tax folk theorem”. As Professor Joel Slemrod, of the University of Michigan, has explained: “There is a folk theorem among tax policymakers that goes as follows: all taxes have weaknesses, and the marginal social cost of the weaknesses increase with the tax system’s reliance on any given tax. “Therefore, revenues should be collected from a variety of taxes rather than a small number.” This folk theorem can be seen at work when Professor John Freebairn, of Melbourne University, suggested that the tax-free status of the family home lead to an over-investment in housing, and too little saving in bank accounts. Remarkably he didn’t suggest that bank interest be tax free, rather he proposed a tax on owner-occupied housing. The United States does have such a tax and it doesn’t seem to have prevented an over-investment in housing there. The debate to date seems to be an exercise in how bureaucrats can devise a perfect tax system to raise more money. No bureaucrat ever saw a problem that more money wouldn’t solve. But it is not clear that our existing tax system raises too little revenue, the problem is more likely the vertical imbalances in the system. Tax reform must be about the Commonwealth raising less money and the states raising more. Unfortunately, all we’re hearing from the Henry Review is increasing taxation and greater centralisation. Sinclair Davidson is Professor in the School of Economics, Finance and Marketing at RMIT University and a senior fellow at the Institute of Public Affairs. |
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30 Comments
How can you say that the family home is not taxed? We pay stamp duty on it when we buy it, we pay rates on it every year - I’d say it’s quite comprehensively taxed.
As far as GST goes, I’d be happy enough if it was wider based and higher, to get more money off those that get paid in undeclared cash…
It is true that this debate has been centrally focussed. But that is because the regional and other inputs have to date been so woefully inadequate. The Feds will likely win any serious debate because they are better informed and better prepared. If the states want their inputs to be considered then they need to be prepared with facts and be able and capable of sustaining their arguments. They need to act like a Federation - instead of a loose collection of parochial fiefdoms. The reality is that the state treasuries have a particularly lightweight perspective that is easily countered. It’s starting to look like they are the architects of their own demise.
Australia taxes lightly for an OECD country and for this reason doesn’t invest as much in education, health, social security and public transport as is desirable.
Taxing owner-occupied housing is desirable to maintain horizontal equity with renters. People who rent their accommodation, most of whom are poorer, pay rent which is taxable in the hands of the landlord owner. The landlord is also normally liable to capital gains tax on the premises. But currently people who live in accommodation they own, most of whom are richer, get their accommodation tax free and are exempt from capital gains tax on the accommodation they own.
Sinclair Davidson takes an easy way out advocating the States need to raise more tax. Presently they are down to using traffic cameras to extort desperately sought after funds. Their motor accident insurance is being slammed wiht multi million claims which includes the public hospitals. The plight of the central states NT and SA with their relatively sparse populations but being asked to provide cross-over roads and railways to cater for the east - west traffic needs is not understood in Canberra. In turn they also have to find funding for water and energy needs from a small numbers of users. Of course the States could resort to an income tax or even a “head” tax starting with a$90 annual membership fee from all pensioners. This would be a transparent book entry to transfer Federal funds, in lieu of things like housing rent increases. After that families would pay so much for each adult and then scale down over the number of children. Any increase in State Duties will start to slow down business development.
Gavin, can you please clarify what you mean by:
“desirable to maintain horizontal equity with renters”?
If house prices are going up, yes, the owners would make a profit on selling thier house. But if they wanted to buy another house, presumeably it’s value would have risen as well. they haven’t really made a cent, the money they made is still tied up in thier accomodation.
What if house prices went down? Would they be able to claim the loss back?
I doubt it.
Socialize the profits, privatize the losses. We could call it the Robin Hood policy.
Petethegeo: I suggest that you re-read Gavin’s post carefully. He explained the term quite well. It is about equitable distribution of taxation. Some feel that more of the tax burden should be carried by those with more income. Some would include capital gains from the sale of the family home (after depreciation, etc) in their definition of income.
Gavin’s point is that the rent that a renter pays must provide for both the capital gains tax on the rental premises plus the ownership costs on the rented home. If this were not the case, then there would be less incentive for people to own properties for rent and their investment would be in another form (superannuation, shares, etc). It is a bit of a double whammy, because the price of houses suitable for rental (ie lower or entry-level, in the main), are thus higher due to their being sought by the less well off, as homes, and the better-off, as rental properties.
The Government is in a double bind, because there is so much money tied up in private housing and rental properties, that any attempt to reduce the imbalance between the renters and the better-off landlord classes by, for example, imposition of CGT on family homes, is a political nightmare due to the emotion of the debate and the risk of a collapse of the property market due to a flight of capital to more favourable investments.
I personally do not see any special reason why income in the form of capital gains should not be taxed as other forms of income, but at present it is not always the case. The debate will continue whilst ever there is a tax man.
@MESKI
Stamp duty is a tax on transactions and thus is different in nature to most other taxes which are on revenue earned or spent (GST). Stamp duty is incurred irregularly and thus doesn’t tax property effectively.
Rates are levies for services which are set so low that they don’t even cover most councils’ costs of providing services, which have to be subsidised by State and to some extent by the Australian Government. If rates were high enough to cover all councils’ costs then they would be effective taxes on owner-occupiers and would do much to restore vertical fiscal imbalance.
@PETETHEGEO
I suggest it is desirable to maintain horizontal equity in both revenue and capital.
Considering revenue first, the tenant’s rent covers the landlord’s costs, profit and tax. Owner-occupiers pay the the costs of maintaining their property but no tax on the accommodation they benefit from.
Now considering capital, rent includes an amount to cover the landlord’s cost of acquiring the property and an amount to cover their capital gains tax. Owner-occupiers pay no such tax. If an owner-ccupier sells their house they retain their capital gain regardless of whether they spend their capital on an overseas trip, a new car, or another house. If house prices have risen they still benefit because they now own a house of higher value. I agree that capital losses should be deducted from tax liabilities just as capital gains are added to them. And of course capital gains and losses should be discounted for inflation.
JOHN BENNETTS:
Thanx
Gavin
Thanks John, that was pretty much what I thought he was saying,
it’s communism dressed as intellectualism.
I just wanted to be sure, that’s all.
and I agree it would be political suicide to introduce such a bill, Australia has a large percentage of the so-called “home owning class” who would see it as a direct attack.
This article discusses options related to the proposition that the state must raise more money. The question posed is how does the state raise more money as painlessly as possible in order to create an even bigger state?
I have a different question. How much better off might we be, were we to have a smaller state? Smaller states need fewer taxes on which to feed while bigger more intrusive nanny states need far larger tax bases simply to maintain their status.
How about we opt for less spending out of the public purse and do a few things for ourselves like we used to do a long time ago – even before Britney Spears?. Can anyone tell me which state run activity has been fixed by having more money thrown at it….mmm?
Any business, unless it is involved in a government assisted PPP, would be shut down and its management tarred and feathered if its solution to poor service and customer complaints was to put up prices. Yet the answer to this same scenario in the public sector is exactly that. Just ask the aborigines how much it has already been spent just to build them one house in the Territory!
Doesn’t it worry anyone that the state keeps selling off our resources, enterprises and services yet continually needs more money to operate? What is it raising taxes for given that it is hollowing out our ownership of the nation at a ferocious pace? Is it needed to be to able to bail out the buyers of those state owned businesses when people get sick of paying monopoly prices for things that used to be provided by our taxes? Watch this space for health and education to go the same way as it has in the UK and the US. Crony capitalism I think it is called. Look out! PPP’s and their fellow travelers, the tax free foundations are on the rise.
Last time I looked, the middle income sector paid 75% of the tax bill and they should be up in arms. But the state must be of the belief that it’s just like taking candy from a baby as the public seems to go along so willingly with this charade. The really rich don’t pay tax because they probably aren’t even resident in Australia. The moderately rich can afford good tax planners and the less well off don’t have enough to pay tax. That leaves the middle to upper middle income earners on salaries that pay the lion’s share. Henry suggests that corporations should pay less tax because if they don’t they will go elsewhere (my inference). This is true. So what you have is middle income Australia paying to keep multinational businesses with no commitment to anything but profits resident here so that in the short run they can continue to employ them. Well let me tell you that no matter what you do, someone else can do it cheaper so despite Australia being a resourceful nation, India has 1.2 billion people from which to find a few million equally resourceful workers who are a darn site cheaper to hire. So this option is at best short term.
Unfortunately, with the help of the kept media, the only side of the debate presented is how to tax painlessly; not why are they are continually raising taxes? I ask why should those who can’t run what they do now get any more money from us?
Is the public on some a mind altering drug delivered via the water supply called “morestateisgoodmedicine”? If it is, we need an antidote quicksmart.
SINCLAIR: You say it’s lazy to decry the exclusion of GST from the review. But as GST is the closest thing to a perfect, distortion-free tax we’ve ever seen, isn’t it more politically lazy to exclude it?
Also, extending Capital Gains Tax gets a lot of support these days but it’s got two major problems:
1. CGT taxes inflation more than it taxes real capital gains.
2. CGT distorts housing markets because investors stopped trading houses some years ago in response to the it; most now buy and hold, using gained equity to borrow more money and buy more homes. In other words, much of the revenue for which CGT was designed is never collected; instead it drives investors into risky and expensive leverage structures to avoid it, as well as distorting the market. Banks are the only real winners of this.
Then again on point 1, maybe taxing inflation, like non-indexed income tax on bank account interest, is desirable if spending is good and saving is bad (which, to my confusion, often seems to be implicit in financial commentary).
James
The distortion you say capital gains tax causes is not a necessary feature of the tax but of the way it is collected. If the tax were collected whenever an asset were sold or every 5 years whichever came earlier there would be no disincentive to sell assets.
Good point. But wouldn’t that go the other way and force some people to sell their homes, family heirlooms, and so on?
I expect that was one of the reasons why capital gains tax is collected only upon disposal of assets. If capital gains tax were assessed and collected every 5 years or so it would be a much smaller amount and in most cases surely not much more than the annual council rates. Of course some assets will appreciate by much more even in 5 years, in which case owners without much spare cash would have to refinance them against the higher value of the asset.
When you add inflation to that, Gavin, it starts to sound like a pretty tough hit on family homes. Some home values in east Adelaide for example doubled in the 5 years to 2008. CGT on that would be great for the banks, lousy for everybody else.
Bob Hawke’s intention for the windfall tax was that homes should be places for living in, not ATMs. His short-lived attempt to quarantine rental negative gearing at the same time shows that CGT was designed with residential property in mind.
But in the current form it’s failed and I’m starting to think CGT is a bad tax, which causing distortions out of proportion to the revenue actually collected, and shifting wealth from taxpayers to the banks.
Capital gains should be taxed on real increases in asset values, not nominal increases. So if the current capital gains tax doesn’t discount appropriately for inflation it should be fixed.
If you tax income but not capital gains you distort the way increases in wealth are taken - it would all be directed to capital gains to avoid income tax. If you tax gains in some assets but not in others you again distort economic activity, as you pointed out earlier.
Even better would be to shift the mass of taxation from income to spending, because money is only worth what you can buy with it, but of course our brilliant leader ruled that out from the get-go.
Sinclair,
“That is the genius of the Howard Government’s implementation of the GST”
You the opposition and your IPA pals just can’t believe little johnny has gone. I notice the qualifying role of ‘implementation” in your sentence, because the implementation is all they did. As Keating said, Costello got hit up the *rse by a rainbow.
Richard,
Seeing how nobody else has had a shot at your parallel universe reply…
“Unfortunately, with the help of the kept media, the only side of the debate presented is how to tax painlessly; not why are they are continually raising taxes?”
I think you are way off-target with this - if you mean media kept by the government…? try this article at matilda; it’s bound to wind you up, even though there isn’t a grain of hyperbole in it (as distinct from sinclairs - ‘genius’, it takes one to know one, style). http://newmatilda.com/2009/08/24/small-l-liberal-not-left
“I ask why should those who can’t run what they do now get any more money from us?”
The money they get from us Richard, is to provide us with the things that they said they would deliver if they got into power. More Australians supported their platform over the alternatives then, and even more Australians support them now. Check with comitatus, don’t take my word on it. A full six percent of LNP voters have walked away and most of those now support the policies and programs of the government. johnny gone. kevin here now.
Meski,
I am with you (just don’t mention the n word) on the GST, after all it is already in place and a little rise can go a long way. Its probably daft but they could even say for eg. this 1% will go to more/better teachers/nurses, this 1% will go to regional social infrastructure etc. Anyway I think most other countries GST / VAT levels are above 15%.
Is there anyone on this forum — crap, is there anyone in the country — who doesn’t think the GST should be raised before any other tax? Apart from the federal cabinet, that is.
Evidently, I see no evidence in Richard’s post that he’s rw, such a stance on taking responsibility for ones own wellbeing could just as easily be regarded as anarchistic. He never stated that the “kept media” were kept by the left either, simply that they were kept by those esposing higher taxation.
I think he raises some questions key to the taxation issue, yes these are ideological, but just because you’ve settled on what you believe is the correct ideology, it doesn’t mean that anyone else with a differing view is living in a parallel universe.
P.S good link you posted there, I got a lot out of it.
@Gavin, Well, make the rates cover the cost of providing the service. Taxes are levies for services too, when it comes down to it, but it seems ideology forms a part of taxes as well.
@Evidently: Ok, I won’t mention the n word - re GST, we don’t necessarily need to raise it, just widen it to cover all items. The state governments still haven’t eliminated all the taxes they promised to do, stamp duty, for instance.
“EVIDENTLY”: I think the one-dimensional right-left scale (such as in the Matilda article you link) never helps clarify anything. Richard was talking about big government vs small government and I think he has a great point. The Aboriginal housing fiasco is just a recent, spectacular, highly visible example of a systemic, widespread disease of extreme government wastefulness with taxpayers’ money. Which seems to be worse in Australia than in a lot of countries both more socialist and more liberal.
But Australia does have characteristic infrastructure needs due to the tyranny of distance and to the unsuitability of the primary production sector for trade policies (or rather, the fact that even if primary production fails to meet economic purist tests of comparative advantage, it’s still worth supporting for other reasons). For example, after many years of Australia regretting its multiple rail gauges, NSW Labor is about to add another standalone gauge in inner Sydney (and that’s the entirety of its transport policy for the entire state).
If big government could do anything right I’d be all for it and maybe Richard wouldn’t sound so right-handed to “EVIDENTLY”. But that “if” is a pipe dream which goes to the heart of the liberal theories that Kevin Rudd so comically fails to understand.
Petethegeo,
well for me richard was vague, which is why I parenthesised it in the question “if you mean media kept by the government…?” Seems like more small government, get out of the way of the invisible hand, blowhard stuff.
Richard lumping together the British NHS with US’s 50% Private (mostly paid by employers) and US 50% Public (medicare and medicaid) is totally nonsensical. The Australian system is, like the NHS, funded wholly nationally by taxes distributed to states or in the case of UK; England, Scotland, Ireland and Wales. Like the UK we have, and continue to, underfund health because of the backlash given to governments that raise taxes, people like Richard.
Sinclair: Re: I think you are way of target with this…
I didn’t get mad at Matilda Sinclair. I think you must be confusing me with someone buying into the false Left V Right paradigm. That is merely a distraction served up to keep us from discussing a far more important question which is “should the people control the state or should the state control the people?” Thomas Jefferson had a clear idea of what he thought was the right approach but his writings eventually went unheeded. The ultimate end to the state controlling the people is globalisation, a global army and police force to “manage” any wayward nation, where everybody is under the thumb of a one world government which, itself is likely to be under the control of the people with the money. And I am pretty sure that won’t sit well with the rest of us. At no time in history have the interests of the ruling class been aligned with those ruled; whether rulers were left or right leaning.
Howard may have been an opponent to big government while in Opposition as was Bush the younger; yet both presided over increasingly fatter public sectors and increasingly greater public spending for little result if we believe their opponents.
Let’s look at Mr. Rudd’s latest message to the people (July 25, 2009, The Age).
He is totally preoccupied with attempting to re-ignite the left - right dialectic while all the time positioning himself as a centrist.
My biggest problem with all this clap-trap is that we are living under an economic model - not a humanitarian model. By humanitarian I don’t mean redistribution – you know giving some people things for free by taking them away from others. I am talking about letting people grow to their full potential. After reading Rudd’s essay one is drawn to the conclusion that he is totally preoccupied with lifting productivity at the expense of everything else; as if more widgets or engineers will somehow make Australia a better place. I am more inclined to the view that more insight and critical thinking would probably work better for most of us. Surprisingly that can also be taught in school.
What gives away the notion that we are dealing with an evangelist for the Marxist view of human potential through productive capacity, is that the present PM views his fellow Australians as nothing more than “human capital” (his words and those of many others in his cabinet and think tanks). This is a term I deeply resent.
WE ARE NOT HUMAN CAPITAL PRIME MINISTER – WE ARE HUMAN BEINGS.
We have the right to expect more from our lives than economic slavery disguised by reality programming and plasma TV’s; where the people are distracted by bread and circuses and forced to endure a lousy built for purpose education system, designed to prepare you after endless testing, for a job that won’t exist by the time you graduate.
At present, the system holds everyone in check through debt slavery but in an attempt to “lock in” the model, debt went out of control; hence the situation we are now in where the cash in the world is about 100th of the debt.
The PM is right in saying we will all have to make sacrifices but I ask why should we when we didn’t create this economic debt model of human existence? That happened about the time the US quit the gold standard. I have to say that if Australians understood that the current social planning model is a production line economics approach rather than humanitarian in concept, they might rethink a lot what is happening. I for one don’t see my children as “human capital” being educated to fulfil their predetermined role in some centrally planned economy. They are human beings with rights - at least I thought that was the case.
The PM’s essay talks about improvements in living standards and I wonder whether he is talking about more stuff or clean air. Is he talking about GDP or unfouled waterways? Is he talking about food bought from local markets or industrial food variously sourced from international supplier groups and dragged off the supermarket shelves by an unsuspecting public? And is he talking about “open air” or “mall air”?
When the Prime Minister discusses “human capital” maybe he should instead be talking about human potential. When he talks about global competitiveness maybe he should be talking about global complementarity. We are living in a sick “survival of the fittest” (end justifies the means) economic matrix where improved production and productivity are the socio-religious goals. Doesn’t that strike you a little Stalinist, a world where the masses are belted about the ear holes daily by endless meaningless statistics and conjured crises.
Listen to all politicians, no matter which side of the spectrum and see which ones think of us as human beings. They are the ones I would vote for.
As for the “kept media” Sinclair, if you were as beholden to your financiers as are the six media conglomerates that dominate the world, you would also be kept!
Meski,
I tell you the rates in my backwater doesn’t run to footpaths and other modern conveniences - yet they have doubled it in the last 4 years (they didn’t bring it down when house prices fell either). I see women having to push their prams with their precious cargo on the roads alongside where a footpath should be, with massive trucks missing them by inches, meanwhile they spend a million on a monument in the centre. It’s a tax alright, a tax on your nerves.
James,
Please illuminate us with one or two of these liberal theories that you say our Prime Minister comically fails to understand. You might quote from something that we may have seen or heard. What about the premiss? Is the government bigger than before the last election; I thought Kevin had been burning them all out with longer hours?
Just some the evidence.
Sorry Sinclair looks like it was “Evidently” who made the “way off” observation.
And apropos Evidently’s comment on NHS, I was referring to the area of education and the Charter Schools in US and private takeovers of the public schools in parts of UK e.g. Birmingham and how the local people are up in arms. We only have two of these projects operational in Australia as far as I know.
The PPP models for health are still largely with the think tanks but give it 12months and you’ll be seein’ ‘em!. In this area, we are possibly a little bit further down the track.
EVIDENTLY: Fair question. Kevin Rudd’s essay on neoliberalism spoke of his nemeses entirely in terms of laissez-faire, winner-take-all greed.
For a better representation of liberal theory I prefer Jefferson (whom Richard also cited) with his faith in human nature which does not need ideological guidance from government to point it in the right direction; also Locke, Hobbs, and Mill, emphasizing slightly different aspects of — and this is where Rudd really needs to do some reading on the plane instead of screaming at stewards — the role of government in limiting the freedom of individuals and corporations such that they do not limit the freedoms of other individuals and corporations (and no more than that). That is a long way from laissez-faire, dog-eat-dog, winner take all.
Kevin Rudd talked up big controlling government, a milder form of Lenin’s organ for the guidance of the people. While at the same time he almost completely turns his back on the sort of projects that big government is actually good for — capital-intensive freight transport and commuter transport for example — in favour of just achieving monetary velocity. The latter would have been better achieved by tax cuts which businesses could actually use for forward budgeting.
… With the exception of his big NBN which may or may not materialize and may or may not work if it does materialize. And which has more to do with establishing his credentials as a tech-savvy with-it guy than providing anything Australia actually needs and which can’t be provided better by a free (in the limited liberal sense of free) market.
Oops, I’ve bored everyone to silence.
I suppose comparing Rudd’s big government to Lenin’s big government may be a bit exaggerated. Fairer to say Rudd went to bed one night a self-proclaimed economic conservative and woke up next morning a Keynesian.
For a well-informed comment on that from someone who writes far better than I, see http://www.theaustralian.news.com.au/story/0,25197,25981707-5015664,00.html
In short, Keynes’ stimulus theories specifically addressed a historical time and situation which, Rudd’s hysterics aside, did not bear that much similarity to Australia in 2009.
No James, not bored, infact this thread has been really enjoyable, keep it up.