Is there hope on the horizon for serious economic reform in Australia? Tax reform zealot Christian Kerr explains.

Be still my beating heart! Yours truly is feeling quite smitten after reading Sophie Panopoulos’ op-ed on tax and welfare reform in The Australian yesterday. Smitten and concerned.

Panopoulos is leading a ginger group of bright young things in the Government determined to ensure that the Coalition uses the control of both Houses of Parliament to finally complete the economic reforms it’s been clear Australia has needed since the 1970s.

Almost 25 years ago there was a similar lot. They called themselves the Crossroads Group. Their bright young thing was Peter Shack. He was elected in the second Fraser landslide of 1977, when the Coalition also controlled both Houses – and ended up an Amway salesman. Careful, Sophie! Careful.

John Howard has made much about his support for economic reform as Treasurer in the Fraser years – but so far seems to have been more anti than ambivalent about the proposals from Panopoulos and Co.

That should not only be raising concerns about what has become the “official” story of the last 30 years of the Liberal Party – the wasted years of 1975-80 – but also about the Howard Government itself. Panopoulos and her friends will have to tread warily.

One of the fathers of the Crossroads Group was Western Australian MP John Hyde. His 2002 book “Dry: In Defence of Economic Freedom” has been treated by the political establishment the way in which enthusiasts of The Da Vinci Code believe the church authorities treated the gnostic gospels. And no wonder.

“Howard the Prime Minister was not the principled reformer that Howard the Leader of the Opposition had once been,” Hyde writes. He says the two great governments for economic reform in Australia have been Hawke’s and Kennett’s.

Panopoulos said on Monday that the Howard Government will be “rightly judged on how it uses this once-in-a-generation opportunity [of control of both Houses] to reform structural defects in Australia’s tax, welfare and labour market systems.”

She starts at the very bottom when it comes to tax reform:

“If bracket creep is the automatic mechanism by which taxes are effectively raised, any reform to our taxation system must provide an automatic mechanism for the indexation of tax rates. This will ensure that tax windfalls to government are reduced, placing the responsibility on the government of the day to sell the need for additional taxes instead of having them slip through the back door of bracket creep.

“It seems a cruel irony for a hard-working aspirational workforce to have a top tax rate of 47 per cent, where the business community is taxed at 30 per cent. While the income tax thresholds will change on July 1, Australia’s competitiveness demands that the top tax rate be reduced and the threshold be increased to beyond the 2005 level of $80,000.

“An increase in the tax-free threshold – languishing at a bare $6000 and nowhere near the comparable annual benefit for a single person on welfare of $12,500 – also desperately requires reform. The reality is that the value of the tax-free threshold has steadily eroded when compared to the strong wages growth seen in recent times. Raising the tax-free threshold to a fairer level would ensure nobody paid tax before they earned, at the very least, the equivalent minimum benefits they would receive on welfare.”

“Reform can’t end with the labour market and the tax system,” she writes. “It is becoming generally acknowledged that Australia’s welfare system will simply become unsustainable if present trends continue.

“The notion of reform of the welfare system seems to strike fear into the collective hearts of many welfare organisations. However, the reality is that for many of these organisations, the greatest gift they can give their customers is to not have them on their books…

“The clumsy interaction between the taxation rates and the income support system often produces some highly dispiriting outcomes for low and middle income earners, and has the effect of sapping the incentive to work.

“Barry Maley and Peter Saunders from the Centre for Independent Studies have offered a number of sensible options to address these structural problems. Maley, for instance, has advocated a single, all-encompassing family benefit, which would not be means tested. Saunders suggests raising the tax-free threshold and replacing means-tested family payments.

“These approaches would go a long way to avoiding the arthritic traps and inefficiencies that arise from the interaction of means testing, welfare payments and tax rates…”

However, welfare organisations are not the only group that seem scared of proposals of these sorts. John Howard and his ministers have shied away from them. He and his Government will have no credibility if they continue to do so.

Current government policy in this area looks like the product of bureaucratic capture, not ideology – big “L” or small “l” liberal ideology.

Panopoulos may be young, but she is a shrewd politician. She doesn’t spell out one of the greatest of the “traps and inefficiencies” created by the present system because it is a clear demonstration of how the current arrangements simply do not work. However, no political observer is unaware of the political pain the Government has worn time and time again from being forced to claw back overpayments of various allowances thanks to our Heath Robinson tax and welfare machinery.

Why have tax credits, why have payments when we can have tax cuts instead? Why waste money on the bureaucracy needed to create and administer these schemes?

That’s what makes Panopoulos’ proposal about raising the tax threshold so significant. It is a beautifully simple way of giving immediate tax relief to anyone who earns an income. Even more so, it is something that could well be delivered as soon as Parliament resumes next month.

Democrat Andrew Murray argued for just the same thing with this article in Crikey in January last year. “Low and lower income Australians struggle with a tax threshold that kicks in at a ridiculously low level of $6000, and they struggle with the highest effective tax rates of all because as they earn more, welfare benefits reduce,” he wrote.

The Dems may be about to lose their party status when the new Senate sits in July – but until then they are the third largest voting bloc in the chamber. An increase in the tax threshold would get through the Senate in minutes, surely. Labor wouldn’t want to block a tax measure that assists low-income earners, either.

Parliament resumes on February 8. There’s plenty of time for Peter Costello to put the legislation together between now and then.

Tax reform, of course, is just one area tipped for change with the Government assuming control of both the Senate and the House of Representatives. However, it is something that clearly benefits the vast majority of Australians.

Why not put a significant reform like an increase in the income tax threshold to the Senate now. It is such a commonsense measure – and one that suggests that John Howard intends to use his coming power not just to push through an agenda of his own, but for all of us.

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Peter Fray
Peter Fray
Editor-in-chief of Crikey
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