The rationale for Malcolm Turnbull’s successful coup against Tony Abbott in September was that Abbott has lost whatever ability he might have ever had — which demonstrably wasn’t a lot — to prosecute the case for economic reform.

Between a timid response to the Murray financial services inquiry and the off-in-the-never-never response to the Harper competition review, “economic reform” has come to mean “tax reform” for the agile, innovative Turnbull government. But in the last few weeks, during which your correspondent has been otherwise occupied, the prosecution of the case for tax reform appears not to have got beyond setting a date for a committal hearing. And that — in the form of a tax green paper — has been delayed until 2016.

Why is tax reform so important? Why has it become synonymous with “economic reform” more generally? Between the claims of vested interests and the arguments of rigid ideology, it’s a little hard to answer those questions right now, which is an indictment of the government’s efforts to sell whatever tax reform it might eventually decide on. “Identify the problem, then explain the solution” goes the economic reform formula advocated by Turnbull, quite correctly. Well, what’s the problem? That’s where it gets confusing.

Is tax reform about increasing or (rather less likely) decreasing revenue? Depends on who you ask. State governments, facing Joe Hockey’s tens of billions in cuts to health and education funding, think it’s about revenue. Most economists think it’s about revenue as well. But the most important person in the debate, Treasurer Scott Morrison, doesn’t think reform is about revenue at all. Australia “doesn’t have a revenue problem”, in his view. Compared to the Labor years, Morrison indeed doesn’t have a revenue problem: if Wayne Swan had been getting 22.3% of GDP in tax revenue — this year’s budget estimate — his deficit problems would have been minimal. Instead, Swan only managed 21.7% in his highest year. And we’re still far short of the 23% and 24% of GDP that Peter Costello was gouging from us as tax revenue.

If tax reform is not about revenue, what’s it about? Presumably encouraging economic growth by making the efficiency with which we tax ourselves greater, reducing disincentives to investment and jobs.

Except, tax reform isn’t going to generate massive efficiency gains. Like a lot of economic reform in Australia, the easy wins on tax efficiency were claimed long ago, under Keating in the 1980s, and Howard and Costello with the GST. Take, for example, modelling by CPA Australia early this year on the economic benefits to be gained from lifting the GST to 15% and broadening its base (removing the silly exemptions from the GST inflicted put in by the Australian Democrats in 1999 is a no-brainer in revenue terms, but one apparently beyond the grasp of Labor). The benefits to economic growth amounted to just 1% of GDP in 15 years’ time. And most of those benefits come from the removal of inefficient “nuisance” taxes imposed by state governments.

Tax does play a more important role in incentivising or deterring workforce participation – thus policymakers’ obsession with effective marginal tax rates. Getting more people into work — or more accurately deterring fewer people from working — is an important goal for a country with an ageing population. But again, the economic benefits aren’t massive — a report for the Human Right Commission found that substantially lifting participation among older workers would produce GDP gains of just $33 billion over 15 years.

But the gains from greater workforce participation are undisputed, even if relatively small except over the long term. There is less evidence — indeed, very little evidence — that cuts to company tax rates do what their many advocates and the government say: encourage investment, employment and growth.

One of the reasons is that many companies simply don’t pay anywhere close to the 30% tax rate they’re supposed to in Australia — and this isn’t merely an Australian problem. Recent evidence contradicts earlier studies about links between lower company taxes and higher growth: at best there is only evidence that lower corporate tax rates have a very marginal, almost trivial, impact on growth and that increases in company taxes do deter investment. Warren Buffett dismisses the link between high company tax and and competitive advantage as “baloney”. But there’s also evidence that companies paying higher taxes create more jobs than those paying lower taxes. And companies themselves say tax rates are a lower-order issue in making investment decisions. Even hard-right Treasury secretary John Fraser admitted earlier this year that company tax rates were not that important for businesses in making investment decisions — although Treasury continues to support lower company tax rates mainly on the basis that it’s all too hard to actually make multinationals pay the same rate of tax as local companies, so we may as well surrender and reduce the tax rate, thereby “reducing” the scale of tax avoidance.

Nonetheless, with even the Australian Council of Social Services backing company tax cuts, big business appears to have successfully sold the fiction that lower company tax rates will lead to more jobs, rather than more profits for large companies.

But even assuming lower company tax rates lead to more jobs, there’s no evidence that that is the most efficient way of creating jobs — the revenue foregone per job might be more than the cost of, say, investing revenue in high-benefit infrastructure or, for that matter, education to improve workforce skills. In fact, a highly skilled, well-educated workforce is more important to companies than tax rates.

Of course, that brings us back to the start: apparently we don’t have a revenue problem, even though state governments face $80 billion worth of cuts to health and education services. If “tax reform” failed to address a key area that would, more than lower company tax rates, drive investment and employment, it would be the very opposite of the “economic reform” that tax changes have now become synonymous with.

Peter Fray

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Peter Fray
Editor-in-chief of Crikey