The conservatives’ drum beat for a GST increase has been so loud for so long that Prime Minister Malcolm Turnbull is now damned if he does and damned if he doesn’t. He will either squib it on tax reform or give Opposition Leader Bill Shorten a campaign about a “Great Big New Tax”. Tough call.
It didn’t have to be this way. Indeed, the Prime Minister’s early declaration that “everything is on the table” and that he wasn’t going to play the “rule in and rule out” game could have allowed an open and wide-ranging debate on tax reform. But while Turnbull may have been up to such a genuine debate, after years of repeating Tony Abbott’s simple slogans clearly most of his team are not.
Tax reform is more important, and more complicated, than whether we increase the GST or not. A well-designed tax system should collect enough revenue to meet society’s needs, should be simple, and should be fair. Luckily for all those interested in tax reform, in the next few days Treasury will publish a document that provides a map for achieving all three at once.
Treasury’s annual Tax Expenditure Statement (TES) is an annual survey of the major loopholes, concessions and distortions in the current system. The TES should be at the centre of our tax debate. Its release should be anticipated and speculated about with at least as much fanfare as the monthly unemployment figures or quarterly GDP data. But its release often passes with barley a whimper. It’s as if treasurers don’t want us to notice it.
Perhaps this year will be different. Superannuation tax concessions and the capital gains discount are now in the frame. Modelling by The Australia Institute and others shows that by winding back these concessions, you remove a distortion, get economic benefits and make the system fairer.
Unlike an increase in the GST, there is no need for compensation — that extra churn, normally hated by reformers, can be avoided all together. And, unlike an increase in the GST, removing tax concessions that drive speculative investment and the pursuit of tax benefits can lead to a decrease in prices.
But while Turnbull won’t rule out such win-win reforms, most of his frontbench won’t touch them with a barge pole. Their reluctance to consider ideas that boost revenue and fairness have made a mockery of the Prime Minister’s pretence that “everything is on the table”.
Tony Abbott’s time as leader still casts a long shadow over the Coalition. But his success in training his MPs to stay “on message” regardless of the question they were asked means that Turnbull now has to work with a team that can’t think on their feet. Take Steve Ciobo’s bizarre response to a question about imposing capital gains tax on luxury homes for example.
“If you impose more tax, then those extra taxes simply get passed on to consumers,” said Ciobo, regurgitating straight from the conservative playbook. Unfortunately for the former accountant, and the Coalition strategy, his comments are as politically naive as they are economically meaningless.
Let’s start with the economics. Does Ciobo really believe that Chinese billionaires will pay higher prices for luxury homes if vendors had to pay capital gains tax? Surely he understands that the price of luxury homes, like the price of art, jewellery and vintage cars is set by the customer’s “willingness to pay”, not the historic price of production. And in the unlikely event that a windfall profit tax was “passed on to consumers”, wouldn’t that mean it had no impact on the current owners of luxury homes?
Asking economists, experts, Treasury, or a myriad of stakeholders if the capital gains tax concession and negative gearing should be reformed and you will get a variety of answers. But no one seriously argues that trimming or removing the concessions will lead to higher house prices. Indeed the “problem” cited is exactly the reverse — namely, that house prices might soften, creating political problems for a housing-price-obsessed segment of society.
Economic nonsense aside, the rote repetition of the claim that increasing taxes will simply hurt consumers doesn’t make much sense when Ciobo’s own party wants to increase the GST. Following his logic, increasing the GST will simply cause inflation and hurt working-class people. Of course, all of the extra GST collected from households could be given straight back to them, but such “churn” would make it impossible to cut taxes for millionaires or big business. So what, exactly, would be the point?
Managing the economy, and managing a national conversation about tax reform, requires a lot more subtlety, and a lot more honesty, than the slogans the Liberal party used to attack the carbon price. The party that attacked the carbon price as a “great big new tax on everything” wants to lift the GST on everything by 5%.
Ciobo’s efforts to dismiss the sensible idea of taxing luxury homes highlights how completely incapable the modern conservatives are of winning a genuine economic debate. While a steady stream of nonsense and ad-hominem attacks delivered the Coalition government in 2013, they are only slowly learning that those same tactics make governing all but impossible. Turnbull may back himself as a great debater, but the last few months have likely lowered his expectations of the team he inherited.
It’s a similar story when it comes to the interaction of climate policy and the tax debate. Two of the most obvious reforms needing attention are the removal of fossil fuel subsidies and the pricing of carbon. These options are popular with economists and highly efficient but the conservative wing of the Coalition has tied itself in so many political knots that any reform has become impossible.
As the TES will show us shortly, a reforming government could productively pursue reforms to negative gearing, the capital gains tax discount and the capital gains tax exemption on main residences. This could raise billions and, at the same time, help those on lower incomes and first-home buyers purchase their own homes. A “win-win” that you would think those in the government who are concerned about economic efficiency would jump at.