Fast Trains & Tax Reform
Every few years in Australia, discussion around the plan to build a ‘very fast train’ pops up in the news cycle. This proposed move to high-speed rail usually comes a few months out from an election. In similar style, tax reform is also a much talked about topic leading up to elections. Both major political parties seem to lose interest in both topics however somewhere around 6pm on election night, and both projects get shelved until the next election cycle.
The Australia's Future Tax System Review, informally known as the Henry Tax Review was commissioned by the Rudd Government in 2008 and published in 2010. The review was intended to guide tax system reforms over the next 10 to 20 years.
I was much more naive back in 2010 and saw this review as a very big deal for my profession. I actually read the review cover to cover (all 216 pages) expecting that this was going to shape the work I’d be delivering for the next decade or two.
The review identified 138 specific recommendations across a number of broad themes. Of the 138 recommendations, only 3 were implemented. One of these was the very controversial resources Super Profit Tax, which later ended up getting shelved, leaving a total 2 of the 138 recommendations actually seeing the light of day.
Since 2010, our tax system has gone on largely unchanged, apart from some tinkering around the edges and some small updates to rates and thresholds each year, usually in line with inflation.
The current system is now widely recognised as being way out of date and organisations which rarely see eye to eye, from the Productivity Commission, the Reserve Bank, to the social services and business sectors, are unanimous in their call for tax reform.
The broad consensus for reform of our tax system includes:
- The lowering of personal income tax rates, which make up the majority of the government’s tax income;
- Eliminating stamp duties on land transactions and replacing this system with a broader base land holding tax;
- Broadening the base and increasing the rate of GST, resulting in a greater proportion of tax revenue coming from consumption and less from income; and
- Reducing the volume of ‘middle class welfare’ resulting in the need to collect not as much income tax in the first place.
Unfortunately, any significant change to our tax system usually involves some short-term losers and some segments of our population to be a little worse off than they were previously (the fact that these same segments were disproportionally advantaged under the old rules is rarely acknowledged). These adjustment inequities give the opposition party (and both sides are as bad as each other) ammunition and a ‘free kick’ which plays out well in the press, scares the hell out of politicians and makes them think twice about ever proposing changes again.
A great example of this was seen during the last election when the Labor policy of cancelling excess franking credit refunds became a significant election issue. Having spent 20+years trying to explain franking credits, with varying degrees of success, I would suggest that the vast majority of the population had absolutely no idea exactly what this policy meant, though just thought it was unfair following a very strong attack campaign from the other side. Whether or not this was good or bad policy, it clearly demonstrates the danger in attempting tax reform.
Once upon a time in Australia, prime ministers earned political capital by being strong leaders, their treasurers then spent this political capital on big important things like tax reform. The Hawke/Keating combination of the mid 1980’s and Howard/Costello combination in the late 1990’s and early 2000’s were great examples and both of these governments instigated significant reforms.
The current scenario, as we lead to another election, involves an unpopular Prime Minister with virtually no political capital, and an opposition leader who is trying to be a very small target.
I fear that neither side therefore will be at all willing to risk any form of tax reform either big or small, and another year will slip by and another opportunity will be missed.
In good news though, I hear we will soon be able to travel from Sydney to Melbourne in under 3 hours by train!