Wednesday, May 22, 2013

Both sides' big secret: taxes must go up, not down

Someone said the reason the political debate in Australia has become so bitter and personally abusive is that, at bottom, there's not a lot of difference between the two sides on policy issues. There are a few issues on which they offer clear alternatives, but not many.

You may think, for example, there's a big difference between them on taxation. But, as it has become clearer in the past week, the supposed differences are more contrived than real.

The parties are as one in their refusal to acknowledge the truth that strikes whoever examines the many studies inquiring into future spending pressures on federal and state budgets: there's only one way taxes can go and that's up.

I'm sure all our political leaders understand this but, fearing what the other side would say, they pretend the problem isn't looming. When I tax cabinet ministers with the topic, they don't tell me I'm talking nonsense, they look aghast and mutter "we couldn't possibly say that".

As so often with economic matters under the Rudd-Gillard government, in the politicians' determination not to confront voters with the harsh realities on taxation it's the Liberals who take the offensive and Labor that's defensive.

Tony Abbott initially put a lot of work into exploiting and reinforcing the voters' deeply held misperception that the Liberals are the party of low taxation, and Labor the party of high taxes. He promised to abolish Labor's "great big new taxes" on carbon emissions and the impoverished mining companies. Bronwyn Bishop repeated virtuously that the Liberals are always opposed to big new taxes.

I wanted to ask her, do the letters GST ring a bell? When you measure the burden of federal taxes as a proportion of the nation's income - as you should - Peter Costello was our highest taxing treasurer. Wayne Swan can't hold a candle to him. Only if you ignore inflation and the real growth in the economy can you pretend Swan is extracting more tax than his predecessor.

But when it comes to cynical and hypocritical exploitation of the public's presumed opposition to higher taxes, both sides have form. Remember how hard Labor campaigned against John Howard's iniquitous goods and services tax in 1998?

It was immoral and would greatly damage the economy. Yet when Labor returned to power nine years later, the idea of repealing or even modifying the tax never once crossed its mind.

Abbott's grandstanding on the horrendous cost and economic damage to be wrought by the carbon tax has been the most successful yet utterly dishonest scare campaign of modern times.

But now Labor is preparing to return the compliment. Prevented by all his crocodile tears over Labor's "debt and deficits" from acting on his promise to return the budget to surplus forthwith while still introducing a tax cut, Abbott is now giving the appearance of action by promising yet another review of the tax system, this time not excluding the goods and services tax.

So Labor is gearing up for another scare campaign on the GST, which will be dishonest not because an expansion of the tax is unlikely - it's highly likely within a few years - but because Labor will portray it as unneeded and economically disastrous, all the while standing ready to benefit from the tax when the party next returns to office.

The pressure for more revenue from the GST is the clearest, most immediate reason for believing we'll be paying a higher proportion of our incomes in tax in the future. It has turned out not to be the great "growth tax" and saviour of the state governments.

The era in which households were running down their savings, thus allowing consumer spending to grow perpetually faster than household income, has ended and won't be returning. What's more, the two main areas of household spending excluded from the GST (apart from food) - health and education - are growing faster than the spending included, meaning the tax applies to an ever-declining proportion of total consumer spending.

Since the states are so heavily dependent on revenue from the GST to finance their own considerable spending, this a big worry for the premiers, who by now must be desperately hoping a way can be found to raise the rate of GST or broaden its scope, or preferably both.

What's a problem for all the premiers becomes a problem for Canberra. And big business is partial to higher GST, hoping the proceeds could be used to cut the rate of company tax (vain hope).

It's often charged that most of the many budget "savings" Swan boasts of are actually increases in taxation. It's true. But note this: last week Abbott warned he reserved the option of implementing all of Labor's savings if he gets into power (no matter what nasty things he'd said about them at the time).

The disability insurance scheme represents a clear extension of the social safety net. Nothing could make more sense than saying such an extension would need to be covered by higher taxation.

Yet Julia Gillard, proud mother of this historic reform, lacked the courage to propose such an obvious measure until forced by budget realities just a week or two ago.

But here is the point: No-new-taxes Tony immediately embraced a 0.5 percentage point increase in the rates of income tax. And voters copped it almost without murmur. The era of higher taxes is dawning.