Wednesday, April 1, 2015

Tax reform needs explanation not spin

Sometimes I think there's no hope for the present crop of politicians - on both sides. When voters react badly to their proposals, they tell themselves there was nothing wrong with the policy, it just wasn't pushed properly.

What they should do is call in a policy expert capable of explaining the proposal and the need for it in words the public can readily understand. What they actually do is call in the spin doctors to help them "sell" the policy.

Lacking the ability themselves, the pollies don't see the difference between explaining something and doing a sales job. Spin doctors use slogans and catchy lines to make policy proposals seem simpler and more attractive than they really are. That is, they're deliberately misleading.

Joe Hockey seems to have a bad case of this. Both his recent intergenerational report and the tax reform discussion paper he issued on Monday were strange amalgams of densely written Treasury analysis preceded by fluffy executive summaries and glossy handouts, which seem to have been written by advertising copywriters who know little about the topic.

One of these characters decided it would be real cool to title the tax discussion paper Re:think.

Some other genius came up with the slogan, Better Tax: lower, simpler, fairer. Anyone who knows anything about tax reform knows that's a trifecta with the longest possible odds.

Not sure who thought of it, but Hockey keeps repeating the line that the tax system needs reform because it was "largely designed before the 1950s". Anyone beyond their 20s would need the memory of a gnat to believe that.

Every country that existed before the 1950s has a tax system that was designed before the 1950s, including us. No developed country I know of has thrown out their old system and replaced it with a quite different system, and neither have we.

But their systems would have changed hugely over the past 60 years - and ours has too. Apart from incessant tinkering, substantial changes were made by Paul Keating in 1985, in a package called RATS - reform of the Australian tax system.

Further big changes were made by John Howard in 1999, in a package called - wait for it - ANTS, a new tax system. Little thing called the GST - remember it?

In 1951, income tax cut in at an income of $300 a year, at a rate of 1 per cent. It then proceeded in 21 steps to a top rate of 65 per cent on income above $30,000 a year.

Today, income tax cuts in at $18,200 a year, at a rate of 21 per cent (including the 2 per cent Medicare levy) and proceeds in just four steps to a top rate of 49 per cent (including the Medicare levy and the temporary budget repair levy of 2 per cent) on income above $180,000 a year.

In the 1950s we paid sales tax on certain goods, but no services, at the rate of 2.5 per cent.  By the time sales tax was replaced by the goods and services tax in 2000, it was imposed on selected goods at six different rates ranging from 22 per cent to 45 per cent.

In the old days capital gains and fringe benefits went untaxed, but the tax breaks on superannuation were much less generous to higher income-earners than they are today. In the old days the states had franchise taxes on petrol, alcohol and tobacco, as well as various fiddling stamp duties, that no longer exist.

Hockey's hyped-up bit of the discussion paper makes much of the fact that, among member countries of the Organisation for Economic Co-operation and Development, only Denmark relies more heavily on income and company taxes than we do.

But if this leaves you thinking we pay more tax than almost every other country, you've been misled. As Treasury says in the fine print, when you take account of all the taxes we pay, "Australia has a relatively low tax burden compared to other wealthy countries."

And when you add compulsory social security contributions (Australia: none) and payroll taxes (Australia: low) to get a like-with-like comparison between countries, we raise 63 per cent of total taxation through "direct" taxes, compared with the OECD average of 61 per cent. Oh.

The discussion paper makes no recommendations, but add up all its arguments and the conclusion we're led to is clear: to reform our tax system to cope with the globalised 21st century, we need to make changes that cause high-income earners and foreign investors to pay less tax, but the rest of us to pay more. Purely coincidentally, of course.

As well, the paper engages in a two-card trick. Hockey's first budget was rejected by voters and the Senate because it sought to fix the budget deficit in ways that were manifestly unfair: big cuts in government spending programs affecting the bottom half of households, but no cuts to the huge tax concessions enjoyed by the top 20 per cent-odd of taxpayers.

The discussion paper readily concedes the unfairness of these elite tax concessions. But it makes virtually no mention of the government's oh-so-pressing problem with the budget deficit.

Get it? In the unlikely event anything much is done about these unfair concessions, the saving will be used to help pay for tax cuts for companies and high-income earners, not to help reduce the deficit.