Monday, February 22, 2016
We look like getting quite a bit of reform, just not the type of reform the big end of town was hoping for. And this will require quite a bit of courage on Malcolm Turnbull's part.
To be fair, however, much of Turnbull's courage will be coming courtesy of his Labor opponents, who've broken the Abbott mould on short-sighted, destructive politicking.
Big business defines "reform" as cuts to the rate of company tax and the top personal tax rate – that is, rejigging the system in favour of foreign investors and high domestic income-earners. There'll be little of that.
What we do look like getting in the way of reform is greater fairness ("equity") in income tax via the removal or reduction of various "tax expenditures" – or tax subsidies as Labor calls them – used mainly by high income-earners.
Turnbull seems to be planning to use savings from the reform of superannuation tax concessions, work-related deductions, negative gearing and maybe even the concessional taxing of capital gains to pay for a modest round of tax cuts.
All four of those tax subsidies have been crying out for reform for years. The fact that they're yet to be fixed despite various attempts and quick retreats is a sign of how controversial they'll be.
Last year, when Joe Hockey was exploring superannuation reforms and Labor said it would definitely be proposing its own reforms, Tony Abbott immediately swore not to touch super so he could portray Labor as high taxing.
Fortunately, Turnbull isn't so destructive. He's more inclined to regard Labor's policies as providing cover for him to act – or maybe even pinch.
The government's super reform may involve limiting the amount of annual contributions able to be made at the concessional tax rate of 15 per cent. It may also tighten the limits on after-tax contributions.
Many workers exaggerate the size of their work-related deductions, but the real rorting is done by wealthy doctors and lawyers claiming for professional development seminars at that renowned hall of learning, Hawaii.
Last week Labor announced good policies to reform negative gearing and the capital gains tax. It proposes to limit negative gearing to new housing from July 2017, with existing investments unaffected.
It would halve the capital gains tax discount to 25 per cent for assets purchased after the same date, with previous purchases unaffected.
Labor's willingness to propose changes that the well-off won't like will encourage Turnbull to do something in this area, though he's unlikely to be as brave.
It sounds like he's planning to put a limit on the number of homes you're allowed to negatively gear, which would affect only a relative handful of investors.
But removing or reducing those four inequitable tax subsidies is only half the story; the other half being what will be done with the tax savings?
If the government had any guilt over its claims of a "budget emergency" to get itself elected, it would use those savings to reduce the deficit.
Instead, it will cut income tax at a time when that's the last thing the budget can afford. Why? Because it's raised expectations of a tax cut that it dares not disappoint.
It's spent its whole term exaggerating the problem of bracket creep to justify a tax cut. If it stuck to that rationale, people near the bottom of the tax scale would get proportionately bigger tax cuts – measured by the fall in their average tax rate – than people near the top.
But I bet they won't.
While all four reform areas would make the tax system fairer, there would also be economic efficiency benefits.
To tax some forms of investment income more lightly than others distorts behaviour.
We've got an investment tax regime that encourages borrowing over saving, speculation over hard work, and passivity over enterprise. A nation already too in love with bricks and mortar has a distorted tax system that makes it worse.
We have a negative gearing loophole no other country tolerates, which is forcing house prices far higher than they need to be and, in the process, locking much of the younger generation out of home ownership.
Don't try to tell me fixing those allocative inefficiencies isn't reform.