A few thoughts on tax reform - Speech to the Tax and Transfer Policy Institute Conference
Posted by Andrew Leigh Mp 50sc on April 27, 2015
Speech to the Tax and Transfer Policy Institute Conference
Thanks for having me here today. It's great to see the positive influence that the Tax and Transfer Policy Institute (TTPI) is having in its short life. I'm reliably informed by my staff that TTPI Director Miranda Stewart has been at every tax event that they have attended since I started my term as Shadow Assistant Treasurer. I'm not sure whether to feel sorrier for Miranda or for my staff.
It's great to be in a room full of people who are excited by tax policy as I am. It's not always an easy topic to get people excited about, and this challenge is by no means unique to me. I read with interest in Crikey last week that the ATO has commissioned BuzzFeed to come up with some funny tax stories. Their efforts so far have included 'Your Superannuation Explained, But With Dogs' complete with hilarious dog gifs. I doubt it's going to win BuzzFeed a Walkley, but I respect the ATO's willingness to try new things to get people interested in their tax affairs.
I'd like to speak briefly today about where I think tax reform is up to currently in Australia, my views on ways forward and finally an update on the opposition's tax policy process. I hope you'll find it interesting, even if my remarks are not accompanied by any LOLcats.
I'm going to keep my remarks relatively free of political commentary, but tax is inherently political, so I hope you will indulge me if at times I sound a little less like an economics professor and a little more like Labor's Shadow Assistant Treasurer.
Current state of tax reform
For those of us who are interested in achieving long-term tax reform – and I'm going to assume that's everyone in the room since you are attending a two-day conference on the topic – one could be forgiven for feeling a little pessimistic about the prospects for improving our tax system.
The government's tax discussion white paper has not broken any particularly interesting new ground. The main problem with the tax white paper though is not its content, but the timing of its release.
The timing of the release of the white paper shows that the government has no intention of tax reform this term. Tax reform happens in the first year of a government in Australia. Governments that intend to implement tax reform don't hand down a discussion paper a month out from their second budget.
When Joe Hockey launched his tax white paper he said he wanted to have a conversation with Australia about our tax system. The Treasurer suggested that there could be some common ground with the Opposition on superannuation tax concessions. But no sooner had this conversation begun than Tony Abbott had shut it down, opting for a political cheap shot over the prospect of bipartisan reform.
Despite this, I'm actually an optimist about the future of tax reform in Australia. There is a quiet revolution occurring in Australian economic policy development, one which hasn't really been picked up on by commentators. This revolution is a result of the death of the small-target and the introduction of the Parliamentary Budget Office (PBO).
The last time that an opposition announced significant tax reform was over 20 years ago. So far this term Labor has announced two tax policies. These policies are based on extensive research, consultation with experts and informed by Labor principles. They have been independently costed by the Parliamentary Budget Office and released 18 months out from an election. I'll talk a bit more about the details of these policies in a moment, but let's just dwell on the mechanics for a moment.
Since John Hewson lost the "unlosable" 1993 election on the back of a 650-page manifesto, the conventional political wisdom in Australia has been that you announce as little policy as possible from opposition. Then when you win government, you blame the previous government for everything and set about implementing your own agenda. In the absence of any agenda you institute a bunch of review processes to make one up.
This small target strategy has proven effective at winning elections. Howard pursued a small target in 1996. Abbott in 2013. The problem with a policy-free election strategy is that you don't gain a mandate to implement any policy when you win the election.
But even putting political strategy to one side, oppositions have not had the resources to properly cost policy proposals. This is where the creation of the PBO has been such an important development. The PBO cost different options, point out potential implementation issues or behavioural responses. They also provide people with the confidence that revenue figures announced will be realised.
So far we have announced two significant tax policies, and I can assure you that we are continuing to work away on the rest of our policy agenda. Labor's policy development process in conjunction with the PBO, the parliamentary library and experts in academia and industry so far has been like the proverbial duck, calm on the surface while paddling like hell underneath. So watch this pond.
Labor's approach
Labor intends to use its time in opposition well. We will not succumb to the small-target trap. We will use the resources that we have at our disposal to develop policies. We will announce these policies well out from the election and if we win the election we will implement them.
We recognise that there is a significant fiscal challenge facing Australia. We believe that difficult decisions will be necessary, but we do not believe that these decisions must be unfair. Labor will have more savings than new spending over ten years – this forms our credible fiscal plan.
The government would have you believe that the solution to reducing the deficit should come wholly from reductions in spending. This implicitly means hurting those Australians who are less well off. Australia's social safety net is already well targeted towards less wealthy Australians. Further cuts can only come from the less well off.
The other ever-green tax policy solution is to broaden the base and the rate of the GST.
I think that the benefits of an increase in the GST are oversold. Don't take it from me. The Abbott Government's curiously ungrammatical 'Re:Think' document put the excess burden of the GST at 20 percent – the same as its estimate of the excess burden of the income tax. That's the standard Treasury view, as reflected in background documents for the October 2011 Tax Forum.
So in efficiency terms, the GST and the income tax come up looking pretty similar.
But when we look at equity, there's a big difference. Income taxes are progressive. By contrast, the GST is regressive. That's because the poor don't save anything, while the rich save a quarter of their income. This explains why the introduction of the GST in 2000 saw more than half the revenue channelled back as household compensation.
When it comes to reducing inefficient state taxes, states already have access to an efficient tax base in the form of land tax. I am encouraged by the work that Tom Koutsantonis is doing in South Australia to look at replicating the stamp-duty/land tax switch that Andrew Barr and Katy Gallagher put in place in the ACT.
So while an increase in the GST is often suggested, I don't believe that it's the right option for Australia. There is no political consensus to change it and the supposed benefits of increasing the GST can be achieved through other methods.
The two policies that the Labor Opposition has announced so far demonstrate our commitment to reducing the deficit, while ensuring that our changes are fair and sustainable.
On multinational tax avoidance, Bill Shorten, Chris Bowen and I announced that Labor would make changes to Australia's thin capitalisation and hybrid mismatch rules as well as invest in the ATO's compliance capabilities. The evidence at the recent Senate Corporate Tax Inquiry has shown just how aggressive the tax planning of multinational firms in Australia has become. The community expects companies to pay their fair share, and confidence in our tax system cannot be taken for granted if people see companies getting away with paying very little tax.
If we don't find ways to address multinational profit shifting, we're turning a blind eye to distortions in the market which will slow economic growth over time. Outdated features in the tax system, loopholes which reward the wrong kind of effort – these function like old-fashioned subsidies. They distort the allocation of resources and give the biggest rewards to those who play the game by testing themselves against the rule book, not their real competition.
We need a tax system that rewards the productive, the innovative, the resilient, the clever and the competitive. We need an economy that rewards hard work in business. Labor wants to see all businesses – big and small, local and international alike – have a fair chance of succeeding because they are competing on a level playing field where the same rules apply to all.
Last week, Bill Shorten and Chris Bowen announced changes to ensure the fairness and sustainability of our superannuation tax concessions. The cost of the tax concession on superannuation earnings is set to double from $11 billion per year to $22 billion by 2017-18. These concessions overwhelmingly benefit the wealthiest Australians, with the top 10 per cent receiving 38 per cent of these concessions. At a time where we need to find savings to reduce the deficit, this is neither fair nor sustainable.
Labor will reduce the threshold at which the High Income Superannuation Contribution begins to apply to $250,000 and we will introduce a tax on earnings of 15 per cent in the pension phase. These are changes that will assist in ensuring that our retirement income system continues to provide support to those who need it.
The total improvement in the budget bottom line as a result of these changes is $14.3 billion over the decade. When combined with our multinational tax avoidance strategy, we have policies which improve the budget bottom line by more than $20 billion over the next decade.
As I said earlier, I'm an optimist about the prospect for tax reform in Australia. Even if the government has decided to abandon the field, Labor will use this time in opposition to develop a comprehensive economic agenda, which of course includes a tax system which will help to grow our economy and pay for the essential services Australians expect. Labor's policies will be built on the principles of supporting economic growth while ensuring that all Australians benefit from increased prosperity.
We don't expect it to be easy. Past efforts at tax reform in Australia are littered with false starts and abandoned changes. But we are committed to ensuring that we have a considered and comprehensive agenda that supports growth, reduces inequality and shrinks the budget deficit. And we will outline our program to the Australian people ahead of the election so that if we are fortunate enough to be elected, we are ready to go.
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