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Tax reform: It’s a lot like 24, only in years

Brendan Brown

by Brendan Brown

30 Jan 05:30am

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Filed under: Economy, Election 2010, Henry Review, Kevin Rudd, Tax, Treasury

24 comments

Taxation reform as a political issue may not float many people’s boat but in an election year it promises to be as entertaining as a day in the life of Jack Bauer. We have two political leaders - Kevin Rudd and Tony Abbott - who are equally unconvincing on the economy and who must grapple with a political hot potato.

The director, Ken Henry

The Rudd Government will soon respond to the final report of Australia’s Tax System Review Panel. The Panel, headed by Treasury Secretary Ken Henry, will recommend the most comprehensive reform of the tax system in a generation.

Taxation reform is a policy challenge more complex than quantum mechanics.  Australia’s existing tax system has outdated Commonwealth-State financial arrangements and effective marginal tax rates that discourage people on welfare from participating in the workforce. Australia also faces significant economic challenges that are intimately related to the taxation system, such as an over-reliance on mining for national wealth; an aging population; and the need to reduce the carbon output of the economy.

Tax reform is also a political challenge as it inevitably creates losers and some of them may be large and well-funded interest groups. With the budget in deficit the Government cannot bribe these disaffected groups.

This is a great opportunity to separate the mighty from the meek. In an election year we have a measuring stick to compare the economic credibility of Kevin Rudd and Tony Abbott. Rudd has the opportunity to introduce important tax reform and Abbott to be a constructive Opposition leader. At the moment, it is unclear which leader will come out on top.

The Prime Minister is trying his best to be more ideological than a Young Liberal. Rudd has positioned himself as a social democrat committed to state power. A central tenant of Rudd’s ideology is that neo-liberalism is dead. In his maiden speech to Parliament in 1998 Rudd complained that “neo-liberalism…dominates the treasuries of the nation - both Commonwealth and state”. One would think neo-liberalism was the greatest scourge to hit Australia since Douglas Jardine in the 1930s.

Rudd’s claim that neo-liberalism dominates the Treasury Department is ominous. Treasury orthodoxy - which I would argue is more liberalism and pragmatism than neo-liberalism - has not changed since 1998. Whatever Rudd found so disagreeable remains.

Yet Treasury are closely involved in the taxation reform process. The Tax Review Panel was headed by the Treasury Secretary; its administrative headquarters were at Treasury; and it was staffed by a team of Treasury officials. The Panel’s recommendations will reflect Treasury thinking.

We therefore have an ideological Prime Minister who may oppose Treasury’s “neo-liberal” taxation reform recommendations, regardless of their substance. All should not bode well for the Government pursuing meaningful taxation reform. Luckily Rudd has given every indication that he is a noisy but ultimately apathetic ideologue.

Although the Prime Minister has little credibility on economic policy, Tony Abbott is doing his best to give Rudd a free ride.

Abbott’s leadership of the Liberal Party got off to an unprincipled start, having to deal with the devil’s agent in the Senate, Nich Minchin, to gain the leadership. Although Abbott did not have to sell his soul, he did have to forsake a serious position on climate change.

And it has been downhill from there. Abbott has developed a cynical narrative of a big taxing Government, claiming that an emissions trading scheme is a “giant tax on everything” that will “raise the price of daily life”. It will be convenient but not constructive for Abbott to paint a new tax or tax increase as further evidence of a big-taxing Labor Government.

Abbott also gives the impression of a leader uncomfortable in his economic skin. He has only ever been at the periphery of economic policy making in Australia. Abbott was Minister for Employment and Workplace Relations and Minister for Health and Ageing in the Howard Government. In Opposition, Abbott was passed up for an economic position under Brendan Nelson and Malcolm Turnbell, despite putting his hand up for one. This suggests that economics may not be his strength.

It is also difficult to discern Abbott’s economic philosophy. Abbott has failed to offer any coherent criticism of the Government’s economic agenda as Opposition leader and pays only lip service to economic issues in Battlelines, his recent book. Abbott’s put-down of Rudd that he has “few real convictions or little deep economic insight” equally applies to him. 

The Kevin Rudd and Tony Abbott tax bout will not have the gratutitous gun play of “24” and Rudd may not torture Abbott with electrical wire and demand that he pass tax reform. But it will still be worth watching. The Taxation Review Panel’s recommendations provide both leaders with the opportunity to make a meaningful contribution to long-term taxation reform. Unfortunately, the taxation debate seems likely to be a race to the bottom.

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24 comments

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    • Justin says:

      05:46am | 30/01/10

      Very true, the Tax System Review Panel is a very good instance to evaluate the mettle of Rudd and Abbott. Unfortunately Rudd hasn’t shown much in the way of making much needed drastic changes to our economic system. Look at his response to climate change. As for Abbott’s economic philosophy, you’re right that he hasn’t got one. Just a populist politician who’ll make us miss Turnbull soon enough.

      Reply

    • John A Neve says:

      06:17am | 30/01/10

      We all know TAX is governments main if not only source of income. Which means the more we want from government the more tax they will have to collect. So we need a tax system that has a broad base, is simple and equitable. I only know of one such tax.

      A Financial Debits Tax, we have had around three major “tax reviews” to my knowledge. I have no memory of a Financial Debits Tax being debated in any one of them !! The question should be why not?

      I would suggest the reason is that the big end of town don’t like the idea. They could not dodge it, we’d all have to pay, there is no escape. The benefits as I see them are; all other forms of tax could be dropped, as a % the level of tax in the $ would be low and the cost to collect it would also be low.

      Under our current system the PAYE taxpayer carries this country.

      Reply

    • Wayne Hutchins says:

      10:11am | 30/01/10

      Could you elaborate a bit more John A Neve @ 7.17am. How would a debits tax work?

    • John A Neve says:

      01:53pm | 30/01/10

      Wayne Hutcvhins @ 1111hrs.
      I’ll do the best I can, but bear in mind I am not a tax expert.
      A Financial Debits tax would take a % of every withdrawal from a person/companies account. There would be no tax on monies going in or monies in the account, the tax would only apply to withdrawals
      Ther would be no acceptions. so conglomerates moving money from company to company, family trust moving money form A to B, parents giving money to their children, in fact every time there was a withdrawal from an account a tax would be paid.
      This would encourage savings, kill “black money” there would to the best of my knowledge be no way to dodge it. It has been suggested a 2-3% tax would produce more revenue than all existing taxes.
      The deductions would be by the financial institutes, who would put in a
      monthly report to government, money would be transfered to the government daily by electronic transfer, as a result admin costs would be very low.

      I can only hope I have done the idea justice.

    • 6clegs says:

      04:22pm | 30/01/10

      I’m interested to know how a Financial Debit Tax would “kill black money’‘?
      I’m fairly uneducated, but I would think that if anything it would encourage ‘‘black money’‘. ?

      This is a genuine question,  grin

    • John A Neve says:

      05:07pm | 30/01/10

      6clegs @1722hrs.
      Simple, to pay some one in cash, you need cash, as soon as you make a withdrawal you pay tax on it. Even if you drew out $million to pay cash for the next X years, you will pay tax on the $million

    • Wayne Hutchins says:

      08:25pm | 30/01/10

      I was going to say that black money, for example drug money, would not count but on further consideration I realized that those that have purchased those drugs have withdrawn from their own bank accounts and therefore been taxed. They could finally tax illegal drugs. Worth more thought. I think I vote differently from you but I agree with you that the system needs a major overhaul. Interesting idea.

    • BigBob says:

      07:31am | 30/01/10

      Tony Abbott give me the impression of a man wanting to please everyone. And when you try to please the world, inevitably your going to upset more than you bargained for.  I am intrested in hearing from Kevin Rudd, as of yet hes been pretty silent. We all know we must pay taxes to keep the country running, a tax free country is a poverty stricken country with bad infustructure and gravel roads ect.

      Reply

    • Paul says:

      08:26am | 30/01/10

      Abbott like Rudd like Howard have shown their anti small business colours, through letting predatory sectors of banking, fuel, and food thrive and remain nationally unaccountable - and impose higher prices on us (arguably another tax on PAYE workers and small business).The Liberal and Labor party have shown themselves to be superbly anti-competition when it suits them.  Was neo-liberalism just some fantasy capitalism marketing campaign or an economic boffins forked-tongue term, to cover the fact that indeed the workers are carrying the weight of taxes and big business is relying on corporate or ‘state’ welfare?

      Reply

    • Joe says:

      08:53am | 30/01/10

      There is no need to reduce the carbon out put of the economy, and Rudd’s new big fat tax certainly wouldn’t do it.

      Reply

    • Paul says:

      10:01am | 30/01/10

      @joe carbon aside, are you happy to continue paying and be silent about paying Howards and Rudds circa 10% extra “tax” from the cartels profit gouging? Is this equally worthy of comment and debate given its drag on and parasitism of the economy? Given that hundreds of millions of dollars are going into big business profit margins instead of that money being invested into innovation,  equipment and technology,  and badly needed infrastructure to grow Australias non-hole -in-the-ground industries. I’m seriously curious that Australians rally against a green flavoured tax, yet are prepared to pay cartel taxes?

      Reply

    • Richard says:

      10:23am | 30/01/10

      I disagree with this article in the strongest possible terms. Nothing is as exciting as 24. Tax reform may be as exciting as Lost but Lost is lame. Is it any coincidence that no terrorist attack has happened in America since Jack Bauer was on TV? No.

      Reply

    • Justin says:

      05:39am | 31/01/10

      Richard, you’ve missed the point. 24 is really not that good. A better television show is The Office. And Abbott’s bumbling statements on climate change take a page out of Michael Scott’s book.

    • Deniz says:

      10:39am | 30/01/10

      I agree with Mr Brown. An outdated taxation system can only mean an inefficient one. It needs tobe reviewed and changed drastically however so does the education system and health. One has to ask, how much is Rudd willing to gamble on big changes as they tend to also create a nervous electorate. I think what little change might happen will be minimal and left to the next gov. to deal with. Gives a party a licence to say ‘we tried’.

      Reply

    • Julian Thomas says:

      12:02pm | 30/01/10

      stripe away all welfare , baby bonuses etc, support health for 5 and under, people really need to learn to save and fend for themselves, all government assistance comes from the taxpaper, do you like paying tax?? or taking other people hard earned money??

      Reply

    • DWest says:

      12:10pm | 30/01/10

      How does Rudd and Abbott propose a tax system that encourages investment in a truly 21st Century economy? During and since Howard’s reign, we seem to have become an anti-science, largely anti- Research &Development; economy.

      Reply

    • Gerard Oosterman says:

      02:18pm | 30/01/10

      This latest from the ABC story and interview with Swan last Friday the 22nd of Jan. 2010

      Quote; And rather than focusing on tax cuts, Mr Henry is warning that tax revenues will need to grow “strongly” if the Government is to cover the costs of Australia’s ageing population. Unquote.

      Good on you Ken Henry. This has to be music to the ears of many of us who have been complaining about the state of our Health, Education, Public Transport and many other social infrastructures that through the years have become crippled by lack of money.  There are finally some encouraging signs that will stop the rot in Governments on both sides forever seeking popularity in massaging and nourishing our deep seated hatred for paying tax by promising reduced taxation for the workers each time there are elections.

      Of course we all know that we still are one the lowest taxpaying country of all the OECD, indeed Australian Government’s own study indicates our low tax regime.

      It is no wonder that we are struggling to keep up with the rest of the world and that rumblings of the dissatisfied are finally coming to be heard.

      We get what we pay for!

      Reply

    • Jeanette says:

      04:29pm | 30/01/10

      I couldn’t agree more. Part of any tax reform debate has to be consideration of a higher level of taxes and a greater investment into services such as health, education, social programs and infrastucture.  Increased tax revenues need to be utilised to increase economic capacity. Look at the Scandinavian countries who have high taxes and a high level of government spending and are ranked in the 20 richest nations by GDP in terms of economic performance and social well being.

    • Gerard Oosterman says:

      05:17pm | 30/01/10

      Here the level of taxation showing our very low taxation level.

      http://comparativetaxation.treasury.gov.au/content/report/html/02_Executive_Summary.asp

      Never before are we so poignantly reminded of our shortcomings than the arguments that have been raging about our shortcoming in Education. There are now all sorts of conjuring tricks being implemented.

      At the last election,’ Computers for all students’ was shouted from rooftops all over the country.  Boy oh boy, have seen acres of video footage of Rudd and Gillard smiling in front of those promised school computer roll-outs. We must have School ratings and Comparisons and publish the Data, shame the lot of them, and the latest from the bag of trickery; Schools to receive public disadvantage rating.

      At no stage do we ever hear that good teachers need to have higher qualifications and therefore a considerable increase in wages. You can’t teach kids by a mixture of people that have only just scraped by themselves in education.  That there are many good teachers is without question, but I bet you in those countries where education is better, teachers are also better qualified and better paid. In Finland, which continues to be on the top of the Education ladder, a minimum requirement is a Master’s degree.

      All this cost money: and where is it coming from?
      It is very much the same story with our hospitals, and again, the paddle pop stick taped together ad hoc financially starved system staggers on. People are dying from the lack of the simplest procedures. Waiting times in Casualty wards are staggering, people bleeding to death and stories aplenty of people turned away or shunted to other hospitals. They have become charnel houses and blame for this goes backwards and forwards between States and Federal Government as regularly as the metronome without a musician. The Government is threatening to take over the hospitals. This is just another voodoo exercise. It is the lack of money, stupid!

      As with education, so it is with health. Those that can afford it go for a private option. How an egalitarian society ever came to believe and develop a two tiered system in such basics as Health and Education is beyond my understanding, but that is how it is at present.  It would have to add to a huge waste and duplication. Not surprising is that those that have succeeded in making the money for private health and education probably enjoyed some very handy tax breaks or even dodges, n’est ce pas?

      So, where is the money coming from for first class, world beating health system?

      We have done so well though. But, has this doing ‘well ‘been on the back of filling up Bulk Carriers with the scrapings of the top 100 metres or so of our country, especially in the North and West. This has been a nice little earner for Australia, all those minerals and all that red dirt. It’s been so easy too. Huge trucks and trains to ports and then shovel it all onto boats and then wait for the money to roll in.  How lovely for the Government, what a win-win. Will this go on forever?

      In any case, it has not provided us with best standard public Education, Health, Public transport and it never will. It just puts money into shareholders who in turn will go for the private goodies and live in big houses.

      As for pensioners, they will just have to feast on those extra $30.- that was added onto their fortnightly pension. Many will just have to continue living just above the poverty line and make do with the no-frills toilet paper.
      Good on ye, Ken Henry,
      We need to pay far more tax.
      http://oosterman.wordpress.com/

      Reply

    • Taxed says:

      05:26pm | 30/01/10

      As a tax professional for many years I doubt much will change with this review.

      Governments are simply too afraid to lose votes by doing something that the other side (or special interest groups) will jump up and down about and cause unpopularity for the incumbent.

      The superannuation system needs to be changed so that people are required to save more adequately for their retirement. Currently, this is not so and even a person earning $80k per annum will run out of savings. The rate needs to be lifted to 15% as Keating intended. But small business (and the Libs) will simply complain about hurting small business and employment.

      This will leave the country with a massive burden in years to come with many retirees unable to support themselves and potentially relying on welfare. To deny them welfare will mean losing the grey vote. A massive chink in years to come.

      CGT should be reformed to take the heat out of the property market (now that Sydney is confirmed again to be one of the most expensive markets on Earth and many people are priced out of the market). But this will lose home-owners and investors.

      Corporate tax and marginal tax rates need to be reduced to make Australian companies more competitive globally, and investment in Australia more attractive and to encourage people to work harder and be more productive (something KRudd flagged the other day). But reducing welfare will have many self-interest groups crying for the poor and the poor vote.

      The system should be simplified. Years of tinkering, trying to close loopholes (even though the same money is simply taxed later down the line), introducing new rules etc has created an unwieldy and complicated system. Keep it simple. Rely on income from actual transactions and leave it at that.

      Outside of this Constitutional reform needs to be undertaken to overcome the inefficiency of the Grants Power where state and fed governments pass the buck on education, health and infrastructure projects. This is unlikely as referenda are rarely passed (“if it aint broke, then don’t fix it”....)

      But none of this will happen. It is too much to risk votes. The last leader we had and will ever have was Keating. He was willing to introduce reforms that have kept us in good stead after the recent crisis. But since him all we will have are gutless cronies with 2 eyes on opinion polls and not tenacity to introduce real reform. The Australian people will suffer when the resources run out and there are less than 3 workers per person on welfare.

      Reply

    • COF says:

      02:55pm | 01/02/10

      Great post, Taxed. It is a shame that an issue such as Taxation is so overtly politicised and causes such an emotional response when it should be approached as rationally as possible.

      I agree wholeheartedly with your view on Super, a scrapping of payroll tax will alleviate the burden of increased super contributions on SMEs - say a 5% in super GT to offset a 5% drop in payroll tax, however this means cooperation with the states which may or may not happen.

      John A Neve’s suggestion of a financial debits tax is excellent - I would suggest a financial transactions tax of an even less amount (0.5 - 1%) which would stabilise money markets and discourage excessive speculation - known as a Tobin Tax. Of course, the revenue from this can offset a drop in PAYE and/or GST.

      There are also a number of ridiculous and inefficient revenue collection systems out there at both a state and federal level that can be abolished on the way - eg. if you have a tobin tax, you don’t need land tax or stamp duty.

      The key to tax in my opinion is simplification and where possible, use it to provide an economic advantage. Income tax is graded so that it alleviates the intensity of the business cycle. GST and company tax do that naturally. A positive tax system at the perfect point on the revenue curve will make for an optimal economy.

      The next thing is to ensure government is using the revenue effectively.

    • Leonard says:

      10:50am | 31/01/10

      Jack Bauer might be offended by this article but luckily he probably won’t read it. He doesn’t search the internet - he just stares down a computer until it gives him the information he needs

      Reply

    • Lisa says:

      05:48pm | 31/01/10

      Small business owners are a tiny minority in this democracy, so it is probably no wonder that so few people have any real understanding of how tax levels dissuade people from starting or continuing a small business. Productivity is a problem for Australia - we want the high wages, but we don’t necessarily want to be productive to get that money. The government tax regimens reflect that position as well. We have a successful small business, but to keep it going we must pay ourselves half of what we pay our staff members, whilst bearing the mental and financial strain of being responsible for the whole schemozzle. My husband is on the verge of a nervous breakdown. and yet we must empty out our bank account to the tune of several tens of thousands of dollars each month, in the name of PAYG and GST.
      High tax levels add so much to the cost of living, as well. High taxes lower the value of each and every good you buy in this country, GST being only a part of the equation.
      Australians don’t like others getting ahead, and they don’t like others working too hard. They love the ‘free’ government services, paid for by the tall poppies and small businesses, such as ourselves.
      My mother, a Labor voter, loves to remind me that ‘everyone pays taxes, Lisa’. But some pay an astonishing amount, without any compensation for the stress such big bills bring, while others generate very little, and even the production, preservation and ultimately payment of that amount is the complete and utter responsibility of the employer. It’s an incredibly ‘progressive’ system.

      Reply

    • BoyerMaryanne says:

      01:26pm | 22/03/12

      That’s known that cash can make us independent. But how to act if someone doesn’t have cash? The one way is to receive the personal loans and just term loan.

      Reply
 
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