Tax reform: It’s a lot like 24, only in years
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 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 Australia’s existing tax system has outdated Commonwealth-State financial arrangements and effective marginal tax rates that discourage people on welfare from participating in the workforce.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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