Let’s talk about tax

Taxes are the things that provide services to the community. They provide transport, social security, defence, education, parks, rubbish removal and so on.

While state and local government provide most of the services we Australians consume on a daily basis, the federal government is the level of government with the majority of the powers to enable taxation to be collected to provide those services. So state governments have to go to the federal government to ask for money, and local governments rely on grants from the state government (because local governments are prevented by the constitution to go directly to the federal government). Yup — it’s as clear as mud but that’s the system as it currently operates. How it works is complicated. You may remember when the Victorian state government changed in 2014 and the new premier Daniel Andrews wished to replace a road tunnel under central Melbourne with a train tunnel. Then PM Abbott, who admitted he wasn’t a fan of public transport, wanted his road-tunnel funding back. Current PM Turnbull, who posts selfies on buses and train stations, is in the process of returning the funding taken from Victoria. Clearly, the higher level of government can impose its will over the subordinate levels.

It seems that when Mike Baird (Premier of NSW) suggested he would look favourably at a GST increase during 2015, he started (either consciously or unconsciously) the great tax debate of 2016. Baird’s rationale for the comments about a GST increase was that the federal government was planning to rip $80 billion from the grants given to the states to run healthcare and education. The money from the GST goes (in theory) entirely to the states and so an increase would mean the states would get their money back.

The losers here are the members of the public as we would all have to pay the additional tax on the majority of goods and services we purchase. In addition, the discussion included proposals to widen the GST so that goods and services that are currently exempt from the tax would be a ‘taxable supply’ item. The suggestion was that the federal government would retain some of the increase to ‘mitigate’ the increased taxation on those who could least afford it.

By application and implementation, any consumption tax such as the GST mounts a greater attack on the wallets of those on the lower income levels. Various groups who have a number of clients from a low socio-economic level claimed it was a bad idea, including the South Australian Council of Social Services, which claimed amongst other things that:
… in South Australia, the current GST accounts for 9.8% of disposable household income for the lowest income households, but only 4.9% of income for the highest income households.

Broadening the base of the GST to include fresh food, education, health, financial services and other miscellaneous goods and services would make the tax even more regressive. Based on the NATSEM [National Centre for Social and Economic Modelling at the University of Canberra] modelling, SACOSS has calculated the impact of broadening the GST. Table 1 shows the impact with lowest income households paying 41.8% more GST than currently, while the highest income households would pay only 36.7% more.
The government proclaimed that an increase in the rate of the GST was only one of the options ‘on the table’; they were ‘consulting widely’; and that ‘no decision had been made’. Sounds very Yes Minister-ish doesn’t it?

During February 2016, the prime minister ruled out any increase to the GST following considerable adverse publicity generated by the Opposition as well as groups representing those that would have been adversely affected by the plan. According to the federal government, the reason for dumping the GST increase was:
After you take into account all of the compensation that you would need to ensure the change was equitable, it simply is not justified in economic terms.
Those of us with a little cynicism might be more inclined to believe that other factors, such as the number of LNP politicians who would lose their seat in an election fought on a GST increase also played a part. It also lays bare the claim that all options were on the table as well.

Fresh from his information/scare campaign (depending on your viewpoint) against the increase to the GST, Opposition Leader Shorten then announced a policy to gradually remove the opportunity to negatively gear most investments within Australia. As negative gearing is complicated to explain in writing, we’ll get Waheed Aly from Network 10’s The Project do it instead with words and graphics (assuming your internet is fast enough to avoid buffering — another LNP policy failure).

According to Network 10, 1.2 million Australians use negative gearing to reduce their income. The ‘magic’ number here is $80,000 — which is the taxable income you can earn before you advance onto the second highest income tax rate. So when Turnbull et al suggest that changing the rules on negative gearing would affect a lot of ‘mums and dads’ who have a taxable income below $80,000 he’s cherry-picking his facts. The objective of negative gearing is to get your taxable income below $80,000 so you pay a lesser tax rate and are eligible for more government benefits. (Again those of a cynical bent amongst us could suggest that those that only reduce their taxable income to $80,000 aren’t trying hard enough — but that’s another discussion altogether.)

The Conversation is a website run by academics that comments on current issues: they have the people with appropriate qualifications and experience available to look at an issue factually. So, when discussing negative gearing, the Grattan Institute — an economic research institute seed funded by the federal and Victorian governments — probably has the knowledge and ability to justify an article discussingThree myths on negative gearing the housing industry wants you to believe’ and discuss why you shouldn’t go there.

So it seems obvious, doesn’t it? Remove negative gearing and gradually the ‘budget emergency’ promoted by Abbott and Hockey will fix itself as people’s taxable income will not be altered by deliberately making a loss on investments. They pay more personal income tax, the states get money for health and education, prices for ‘entry level’ dwellings stabilise as well, causing the world to be a happier place. Unfortunately, it’s not that easy. Despite noted economist Stephen Koukoulas writing in The Guardian that ‘Labor’s negative gearing reform is economically responsible’, Turnbull is claiming that reducing the avenues for negative gearing ‘harms average earners’. However, Fairfax is reporting:
independent modelling shows there will be "significant" long-term savings from Labor's proposal to quarantine negative gearing to new housing investments from July 2017, eventually raising between $3.5 to $3.9 billion a year.

It also shows Labor's proposal to cut the capital gains tax discount from 50 per cent to 25 per cent would raise about $2 billion a year in the long term. It shows the vast majority of savings would be at the expense of the top 10 per cent of earners who negatively gear their properties.

It also estimates that by restricting negative gearing to new housing, the policy would "increase the share of investment housing devoted to newly built housing" by 10 to 20 per cent.

It does not say house prices would drop.

"Our modelling shows that negative gearing benefits high-income families with 52.6 per cent of the benefit going to the top 20 per cent of incomes," the paper says.

"Only 5.2 per cent of benefits go to the bottom 20 per cent of incomes. This result is mostly driven by high-income families being more likely to negatively gear, having larger negatively geared deductions, and a progressive tax system that magnifies the gains for higher income persons.

The modelling was done by the Australian National University's Centre for Social Research and Methods.

It was not commissioned by any political party, organisation or individual.
Could the real issue here be politics? The process basically benefits those on a large cash income who can’t minimise their tax through income splitting or other methods. So you are looking at those who don’t have the ability to incorporate themselves into a small business where income can be split between two or more people (such as ‘mum and dad’ businesses, where there is the potential for all the owners of the incorporated business to perform some work for the entity, and be paid accordingly). Those on a higher income and in ‘prestigious professions’ are more frequently supporters of the conservative side of politics. Those on a higher income also are more likely to look for ways to reduce their income to pay less tax — it is to their benefit to do so. To a large extent, politicians’ campaigns are funded by donations from those with the means to do so, not the taxpayer.

It’s time to follow the money.

The annual report on who donated to whom is issued by the Australian Electoral Commission in February. As you would imagine, it’s not something that you would download. ABCTV’s The Weekly looked at the issue soon after the report was issued — according to the host of the show, Charlie Pickering, they have the time to do so.

While no one is all that surprised that Clive Palmer’s Queensland Nickel donated millions to the Palmer United Party, it is somewhat concerning that the names responsible for 40% of political donations did not need to be reported. Perhaps even more concerning is that the Australian Electoral Commission (AEC) has never prosecuted anyone for a breach of donation law since the laws were enacted in 1918 (yes 98 years ago). Even worse, the AEC asked for details of potential breaches identified by the people that put The Weekly together. In effect, we don’t know where nearly half of the donations come from and what might be expected in return for the donation. We don’t know if someone making a decision on, let’s say, the future of negative gearing is in parliament due to the donations of property developers, finance companies and real estate agents.

If for example you asked F1 racing car driver Nico Rosberg (the gentleman on the left in the picture at the top of this article) what type of mobile phone he prefers, you wouldn’t be a bit surprised if he rubbished Samsung and Apple devices while promoting Blackberry. And why wouldn’t he? — he and his team are obviously benefiting considerably from a commercial relationship with Blackberry. Unfortunately, we’re not in the same position of knowledge when it comes to our political parties. While the proposal (referenced in the clip from The Weekly) in California to make politicians wear stickers that identify their supporters is probably over the top, there is clearly a need for some rigour in the disclosure laws in Australia.

Turnbull and Morrison are mouthing all the right words about making taxes equitable, understandable and progressive. The reduction in availability of negative gearing addresses all three required outcomes as well as producing some income for funding services for our community. A host of economists can give you chapter and verse on why the proposal makes sense and won’t necessarily reduce the value of your house. We don’t know what, if any, external influences any politician might be under if they come to a view that negative gearing is a valuable part of the tax system and should not be altered.

Taxes pay for government services: so next time you are stuck in a traffic jam, walk through a park or are waiting in the phone queue at Centrelink being told that your call is important, think about how governments around Australia could get more money to rectify service delivery; then think about those who receive the top 20% of income who can legally reduce their income by consciously choosing to lose money on investments. As we all drive on the roads or ring Centrelink at some point, surely we should all pay a proportionate amount for the privilege of doing so.

What do you think?

Rate This Post

Current rating: 0.4 / 5 | Rated 14 times

Ad astra

5/03/20162353NM Your piece is timely. If ever there was a need to review taxation comprehensively, it is now. Despite Morrison’s insistence that we don’t have a revenue problem, only a spending one, balanced economists disagree with him; he is wrong. We do have a revenue problem, which we will never solve while the options for raising revenue, or preserving it through removal of concessions, are steadily relegated to the trashcan. As each option is floated, rent seekers rush in to push their own wheelbarrow until they scare off nervous backbenchers who don’t want a bar of whatever is floated. Notably they are all men - seeking to confuse the debate so they can win their flawed, self-seeking arguments. It is disgraceful. It is leaving Turnbull and Morrison with almost no room to move. So we will likely see a Budget exsanguinated of its life-blood, and near moribund.


6/03/2016Great article about inequality in fiscal policy, but unfortunately you staring premise is wrong. According to Modern Monetary Theory, a sovereign government with its own fiat currency has no need to raise taxes in order to spend. Government spending is in effect a creation of new money (in Australia's case, through the Reserve Bank). Taxation is required to reduce the risk of inflation, and to create a demand for the national currency as firms and individuals pay their tax. It is disappointing that our politicians stick to a 'kitchen table' level discussion of the national accounts. Either they do not understand MMT (which means they're ignorant) or they do understand, but pretend not to (which makes them deceitful).


7/03/2016Thanks for the comment Chris and you're correct that MMT doesn't require countries to increase tax to spend more - the US and UK have been printing money for years. We have previously discussed MMT on The Political Sword http://www.thepoliticalsword.com/post/Debt-crisis-%E2%80%94-what-debt-crisis is the one I could find quickly.. Unfortunately the 'retail' political debate on economics is still based on the domestic cheque book and there has been a lot of 'capital' (sorry) invested in 'the budget must balance' from both of the major parties. I suspect that both sides of politics do know about MMT but find it politically advantageous to bash us over the head about how the 'other' side is a hopeless money manager, which seemingly is more important than doing the right thing for the future of the Country. If further evidence is needed, look at the debate around the Carbon Pollution Reduction Scheme AKA carbon tax - prosecuted very well from a marketing viewpoint by the LNP - but diametrically opposed to what is actually needed. Basically politicians are scared of new concepts. It is widely accepted that John Hewson lost the 1993 election because of his GST proposal, Howard lost partly due to Workchoices and Gillard/Rudd lost partly over the 'carbon tax'. Without bi-partisan support I can't see a politician going down the road of while you at home have to balance your budget - we don't have to because we just print more money. As Turnbull came to the top job with his hands tied firmly behind his back (and the conservative rump still 'pulling the levers', it could be a long time before any consensus (as in the days of Fraser and Hawke) allows for a rational discussion. From your two options above - I'll lock in "B" thanks.


7/03/2016Interesting 2353 - I'd lock in A. I really don't think our 'ruling class' on either side of the divide has a clue about fiscal or monetary policy. Both are captive to the neo-conservative view that's been pushed hard into our consciousness for almost 4 decades. This is the difficulty those who wish to change the 'conventional wisdom' face - these concepts are taught in many universities as 'accepted fact', rather than challenged by enquiring minds. There are of course exceptions - Bill Mitchell here in Australia or L. Randall Wray in the US (amongst many others) seek to challenge young minds to look deeper than this 'conventional wisdom'. What is actually happening as opposed to what the 'smart' economists tell you is happening! The concepts (which aren't really anything new) are gaining currency in the US via the candidacy of Bernie Saunders (advised by Stephanie Kelton) - perhaps we also need to ditch the 'framing' set up in the Thatcher and Reagan eras and argue our case from a point of view of how the system actually works, as opposed to how right-wing economists so desperately want it to work? I'll throw this into the mix - a different starting point or 'frame' if you like: https://www.gmo.com/docs/default-source/research-and-commentary/strategies/asset-allocation/market-macro-myths-debts-deficits-and-delusions.pdf Hopefully those here better educated in economics can set me straight ;)


8/03/2016Hi Bacchus. The reason I believe the federal pollies know about MMT, but pretend not to is that Treasury officials have told them - and the pollies have decided that they can't win the argument if they 'let the cat out of the bag'. It's been a long time since we had a gold standard and while we're not printing millions a day to prime the economy, there is no effective link between the currency in circulation and the nett worth of the Country. Besides its far easier to whack the other team over the head about economic management when the 'common belief' is that there is some substance behind the $20 note in your pocket. Look at the framing here by both sides - the budget must balance, we can't afford some things like high speed rail between Brisbane and Melbourne, a second major airport in Sydney, the rail line to Perth or Melbourne Airports or even the original form of the NBN because we have a 'budget emergency', the economy has problems because tax receipts are down and so on.


8/03/2016Chris: "Taxation is required to reduce the risk of inflation, and to create a demand for the national currency as firms and individuals pay their tax. " I would add to that: "also to reduce wealth inequality, which not only reduces growth, but is clearly having a corrupting influence on our democracy." 2353: While I understand your reasons "for locking in B", it isn't really an either/or situation. We can also approach option A in a gradual manner, by pointing out that although households may "balance the budget", they do borrow to invest, and so do companies. Can anyone tell me when, in its 150 years of operation, BHP paid off all its debt and generated surpluses? Once you get people to understand that borrowing to invest is fine, and that rolling the the debt over forever is also fine, you can approach the next question. That is: who are we borrowing from? The paper linked to by Bacchus discusses that, or rather debunks that under Myth 5: Debt is a burden on future generations. The author of that paper points out that all the bonds representing govt. debt today will be held by the next generation one day, as their assets. The above fact ties in neatly with the fact that govt. spending helps create financial assets in the private sector, as seen from the sectoral balances identity. This has been discussed by any number of people and is just simple arithmetic and finance. Once all this is absorbed by someone, the rest of MMT becomes only too clear. I disagree with 2353 that treasury officials have told the pollies about MMT. Anyone in treasury who disagreed with the neoliberal orthodoxy was probably purged decades ago. While some of them may hold private views disagreeing with neoliberal orthodoxy, it is unlikely they would reveal them publicly. It was surprising that treasury (under Ken Henry) suggested Keynesian stimulus to get us over the GFC. Recall that treasuries all over the world didn't even do that and everyone there has suffered as a consequence. Once Ken Henry was gone, treasury did not dissuade Wayne Swan from the stupidity of "trying to achieve a surplus". Firstly this reduction in govt. spending was contractionary for the economy, secondly it failed to work (as any MMT economist might have predicted) and Wayne Swan ended up with egg on his face. So did the entire Labor govt. It is really hard to unlearn something that has been drilled into you for many years, and for neoliberal economists it actually means repudiating much of their p


8/03/2016(cont'd) ...past.


9/03/2016Welcome back totaram In regard to Swan and the surplus - we'll never know if Treasury did give the warning about surpluses and it was either ignored for political reasons (we're as good as managing the economy as the blue team) or not understood. However Swan did pay for it in the end. You're right that we can gradually move towards Option "A", however that would involve a discussion and consensus with the Australian people (AKA Hawke/Keating with the Accord). This would involve Turnbull communicating with the public rather than rehashing Abbott's three word slogans into sentences. While Shorten has got some traction with the Negative Gearing/Capital Gains discussion - he probably doesn't want to over-egg it with something truly ground breaking. I'd love to see a genuine discussion on sovereign debt not being a bad thing - but figure I had a better chance of winning lotto last night (I didn't for the record!)
T-w-o take away o-n-e equals?