Can Australia learn from its tax mistakes of the past?

‘The next election and the next Senate will have to make some of the biggest decisions on the direction of taxation policy in a generation’ Photograph: Mick Tsikas/AAP
‘The next election and the next Senate will have to make some of the biggest decisions on the direction of taxation policy in a generation’ Photograph: Mick Tsikas/AAP

Australia is about to have another big debate about tax. The government is building its new tax campaign, targeting Labor’s moves on negative gearing, capital gains, franking credits and higher income tax rates at the top end. Then there will be the duelling income tax cut plans for low and middle earners from both sides in 2019.

A budget surplus on the eve of an election campaign, with the government well behind in the polls, is a dangerous thing. That is even more so if it is a surplus built on temporary commodity price improvements. An improved budget bottom line can give irresponsible governments an excuse to spend billions on permanent tax cuts which, as history has shown, are almost impossible to unwind once in.

We seem doomed to repeat the mistakes of the past. Peter Costello and John Howard’s incomes tax cuts are widely acknowledged as being overly generous. A once-in-a-generation revenue boom was splurged on tax cuts. Revenue that could have been used on services and infrastructure, spending that would have been a bulwark against inequality. Instead the cash was used to fuel the inequity that drove politics for much of the next 10 years. Australia Institute research has shown that within seven years of being implemented those tax cuts equated to $169bn of foregone revenue. 42% of the money, $71bn, went to the top 10% of Australian income earners. The top 10% got more in tax cuts than all of the bottom 80% combined.

While Howard and Costello’s economic management is lauded, their budget policy delivered not only those income tax cuts but superannuation tax concessions that have had to be wound back; a capital gains tax discount that is as wasteful as it is inequitable and indeed the cash refund franking credits initiative that Labor is now targeting.

While the election campaign and its build up will be a fierce tax debate, this is just the beginning. Should Labor win, the real debate will get under way after polling day – the battle to get the tax reform agenda through the Senate. It will be the next parliament that will determine whether Australia can learn from its tax past.

Despite some protestations to the contrary, the Senate has not been irresponsible during this Coalition five year reign. While the Senate did oppose many spending cuts associated with the 2014 budget, it balanced this out by opposing what would have been a massive long-term hit to the budget bottom line – the big business company tax cuts.

While it did pass the government’s carbon price repeal, it resisted efforts to dismantle key elements of Australia’s clime infrastructure – the renewable energy target, the Australian Renewable Energy Agency (Arena), the Clean Energy Finance Corporation, the emissions reduction fund and the Climate Change Authority.

And while everyone is now in agreement that unemployment benefits need to increase, it is only thanks to the Senate that the country’s unemployed did not see a reduction to the effective rate of Newstart.

Should Labor win the election, the Senate will have the opportunity to act responsibly. Indeed it can prevent our tax history mistakes from repeating themselves.

If history is any guide, it seems unlikely income tax cuts will be blocked in the upper house. However, the Senate can again square the ledger by backing plans to reduce tax concessions and loopholes. Labor’s plans on negative gearing, capital gains tax and franking credits, while bold, do not remove those tax breaks altogether. Dividend imputation remains; a capital gains tax discount reduced but not abolished and indeed negative gearing is trimmed not ended.

Without a Senate willing to block income tax cuts and/or back plans to reign in tax concessions, an incoming Labor government’s ambitious plans for government will face large hurdles. And the stakes are high.

One of most significant parts of Shorten’s address to the Labor national conference was his declaration that Labor’s real enemy was not the Liberal/National coalition. Instead he said Labor’s “deeper opponents are distrust, disengagement, scepticism and cynicism.” And that his mission was “to rebuild trust in our very democracy, to restore meaning to the fair go.” And he wanted to “… breathe new life into … the idea that government has the power to bring meaningful progress into people’s lives.”

The idea that the government can, and should, do more therefore lies at the foundation of a new Labor government’s plan to tackle one of the worrying scourges of our age – the decline in the belief in democracy itself.

Building a bigger government that addresses inequality (the ‘’fair go’’) and restoring faith in democracy – the two are now intertwined. Of course Labor will have to deliver competent, steady, good government as well. But delivering better services will require a stronger and bigger state. A necessary pre-requisite for that is a good tax base – freer of concessions and distortions that favour the wealthy over the many.

While the Coalition government fixates on the fact that a new Labor government will exceed an arbitrary tax to GDP ratio “cap” of 23.9%, Labor is moving on. History demonstrates why. Wealthy, more developed societies pay more tax. As a society’s living standard improves over time it is natural that people want to see improvements in infrastructure, health, education, aged care, the environment and the other things that the government can best provide.

The next election and the next Senate will have to make some of the biggest decisions on the direction of taxation policy in a generation. If they get it right, perhaps their most important achievement will be showing to all Australians that our democracy is not yet completely broken.

Ben Oquist is the executive director of the Australia Institute.

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