The best way to stop a debate about tax reform in Australia is to start a debate about increasing the GST.
The overwhelming majority of economists and voters support the introduction of ‘polluter pays’ levies on the fossil fuel industry, they support windfall profits taxes on the gas industry. They think we should rein in the enormous tax concessions for superannuation and housing that give literally nothing to those with the least and flow overwhelmingly to those with the most. Most Australians also support major changes to, or the abolition of, Scott Morrison’s stage 3 tax cuts.
But when faced with an overwhelming economic case for politically popular tax reforms, the Business Council of Australia knows they have to throw a big, GST-free red herring on the table. The business community spends hundreds of millions of dollars per year on PR advice, so it should come as no surprise that they know better than to let a democratic debate about genuine tax reform bubble along without steering it into a nice big dead end.
There was no economic modelling to support the $313 billion ten-year worth of stage 3 tax cuts cooked up by Scott Morrison back when he was Treasurer in 2018. Why? Because there is absolutely no economic case for them. Indeed, most of the tax cuts will deliver zero economic benefits.
Conservative economists mainly obsess about tax cuts because they believe that the lower the marginal tax rate, the more hours people will work and, in turn, the greater our GDP will be. There are too many problems with how neoclassical economists assume the labour market works to outline here, but suffice it to say that if you don’t march into your boss’s office and renegotiate your hours of work every time you get a pay rise or a tax cut, then orthodox economists think you are being ‘irrational’.
The design of the Stage 3 tax cuts means most of the benefit goes to those earning the most. Those lucky enough to earn more than $200,000 will undoubtedly enjoy the $9,000 per year gift they are about to receive; those same high-income earners will see no change in their marginal tax rate of 47 per cent.
That is, while the changes to the tax scales leading up to the top tax bracket mean those earning more than $200,000 per year will pay $9,000 less in tax because the top marginal tax rate isn’t changing and because neoclassical economists believe it’s the tax you pay on the last dollar you earn that determines your willingness to earn another dollar, there is no reason to assume that those making over $200k per year will work any harder after they get their $9,000 windfall. That’s why conservatives are so quiet about the benefits of the stage 3 tax cut; they know that the most expensive part of the tax cuts delivers no boost to either labour supply or productivity.
The silence about how we tax our resource industry is just as revealing. While Australia exports more gas than Qatar, Qatar collects 20 times more tax from their gas exports than we do. Around half of the gas exported from Australia comes from gas wells that pay zero dollars in royalties. The other tax that is supposed to collect revenue from the oil and gas industry, the petroleum resource rent tax (PRRT), is so poorly designed that even the Coalition announced an inquiry into its ineffectiveness. In the last budget, the Albanese Government proposed tweaks to the PRRT so minor that the extra revenue they propose to collect is less than the amount collected from tobacco.
And then there’s housing. Labor went to the 2019 election promising to reign in tax breaks for negative gearing and capital gains and unexpectedly lost the election. They were good reforms then and remain good now, far better for the economy and more politically popular than increasing the GST. This is, of course, why the ‘tax debate’ is yet again being driven down the dead end of increasing the GST.
For those who say they would like to collect more GST, I have a simple challenge: how about we remove the GST exemption from private school fees and private health insurance? These exemptions cost billions of dollars annually, flow overwhelmingly to high-income earners, and do nothing to boost productivity, participation or equity. Unsurprisingly, it’s rare to find a proponent of ‘tax reform’ in the business community who supports this simple reform, even though many have no problem introducing the GST on fresh food in the name of ‘consistency’.
The secret to understanding the ‘tax debate’ in Australia is that it is only considered ‘sensible’ to propose tax cuts for powerful groups.
The secret to understanding the ‘tax debate’ in Australia is that it is only considered ‘sensible’ to propose tax cuts for powerful groups. Even though the data makes clear that Australia is already a low-tax country that collects relatively little revenue from its resources and property sector and, unlike the US and UK, has no wealth tax, the ‘sensible’ thing to say in Australia is that we need to cut income taxes even further and increase one of our most regressive tax bases, the GST.
Proponents of the stage 3 tax cuts like to argue that income taxes in Australia account for a relatively large percentage of total taxes collected, but what they don’t like to talk about is the fact that it’s our lack of taxes on resources and wealth that make our tax system appear over-dependent on income tax. They also don’t like to mention that the most successful economies in the world have higher taxes and higher labour force participation rates than Australia, mainly because, unlike Australian proponents of tax reform, Nordic policymakers assume that free child care does more to boost participation than lower taxes.
Many simple tax reforms make good economic sense, have strong public support and would diversify the Commonwealth’s revenue base and improve income distribution. And it’s that last benefit that prevents their introduction. While it is considered OK to ask low-income earners in Australia to make sacrifices ‘for the economy’, it is definitely not OK to suggest that those with the most should contribute more. And few have more than the fossil fuel industry.
Regarding climate change, we are told that, despite the science, we must hasten slowly, be pragmatic, and accept small incremental changes as the only route to victory. But the same voices that tell us to be cautious regarding the most significant risk to our way of life want us to be bold regarding tax reform. Why do something simple and popular like making the gas industry pay some tax when we can instead have a five-year debate about big changes to the entire tax system?
Australia doesn’t need a bigger GST to broaden our revenue base; it needs to collect more tax from polluters, property owners and those making enormous windfall profits selling our natural resources. Unsurprisingly, the lobbyists for big business would try to derail such a popular and productivity-enhancing reform agenda. What is surprising, however, is that it still works so effectively.
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Luciana Lawe Davies Media Adviser