Originally published in The Australian Financial Review on July 24, 2017

Rising inequality is, according to the lefties at the International Monetary Fund, a drag on economic growth. And low wages growth is, according to the lefties at the RBA, a drag on growth. And according to lefties like Theresa May fixing economic equality is “crucial” to the economy.

[This article was first published by the Australian Financial Review – here]

Promising to collect more tax from those with the most wealth and spend more money on services that do the most help has always been electorally popular but, for the last few decades, the pursuit of popular policy has been derided as “populist” which is a strange insult to throw in a democracy. But as the mounting economic evidence clearly shows, Bill Shorten’s announcement that he wants to place equity at the heart of his policy agenda is not just good politics, it is likely to boost economic growth as well.

Fairytales about how cutting the corporate tax rate will trickle down to workers with a wage rise from a generous boss were always hard to believe; especially when pitched to workers who fear losing their jobs in an under-employed economy and with threats from technological change. Workers can see how big companies are increasingly using labour hire firms as phoney middle-men to avoid paying full entitlements. They can see how phoenix companies are being used to avoid paying superannuation. And they can see how family trusts are being used to shield business owners from pesky creditors like the staff whose wages and superannuation they chose not to pay in full.

A quick Google search yields dozens of lawyers and others offering advice about how to use trusts to “shield your assets”. One law firm spells out the role of family trusts in avoiding income tax quite clearly: “The Discretionary Family Trust is essentially a device for splitting the income of a family group by channelling the earnings of the head of the family through a trustee arrangement to individual members of the family.”

Avoiding obligations

The same lawyers go on to explain “The best form of asset protection is that provided by a fully discretionary trust … if a (trust) beneficiary were to be the subject of a claim, the creditor would have difficulty barging into the trust and obtaining an Order affecting the trust property.”

Given the many ways in which discretionary trusts can help people avoid their obligations to their community and their contractors it should come as no surprise that their use is growing so fast. Research by the Australia Institute’s David Richardson last week pointed out that the equivalent of around one fifth of GDP now flows through trusts in Australia each year, leading to billions of dollars in lost tax revenue. It also showed that the number of discretionary trusts has grown 95 per cent since 1996-97.

It’s hard to see what the macro-economic or fairness benefits of discretionary trusts are, but it is easy to see why an increasingly confident ALP might be keen to take on such tough tax reform. No doubt those who profit most from these 19th-century tax structures will rage against modernising the tax system. But while driving tax reform is never easy, driving reforms that close loopholes, collect revenue and increase fairness will likely be a bit more popular than the Coalition’s plans to cut the corporate tax rate (cue the “populist” howls).

No doubt some will claim that you can’t call closing loopholes “tax reform” by arguing that cuts in the corporate tax rate and increases in the GST are the only “real reforms”. But advocates of tax reform have long argued that we need to broaden the base and lower the rate. Reducing the amount of money leaking from the tax system via discretionary trusts, superannuation subsidies, capital gains tax discounts and other design flaws could collect tens of billions in extra revenue. Trusts that make it easy for some people to avoid their tax simply shifts that burden to other taxpayers. New sources of revenue could, in turn, fund income tax cuts, cuts to the company tax rate or better quality services. In a democracy, once you strip away the dodgy economic arguments, as the IMF has done, such choices about priorities are supposed to depend on which is more popular.

Richard Denniss is the chief economist for The Australia Institute and is a regular AFR Contributor

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