I don’t understand why Prime Minister Turnbull and Treasurer ScoMo are busily demonising Labor’s entirely sensible announced policies in relation to negative gearing and Capital Gains Tax for residential rental properties. I can only assume that the politician’s instinct to condemn just about everything an opponent proposes has proven irresistible.
They probably also imagine an effective scare campaign to convince suburban mums and dads that Bill Shorten is attacking the value of the family home. That might well work to an extent, but it would be a pyrrhic victory. As things currently stand, abandoning their plans to jack up the GST to pay for income tax cuts has left the Coalition without any tax policies at all, and just as importantly without any deficit reduction policy either.
If they could only resist that kneejerk impulse to attack an opponent’s policies at every opportunity, surely Turnbull and Morrison would recognise an opportunity to use announced Opposition policies as political cover for implementing genuinely liberal pro-growth policies that would certainly differentiate the Coalition decisively from Labor.
What Turnbull should do is steal Labor’s tax policies, tweak them a bit and then use the proceeds for:
(a) some minor compensation for “bracket creep” (given that incomes aren’t rising anyway at present, the need for major compensation for bracket creep is hardly urgent. Turnbull could commit to delivering more extensive compensating adjustments to the marginal income tax thresholds for lower and middle income earners when incomes and economic growth begin increasing strongly again;
(b) a large cut in company tax from 30% to 25% (which would take us down to around the OECD average rate) starting next year, with a longer term expression of intention to move towards a rate of 20% over time. The Henry Review and assessments of most economic observers conclude that a company tax cut would be one of the most effective ways of stimulating investment and economic growth through the tax system.
Australia’s dividend imputation system works such that the company tax is, in effect, a withholding tax – a tax temporarily held by the Commonwealth which is returned to shareholders when their dividends are paid. So, whether the company tax is withheld by the Commonwealth at a rate of 30 per cent or 25 per cent is immaterial – the Commonwealth is going to return the money to shareholders anyway, regardless of the rate.
While this is partly true, it is also somewhat misleading. Many companies don’t distribute much of their profit to shareholders as dividends; instead they retain those earnings and plough them back into the company’s business to fund growth. Reducing the company tax rate as I am suggesting would give business owners 5% more working capital, on which tax has already been paid, that they can use to fund growth and innovation. That’s the major reason why Ken Henry and many other observers advocate that reducing company tax is a very effective way of stimulating economic growth.
But where would the money come from? By stealing/appropriating Labor’s already announced tax increase policies, but using the proceeds to fund a big company tax cut instead of paying the States to meet the their own obligations to fund health and education (Gonski etc). Labor’s negative gearing/CGT policy is estimated to raise about $5 billion per year on its own after the forward estimates period. That would go a long way towards funding a 5% company tax cut by itself, and it meets the fairness principle because (as Labor itself has argued) most beneficiaries of negative gearing are high income earners.
Turnbull should also adopt Labor’s multinational corporations anti-tax avoidance proposals, which are estimated to raise around $500 million per year. Relatively small beer, but every little bit helps. And even a fairly modest attack on high income earners’ superannuation perks should be able to raise another $1.5-2 billion or so per year, without the Coalition’s core business supporters squawking too loudly (they’re not going to vote Labor anyway).
Lastly, Malcolm should also steal Labor’s proposal to jack up excise on tobacco products, estimated to raise around $5 billion per year, but in a more moderate fashion recognising that many smokers are from lower income groups. That should still raise around an extra $3 billion per year.
Add all that up and you can see that the Coalition would have more than $10 billion per year (by the end of 2018-19) in additional revenue, raised in an entirely fair and equitable manner. More than enough to fund a 5% cut in company tax, which will boost investment, growth and ultimately jobs and wages, as well as funding a very modest cut in personal income tax marginal rate thresholds (which is all that is currently needed).
What about the States? The States certainly need to raise more revenue to fund increasing costs, especially in health and education. But, contrary to the assertions of some, the States actually have sufficient capacity to raise that money for themselves. They just prefer to pretend otherwise and let the Commonwealth carry the political opprobrium. For example, they could raise rates for existing state taxes like mineral royalties, payroll tax (the least desirable because it is a tax on jobs), and gambling taxes. And there is no constitutional bar to their introducing or increasing the rate of land tax (some States already have it). Other new (and intrinsically fair) taxes that States could introduce include death/estate duties and a road congestion charge hitting drivers who insist on driving their cars to the big city CBDs during peak periods instead of using public transport. There is also no constitutional restriction on States levying taxes on services (as opposed to goods). That’s why they can levy taxes on gambling. But they could also look at imposing (say) a tourism bed tax (the NT used to have one) and levying it on people renting out bedrooms to tourists on AirBnB, Gumtree etc as well as mainstream commercial operators. Many of those people are also illegally evading personal income tax and GST, thereby competing unfairly with existing tourism businesses which employ lots of people.
Not only do the States have adequate capacity to raise their own taxes, it’s also inherently unfair for them to expect the Commonwealth to incur the odium of collecting taxes (e.g. GST) that the States get to spend. Requiring the States to take responsibility not only for their own spending but their own revenue-raising would be consistent with the constitutional principle of subsidiarity and classical liberal principles of fiscal federalism. By contrast, Labor’s Gonski and health funding reforms violated those principles and would if fully implemented have represented the final victory of centralism in Australia. A genuinely liberal federal government would and should make a powerful case for fiscal federalism. The Commonwealth’s role in relation to the States could then revert to a subsidiary one of redressing major imbalances/inequalities in smaller States’ revenue-raising capacities through much more modest general revenue grants calculated on the same Grants Commission formula used to distribute GST revenue (which still must be collected by the Commonwealth for constitutional reasons).
Will Turnbull and Morrison dare to implement genuinely liberal tax policies like these? Somehow I doubt it, but in my opinion they would constitute both good policy and good politics.
Postscript – It may well be that Turnbull/Morrison DO have real plans to hit negative gearing, but in a different way than Labor. In fact that is exactly what this story from the AFR’s Phil Coorey suggests:
The Turnbull government has rejected Labor’s policy to restrict negative gearing to new properties and will move ahead with its own plans to target high-end investors by either capping the number of properties that can be geared or limiting the annual tax deductions of which can be claimed.
Depending on where the cap is set, this could raise as much or even more than Labor’s proposal, and it would also have the virtue of avoiding distorting the market by confining negative gearing to new properties. You could still have a somewhat higher cap for investment in new properties, which would have obvious desirable aspects, but by still allowing investments in existing homes to be modestly negatively geared it would be possible to:
(a) avoid drastically reducing the market value of existing homes for suburban mums and dads; and
(b) preserve the ability of middle income earners to use the strategy to build wealth while restraining high income earners from radically minimising their taxable incomes with huge negative gearing deductions.
I suspect there’s still quite a long way to go on Malcolm’s Great Tax Reform Journey, and we may yet end up with better outcomes all round through having something at least vaguely resembling an open, mature discussion.