Real And Phantom Tax Battles

Sydney Morning Herald

Tuesday September 25, 2007

Steve Burrell

IT'S the little things that get you. For John Hewson in 1993 it was a birthday cake - or more specifically the aspiring PM's inability to explain how it would be treated under his proposed GST. To this day, he cringes when "cake" is mentioned.

For one of Australia's shortest-serving treasurers, John Kerin, it was an obscure national accounting term that proved the political iceberg. Forgetting that GOS stood for Gross Operating Surplus (rather than Get Out Stupid?) finally proved an acronym too far for the hapless Kerin, and Bob Hawke dumped him.

For Kevin Rudd, it was a lack of front-of-brain knowledge of the tax scales when he fielded a left-field question at a press conference ostensibly about education.

Of course, such a gap in the memory banks does not, of itself, disqualify someone from becoming prime minister. Nor does it necessarily indicate the abysmal ignorance of economics that the incumbent and his Treasurer maintain it does.

No, like Hewson's cake and Kerin's terminal terminological slip, it's not the substance of Rudd's error but the symbolism that counts. It's how these things play with voters at a deeper level, shifting or reinforcing their underlying perceptions of a politician's competence.

In this case it was a "gotcha" gaffe which resonates with that lingering doubt that he and his team may not quite have what it takes to run the economy - a negative theme the Government has been hammering since Rudd took the Labor leadership.

This could still be telling. In fact, the issue of "economic management" may be the only thing that brings voters back to the Coalition. But it is more about perception than reality. Ironically, the crucial fight of the election may be on a phantom battleground.

As this column has argued before, the whole economic management issue is a bit of a furphy.

In the modern world of open, deregulated economies, "managing" them - beyond setting the basic policy framework - is largely outside the control of elected governments.

International economic events, an unfettered exchange rate and an independent central bank setting interest rates have a much bigger impact on the course of the economy than who is sitting on the Treasury benches in Canberra.

And to the extent that governments still have a fingertip on the levers of power, Rudd's strategy of policy convergence means that there is very little between the two sides on the basic structural issues of economic management anyway.

Labor is committed to keeping monetary policy in the hands of the independent Reserve Bank. It has set out a trilogy of commitments on fiscal policy: maintaining a surplus on average over the cycle, no increase in tax as a proportion of GDP and new spending commitments funded with offsetting savings.

Macquarie Bank's Rory Robertson makes a similar point on this phoney war. "Canberra and the rest of us have little option but to make the most - with help from the RBA and our floating dollar - of whatever economic strength or weakness the global economy dishes up," he says. "That is not to say that a particularly bad government could not stuff things up big-time, but it would have to try very hard to be hopeless. After all, the stated macro-economic approaches of the major parties on monetary and fiscal policy are very similar."

"With few macro-economic 'policy levers' to pull in Canberra these days, any modern Treasurer's job often resembles 'Head of Government Marketing - Economic' ... It's at least as much about ... providing upbeat economic commentary for public consumption, as it is about making macro-economic policy.

"Most of the actual decisions Canberra makes on the economy these days are about the distribution of taxation and public spending, and the level of the budget balance.

"It is on this aspect of economic management ... that governments should be judged. ... for it is taxing and spending decisions over which Canberra has the most actual control," Robertson says.

Very true. Which makes tax policy, below the radar in recent times, the real "economic management" issue in the coming poll.

The question is whether the contest will just be about tax cuts or about genuine tax reform - structural improvement rather than mere election largesse.

Among the many things to be done, an important priority is continuing to reduce the high effective marginal tax rates (EMTRs) caused by the interaction of the tax and the benefits systems.

This could include cuts in marginal rates and higher tax thresholds at the lower end, where EMTRs, and the potential for greater workforce participation, are highest - although this is an expensive solution because the cuts go to everyone, including those on higher incomes. The cuts could be quarantined to those on lower incomes where benefit cut-offs are relevant, albeit at the price of a more complex system.

Further extending the low-income tax offset or moving to a full-blown earned income tax credit system could also help.

Business tax reform is needed, including rationalising the 51 taxes now imposed on Australian businesses by federal, state and local governments .

However, the business tax base should not be narrowed with new "incentives" and tax breaks. Better to cut the company rate.

Nor should the contenders propose cutting or abolishing the capital gains tax on long-held assets, which would distort investment and encourage tax avoidance, as a lure to "aspirational voters".

On the other hand, the 45c top tax rate, which cuts in at $180,000 from next July, is now largely there for show. It will affect only 2 per cent of taxpayers and for most, only a small slice of their income.

It wouldn't surprise if one or both sides proposed to abolish it, with the threshold for the new 40c top rate (lower than the US and equal to Britain and New Zealand) perhaps raised to $100,000. If the numbers can be made to add up, it could even be cut to a rate with a three in front. Now that would send a message to the aspirationals.

© 2007 Sydney Morning Herald

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