Lionel Bowen was asked in the lead up to the 1980 election what the key issues would be during the campaign. "Tax my boy, same as the last election, same as every election!" Lionel was exaggerating somewhat but tax or tax reform usually feature prominently at election time. And so they will at the forthcoming election. Tax reform is a dangerous beast, the Capital Gains Tax scare certainly played a part in Fraser's survival in 1980, and the GST scare a large part in Keating's in 1993. Will it lead to John Howard's demise in 1998?
Major tax reform is a rare thing. The trouble with it is that the economy doesn't vote. What could otherwise be a search for the most efficient form of tax becomes a game of buying acceptance.
All governments have from time to time given tax cuts which amounted to no more than reimbursement of the ravages of inflation, but that is not tax reform.
Why should John Howard attempt tax reform if it is such a risk? The truth is he has to. He was elected in 1996 with a platform so thin that it was exhausted in his first year. Governments are not rewarded for doing nothing. So he had to create an agenda, and that agenda was always going to include tax reform, the last great intellectual task that the Liberal party undertook with Hewson and the one great reform that Labor could not tackle (outside the waterfront labour monopoly) after Keating's 1985 Option C died.
Both 1980 and 1993 were instances where an Opposition had proposed a new tax at election time, and both were subject to the most terrible vilification by the government of the day. What happens when a government does the proposing? In this instance the electorate are being challenged to toss out a government on the basis of tax reform, not fail to elect an Opposition. There is a difference, so the Howard government which is otherwise not in a terminal state, has an advantage in the contest.
The current system is unduly focussed on business inputs and income, and applies differently to different parts of the economy. The Howard government can opt either to retain the main features of the personal (income, FBT), corporate (company, payroll, licenses) and indirect (WST, petrol, excise) tax mix, or replace as far as possible, personal and corporate income taxes with a consumption tax.
The Howard government has to map out a strategy for reform that, step by step, leads towards the second option, seeking a mandate for every change along the way. For example, step one is a simple tax swap, the Wholesale Sales Tax for a GST. Step two might be to change the mix of taxes, say raise more in indirect taxes but less in direct taxes. Step three might be to relieve the states of their reliance on some of their sillier taxes like gambling and betting.
The best way through this is to be conservative and opt for the indirect tax replacement of one tax, the WST so as to keep the debate confined, as far as possible, to industry groups. Where at present only a small number of wholesalers have to file tax returns, in the future all retailers would have to do so. A WST can only fall on goods (you cannot wholesale a service) so a whole new sector of the economy has to become involved. The only tax mix change would be at the fringes. For example, where there cannot be a clean replacement of the revenue forgone with the abolition of the old tax, and where any compensation is due to any group because of a differential impact on incomes.
But just to make sure everyone is happy you must offer a very large apparent tax cut. Apparent because the money will have to come (in the absence of swingeing cuts to outlays) from taxes. This must be done not by raising new or existing taxes, but by taking them from future Budget surpluses. Of course, those surpluses need not be available in the first place at least not for the purposes of providing a cut. Nevertheless, that is the strategy for cleaning up the indirect tax system. Income tax relief, which may or may not be economically warranted is politically essential.
Opponents will argue that the new tax will rise in the future. But why is that different to any other tax, and besides a government running a surplus at a lower level of total tax take has some basis for being believed that the rate will remain steady. More important, in time the tax should be used to buy out other taxes. To the question, will the GST rise, Howard can truthfully answer, no, if he means not in its own right.
Modest tax reform is one step in major tax reform. The Labor government took the first steps, the Coalition has to take the next.
I recall when interest rates hit 18% in 1990-91. Facing enormous political pressure Prime Minister Bob Hawke let it be known that he was considering easing rates. The moment he made his announcement the nervous-nellies on the backbench started ringing around seeking to meet and demonstrate against the Treasurer. Paul Keating told them to hold the line. The government did, and survived. If Keating had shown weakness the government would have been doomed because the electorate would have asked, and quite rightly, "why did we have to go through all this in the first place?" The electorate do not like change but they will accept it if they are convinced that it is essential and enduring.
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