IAN McAULEY. Tax reform, not tax cuts

Economy, Politics

Mar 5, 2018

From an unlikely source comes a message that Australia doesn’t need “smaller government”. Rather we need tax reform to ensure we can build a social safety net, and fund world-class health and education.

Imagine the chairman of one of our big four banks publicly asserting that Australia’s taxes are too low.

No, it’s not a fantasy.

Last Friday, in a speech to the Australian Institute of Company Directors, NAB Chair Ken Henry said “We know the total tax take is too low, but that simple fact seems too horrible to admit.”

In the same speech he mounted a strong case for cutting corporate tax rates.

Confusing? Contradictory?

Not really, unless one holds a model of economic policy as a Manichean struggle between a “tax-and-spend left” and a “small-government right” – the way in which Turnbull and his ministers frame our nation’s economic choices.

Henry’s speech is about tax reform. It condenses his and his colleagues’ work ten years ago when, as Secretary of Treasury, he chaired the Australia’s Future Tax System Review, eponymously named the “Henry Review”. The Rudd-Gillard Government implemented only a few of its recommendations, and the Abbott Government’s only interest was in cutting public expenditure, not reforming taxes.

His message now is that we have too many taxes (ten taxes collect 90 per cent of our public revenue, while 100 other taxes collect the other 10 per cent), and we are taxing the wrong things. These were the main theme of the Henry Review. About our overall tax level, he says:

… we have to keep in mind that the purpose of taxation is to raise revenue to fund government spending; to do things like build a social safety net that reduces inequality, and to fund world-class education and health systems. The tax system is a critical determinant of our social fabric.

Within that context he makes a case for cutting corporate taxes, in a way that Turnbull just seems unable to do.

Rather than presenting a reasoned argument, the Turnbull Government shouts from the pulpit that cutting the top corporate tax rate would be good for “jobs and growth” and would lead to higher wages. Adding volume (but not reason) it has a cheer squad from so-called business lobbies and the Murdoch media. And quite disingenuously it has conscripted one of the world’s most unpopular and distrusted politicians to the cheer squad, suggesting that we should follow Donald Trump’s race to the bottom in cutting corporate taxes.

The government misrepresents the level of our corporate taxes. Treasurer Morrison cites the headline rate of 30 per cent, without acknowledging the benefit of dividend imputation, which brings our corporate tax rate for domestic investors down to one of the lowest in the developed world (around 9 per cent). Nor does he acknowledge tax avoidance by multinationals using transfer pricing and thin capitalisation to shift profits to low-tax jurisdictions.

Opinion polls confirm that the public is unconvinced by the government’s case. People reasonably expect that most benefits of lower taxes would flow to shareholders and already overpaid executives. The Reagan-Thatcher model of trickle-down economics is discredited.

Even if people don’t read the financial press or pore over national accounts, the conspicuously vulgar lifestyle of the rich demonstrates that the top end of town is doing very well. Official statistics confirm that the profit share of GDP, after a post GFC dip, has resumed its upward trend. Those who follow the financial press know that companies have plenty of money to invest, but lacking opportunities they are handing profits back to shareholders in the form of high dividends and capital buybacks: why would even higher profits change that behaviour?

Businesses make their investment decisions on a host of criteria, of which corporate taxes are only one. They seek countries with high quality transport and internet services, a well-educated workforce, uncorrupted political and social institutions, a professional public service and a reasonably stable policy environment. On all these criteria Australia is slipping in relation to other countries. When countries cannot offer such supportive physical and social infrastructure all they have to turn to is tax cuts.

More basically, the government promotes business tax cuts as a means of cutting taxes in general. That means less money for public services and redistributive welfare.

That’s hardly the way to win friends and influence people when almost all government services (except border security) are stressed, when income and wealth inequality are rising, and when the electorate is becoming increasingly disenchanted with privatisation of once well-provided public services. (Come to think of it, Australians were never too enchanted with privatisation in the first place.)

Contrary to the often asserted view that taxes are universally loathed, research shows that people are comfortable about paying taxes provided they see them spent on needed public services. There is growing awareness that tax cuts often have a net cost, as once free and high quality public services give way to expensive private substitutes, such as toll roads and private health insurance.

Rather than buying into the “small government” agenda, Henry is promoting cutting corporate taxes in the wider context of tax reform. He wants to see taxes shifted from areas where they may distort resource allocation (for example property transfer taxes) to areas where they may help resource allocation, such as progressive land taxes (essentially a wealth tax), road user charges, a resource rent tax and a carbon emissions trading scheme. (Some economists such as Joseph Stiglitz put it simply saying we should tax “bads”, not “goods”.) And Henry calls for a broader consumption tax, something that was ruled out in the terms of reference for the Henry Review.

He is clearly frustrated at the way the government and its supporters in the business lobbies have put their case for tax cuts:

… we in business should not expect to be taken seriously in tax reform debates until we demonstrate a serious commitment to a purpose that improves the wellbeing of Australians. Surely nobody needs to spell out why a businessperson motivated by nothing more than profit is going to have a hard time convincing anybody of the merits of a proposition to cut the rate of tax applying to profit.

We can argue about aspects of Henry’s agenda. As one who has studied and taught public finance I’m sceptical about the case for cuts in company tax in the current environment, as I have written in a recent New Matilda article. Benefits would flow only to foreign investors: we would do better to mobilise our domestic savings towards wealth-creating investment. On the other hand, in disagreement with many on the “left”, I see a strong case for increasing consumption taxes. They are mildly regressive in their collection, but because they flow to state governments they fund health, education, public housing and urban infrastructure, all important parts of the social wage, making the net effect highly progressive.

The important point however is that Henry is talking about tax reform in its widest context, and not in a “small government” context. He recognises the economic importance of a balance of public and private goods in an economy.

It’s unlikely that the present government can dig itself out of its ideological trench to do anything about tax reform. An incoming Labor Government would do well to pick up the tax reform agenda, and undertake a proper process of policy reform – widespread consultation, a green paper, a white paper. Labor in office has a good record of tax reform: the Hawke-Keating Government introduced dividend imputation, cut the corporate tax rate from 49 per cent to 36 per cent, and reformed capital gains tax so as to bring tax neutrality between dividends and capital gains (a reform the Howard Government was quick to abolish). At a sub-national level the ACT Labor Government is at the forefront of replacing property transfer taxes with land taxes.

In an unlikely but welcome turn of events, it seems that the Chairman of NAB, without any partisan bias, has just written a tax policy for an incoming reforming government.

Ian McAuley is an Adjunct Lecturer in Public Sector Finance at the University of Canberra and a Fellow at the Centre for Policy Development. He and Miriam Lyons in their work Governomics: Can we afford small government? put the case for a stronger and better-funded public sector, and present evidence of public support for higher taxes to fund public services.