MUNGO MACCALLUM. Progress taxation or a flat tax

May 15, 2018

Scott Morrison’s budget has been greeted as underwhelming, which is probably the way he likes it.  The goodies are unnecessarily complex  — the tax cuts aren’t really tax cuts, they are built in to your 2018-19 return as an offset, which means  they will appear in your kick only if and when you are entitled to a net refund. No big sugar hit there. There are no real losers, apart from  black marketeers, migrants, the unemployed,  climate scientists, recipients of foreign aid, and the ABC, along with a basket of other deplorables who do not normally vote for the coalition, but, as Peter Dutton might say, they are all dead to him.

However, hidden in the low key first bid for election is an almost revolutionary and definitely reactionary overview, which deserves rather more consideration. The centrepiece of the Enterprise Tax Plan, so-called, is to be the abolition of the progressive system of income tax which has endured in Australia for more than a century and its replacement with what is in effect a flat tax plan. 

Income tax has always been predicated on the idea that the richer you are, the more you pay – the rate of tax imposed rises with the income of the taxpayer. There have been many distortions, mainly through exemptions manipulated by the wealthy and their lawyers and accountants. And of course the scales need constant revision against the scourge of bracket creep.

Morrison intends to end that with a nuclear option: remove the key middle layer altogether, leaving some 94 per cent of earners paying 32.5 per cent or less in seven years time.

There will still be a small bulge at the top: the remaining six per cent will pay 45 per cent, and pay a large chunk of revenue, and so they should – in theory.  In practice they will continue to avail themselves of the lurks and perks provided by government – dividend imputation, negative gearing, capital gains concessions, superannuation advantages and trust funds to name but a few – so they should not suffer unduly.

The forgotten people, as former Treasurer Peter Costello bizarrely calls them, have not been  forgotten, but heavily protected. And those close to the top – those of just under $200,000 a year – will get a massive windfall gain at the expense of everyone else, especially those on $40,000 a year who are to pay exactly the same rate.

Any criticism of this blatant inequity will, of course, be dismissed as class war, the politics of envy, and indeed it has been in a barely coherent editorial in The Australian last Friday, which spluttered with rage at the prospect that Labor might deprive them of the loot. The elitists at our national daily have their own class war to pursue in defence of the politics of greed.

But there is a better way to deal with bracket creep; it’s called tax indexation, whereby you don’t change the tax rates, you lift the tax thresholds as inflation demands. That way people still keep the same proportion of their money but the system remains progressive – and a great deal fairer than Morrison’s demolition job.

The only serious problems with tax indexation is that politicians don’t like it: the automatic and comparatively painless increases in revenue bracket creep offers are removed. And, more importantly, the government gets no political credit from announcing a tax giveaway.

Malcolm Fraser tried a brief experiment with tax indexation in his early days (before John Howard became treasurer) but decided it wasn’t worth the trouble. Since then no one else have been game to try, and Morrison is not  even vaguely interested; he appears to be morphing into an economic fundamentalist. “It’s their money, you muppets”,  he bellowed across the parliament when Labor called the tax cuts a handout to the rich.

He all but echoed the libertarian mantra that all taxation is theft. But of course, he is happy to grab a swift 23.9 per cent of everything that isn’t nailed down, because he can. And given that Morrison is still pushing for a budget surplus and smaller national debt he is not going to give back too much of the taxpayers’ money.

However, the rhetoric is clear: if Morrison and Turnbull can push their radical tax platform through the senate – very far from certain – it will increase inequality in what is an already fracturing society.

And this, of course, is how Bill Shorten hopes to frame the debate. Forget the pie-in-the-sky promised in seven years time: with at least two and probably three elections to contend with before 2024, the idea that last week’s budget can be set in stone for future governments to follow is fanciful.

There will be much more to be said between now and the forthcoming general election, let alone those to come. But it is not sufficient for Turnbull to dismiss Shorten’s platform for bigger cuts, more money for schools and hospitals and the prospect of a surplus surpassing the government’s as “unfunded, uncosted and unbelieva-Bill”,  which even our articulate Prime Minister realised was a bit clunky.

Shorten has not yet revealed his detailed estimates, but there is no reason to believe they will be either unfunded, uncosted or unbelievable. Apart from removing some of the lurks and perks mentioned earlier, which will put many billions in the exchequer, he will have Turnbull’s corporate tax cuts to bank in future years – unless, of course, they are to be regarded as uncosted and unfunded, which would be a stretch even Matthias Corman would struggle to explain.

There is an argument to be had over the competing agendas, amounting almost to ideologies, between the two sides, but on early indications Malcolm Turnbull is not getting into policy, he is concerned only with insults. Conflating the budget debate with the dual citizen saga, our prime minister screams about lack of credibility, Unbelieva-Bill, boom tish. And he may get away with it for a while, especially in the run-in to the by-elections nobody wants.

But sooner or later he will have to tell us just how and why he thinks giving away hundreds of millions in revenue over the highly uncertain international conditions year in the future will really actually build a stronger economy. At this stage it sounds even more vacuous and improbable than Donald Trump making America great again.

Still, Trump got away with it, so perhaps Australian voters may be inclined to forgive and forget the divisive, wasteful and largely pointless five years since the coalition came to government. Or less charitable and more realistic, they may not.

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