“Follow the bouncing ball” was a technique of singing to lyrics that were displayed as onscreen subtitles, in sync with the actual beat and rhythm of the song. It is also apt for the current state of taxation policy.
In the lead-up to the Federal elections, which are most likely to be held this year, the major political parties have been singing about how certain taxation policy issues will be dealt with in the guise of tax reform. So sit back, and let’s follow the bouncing ball!
Chorus – No more tax reform
Just as the Beatles started their 1960’s number one hit “She loves you!” with the chorus, here’s the chorus in the tax policy sing-along. There is no longer any formal tax process which is a disappointment.
The Abbott government promised so much with the Re:Think Tax Reform White Paper process which began in March last year. After broad consultation, the process was expected to produce a Green Paper (options paper) before a final White Paper (policy paper) release sometime next year.
Following the Rudd government’s similar “root and branch review” culminating in the Henry Tax Review, of which precious few of the report’s 138 recommendations for tax reform saw the light of day, it seems as though real tax reform is something to be grappled with by future generations.
First verse – Carry that weight
Make no mistake; the present tax laws are based on an Australian economic model that served the nation well in the 20th century. It simply can’t be transposed into our 21st century advanced economy relying mainly on primary production and tertiary services.
At its most basic, it’s in everyone’s interest to have tax law that is effective and transparent in its operation, efficient as to revenue collection and balanced as to the burden on the community as a whole. This will serve Australia’s interest by ensuring that government will be able to raise enough revenue in an uncertain future.
And it’s getting the burden right that’s the hard part. The recent Treasury modelling used by the government to justify no raise in the rate of GST is a good example. The modelling showed that a raise in the rate that was offset by a lowering of income tax rates produced no substantial tangible economic benefit.
Remember, income tax taxes money on the way in, whilst GST taxes money on the way out as consumption. People earn money differently to what they consume. Generally, you can only consume so much, regardless of the income you make. Government needs to get the trade-off between taxes on income and consumption right to ensure no-one is unduly disadvantaged.
Second verse – Pick the low-hanging fruit
When it comes to “negative gearing” and the rate of the discount for any capital gain, any limits in the guise of tax reform need to be considered carefully. The housing market is finely attuned to economic changes, which in large part are tax-driven. Take out the demand from investors who can get a tax-break and anything can, and most likely will, happen to the supply of housing and rents. Just look at what happened when the then Hawke government introduced such rules in 1987 and had to do a quick back-flip!
Also, in 1999 the discount of 50% on any capital gain was introduced to stimulate the attractiveness of investing in capital-gains-bearing assets by individuals. Other than political expediency, there’s no real policy reason to stultify such demand and reduce, or even eliminate, any such discount.
Final verse – How super is Super?
If government policy is to encourage private savings to fund an independent retirement, any changes to superannuation should be given careful thought.
Reducing tax breaks on contributions, increasing the rate of tax on earnings, and taxing any benefits that would otherwise be tax-free all sound good for grabbing votes, but baby-boomer superannuants who are looking for some certainty in wildly swinging equities markets, will again be faced with uncertainty and grappling with new tax rules.
If there must be change, it has to be with the political will that it is the last changes for a generation, if only to allow retirees’ sanity to prevail.