We need a new grand bargain on tax
In the interests of equity, we need a grand bargain that puts company and personal tax reform on the table all at once, writes Richard Holden.
Published on the 22 Feb 2017 by Richard Holden
Photo: Shutterstock
OPINION: The latest instalment in the ongoing debate about Australia's company tax rate is that the big four banks should be "carved out" from the federal government's proposed transition to a 25% rate.
As I wrote on these pages recently, the chief tension over a company tax cut is that it will benefit installed as well as new capital, whereas its reasoning is to reward new capital investment. The big four banks represent the largest block of installed capital in Australia.
Add to that the popularity that banks don't enjoy, a profound lack of competition, and some recent questionable behaviour, and it's no wonder Coalition MPs are not wild about being seen to hand the banks a $1.5 billion annual windfall.
But a tax-cut carve-out for the banks would be a terrible idea. As I mentioned in my last piece, capital depreciates and needs to be replaced. The banks could also choose to gradually shift their capital offshore through acquisitions. The idea that the banks have captive capital that we can tax at will is, in a word, wrong.
It's worse than that, though. A bank carve-out involves a kind of ad hoc tax policy management that is deeply misguided, and ripe for special-interest lobbying. It's like winner-picking industry policy on steroids. And we all know how successful that has been.
Tax policy should be about general principles. Tax in the least distorting way possible. Tax for efficiency and redistribute for fairness. Beware unintended consequences. Recognise that complexity leads to gaming. These are sound, broad tax principles.
The bank carve-out is populist tax policy on the run. It's policy for the next 20 months, not the next 20 years. And to his credit, the Prime Minister has said what a bad idea it was. But hands up who thinks that will be the end of it. I understand why many voters will ask "Why are the big banks getting a tax cut but I am not?"
This reminds us that reforming tax policy piecemeal is dangerous at best, and a fool's errand at worst. Right now, we have a proposal from the government to move the company tax rate – at a glacial pace – to a level 1½ times as high as the proposed US and UK rates, and the current Singapore rate. Worse still, it is front-loaded with cuts for small businesses.
Small businesses are great. But there is no economic rationale for cutting taxes for small businesses and not larger ones. Do you think your local coffee shop or a large technology company is more likely to move to Singapore?
We need a national tax convention to cut through the day-to-day politics. We need to stop thinking about the next media cycle, and start thinking about the next generation.
Moreover, it's not only financial capital that can move offshore. Human capital is more internationally mobile than ever. And we tax high-value human capital at 49¢ on the dollar. More if Senator Xenophon gets his way. With tax rates like this we don't risk a slow "brain drain", but a more rapid "brain evacuation", with all the revenue and other consequences that go with it.
We need a grand bargain that puts company and personal tax reform on the table all at once.
As many have said, myself included, the only way to have competitive personal income tax rates is to increase the GST. But this has equity issues that are very real. So, here's a proposal to address that.
Let's raise the GST to 15 per cent and broaden the base to cover everything. Let's also provide every Australian 18 years or older with a $10,000 annual exemption from GST. Given our advanced payment system this could easily be implemented so that any electronic transaction (debit or credit card) automatically exempts GST up until the $10,000 per-person cap is reached.
This acknowledges the equity issues – and that there are some essentials that we probably don't want to tax. But there will be no more debates about whether fresh food, prepared food, or sanitary products are more deserving of an exemption.
When countries establish or materially change their constitution they have a constitutional convention. They do so because they know the ordinary political process is not up to the task.
Our political process can't pass a company tax cut that both sides agreed on 16 months ago – and probably still do.
Or that generation will not have the future that we want, or they deserve.
Richard Holden is a Professor of Economics and PLuS Alliance Fellow at UNSW.
This opinion piece was first published in The Australian Financial Review.