Until recently, the Australian tax debate has been primarily concerned about the merits or otherwise of particular ways of raising tax revenue. The question of how much tax we should pay, and what services we should expect from the governments has been ducked, or else suppressed by bipartisan consensus, in most election campaigns of the
past twenty years. In the coming election, both issues should be debated.
In terms of the structure of the tax system, the record of the present government has been decidedly mixed. There are a couple of fairly substantial items on the plus side.
The replacement of wholesale sales taxes and a range of ad hoc financial transaction taxes by the GST represents a significant improvement. Moreover, the tax base ultimately adopted for the GST, with food, education and health exempted or zero-rated strikes a reasonable balance between efficiency and equity.
There is, to be sure, room for adjustment to the GST tax base, most of which should take the form of 'rollback', to adopt the cant phrase of the day. In its anxiety to defend revenue, the government began with excessively tight definitions of the main exempt items, creating more anomalies than would have been the case with a broader range
of exemptions. Most importantly, the exemption of 'fresh' food is silly. A better approach would be to exempt all supermarket purchases of food except those that directly compete with restaurants (complete prepared meals).
Another important positive is the Australian Business Number system. In the long term, the ABN should play an important role in controlling tax evasion and avoidance. In the short term, unfortunately, the associated Business Activity Statement has been something of a disaster, but this was a problem of implementation rather than policy
Leaving aside the relatively minor problems associated with the implementation of the GST, there have been some important negative changes in tax policy. By far the worst of the government's taxation initiatives was introduced with the support of the Labor Party, which happily collaborated in the gutting of one of its most important
reforms, the capital gains tax.
Because there are many methods by which income can be converted into capital gains, and vice versa, the taxation of capital gains on the same basis as other income is an essential element of an efficient and equitable tax system. Before the introduction of capital gains tax, a large component of the tax avoidance industry operated
through the design of speculative schemes in which taxable income was converted into untaxed capital gains.
The main rationale for the reintroduction of preferential treatment for capital gains was the supposed success of a similar measure in the United States. It is now clear that the thirst for capital gains was a major factor in the generation of a stockmarket bubble, the bursting of which looks like causing a worldwide recession. We should
perhaps be thankful that such 'success' has not come our way.
Although standing relatively firm on the ABN, the government has repeatedly capitulated to resistance to its attempts to control tax avoidance through trusts, companies and other devices. The recent debacle over the treatment of contractors illustrated the extent to which the decline of wage and salary employment has been driven by concern
to minimise tax rather than by real economic advantages.
The treatment of fuel taxes was another important failure. Australian road users, particularly those in cities, pay considerably less than the total costs they impose on society, including the cost of the capital tied up in the road network, the costs of local air and noise pollution and their contribution to global warming. Economically
sound tax reform would have raised the average cost of fuel, while reducing the cost for rural and regional users relative to that of city motorists.
The tax package produced a messy compromise between the need to placate the National Party and the need to produce something that could be sold to the Democrats as environmentally sound. The result included some desirable elements, such as the differential between urban and non-urban taxes and diesel fuel, but was fatally flawed by the
commitment that the price of fuel would not increase. In the end, this promise led the government to the point where it scrapped indexation of fuel excise altogether. Whatever its political colour, an incoming government must reverse this disastrous step as soon as possible.
Finally, the income tax cuts accompanying the tax package were massively skewed towards upper-income earners. This point is sometimes obscured by the fact that the marginal rate for incomes above $60 000 was not changed. But someone earning an income of $60 000 or more gets the full benefit of all the reductions in marginal rates for lower
incomes amounting to a tax saving of around $3000 per year. By contrast, low-income households, particularly those with two earners and no children, got hardly enough to offset the immediate impact of the GST, without considering the reduction in public services needed to offset the reduced level of total revenue.