Date created: 15/11/08 3:02 PM
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John Quiggin

Tax breaks must be axed

John Quiggin Australian Financial Review

13 March 2008

Given the tight message discipline shown by the Rudd government so far, the leak of proposals to end bonus payments to carers needs some explanation. The most obvious explanation, and the most flattering to the press is that there was a serious proposal to cut the bonus, and the leak came from someone who wanted to kill the idea.

An alternative, denied yesterday by Wayne Swan, is that the leak was a trial balloon, designed to test public reaction. Given the predictable storm of outrage, this explanation doesn’t reflect well on the political judgement of the leakers.

The third possibility is that this was an exercise in what psychologists call anchoring. By raising the possibility of cuts in areas that would generally be viewed as off-limits, the government may shift the terms of debate, so that other measures, that might previously have been seen as harsh, are now seen as moderate.

This is a risky tactic since it can easily lead to a forced backdown that moves the debate in the opposite direction to that intended. In the case of the carers bonus, for example, the government’s latest position is that the bonus is safe for this year. In the future the proceeds may be rolled into regular payments to carers, in such a way that they are no worse off.

This would be a sensible reform. The many one-off payments introduced under the Howard government are a textbook example of bad public policy. But as many governments have found, whatever you do, it is almost certain that someone, somewhere will be worse off. With the opposition demanding a commitment that the bonus be retained unchanged, Rudd will need all his political skills to hold the line.

But the debate over the carers bonus has shown that it’s going to be difficult to make big improvements to the budget balance if attention is focused solely on the expenditure side. At best, tight discipline on the spending side will free resources that can be used to address the many unmet needs already identified by the government, in areas ranging from education to the needs of indigenous communities.

As far as revenue is concerned, the government is constrained by the huge cuts in income tax it promised in a successful attempt to neutralise even larger cuts offered by the Howard-Costello team at the opening of the election campaign. Such a large precommitment, extending over the entire term of the Parliament, and with an ‘aspirational’ component going beyond that, was obviously irresponsible.

Given the widespread agreement that the tax cuts were a bad idea, many commentators have called for them to be scaled back, or converted into superannuation payments. Whatever the economic merits of such suggestions, the government is right to reject them. The Howard government’s casual repudiation of solemn promises (building on precedents set by previous governments) was hugely damaging to Australian democracy.

Rather than inventing some new class of ‘non-core promise’, the Rudd government should take its election commitment as a challenge to broaden the tax base sufficiently to make the proposed cuts in tax rates affordable.

That means that the budgetary razor gang needs to take a close look at the tax expenditures, concessions and loopholes that proliferated under the Howard government.

Leaving aside superannuation, the two big tax concessions are the favorable treatment of company cars under fringe benefits tax, and the concessional treatment of capital gains. The FBT exemption is probably the easier of the two to tackle. However, when we look at the huge increase in house prices since 2000, largely driven by speculation, it’s hard to think of a more disastrous policy decision than that of Howard and Costello to halve capital gains tax.

Perhaps the only worse legacy of the outgoing government is the freeze on fuel excise introduced in 2001, which costs around $1 billion per year, an amount that will continue to grow. Ending the freeze will be embarrassing in the light of Labor’s silly populism on the issue of fuel prices during the campaign, but it is not a breach of promise, and is the right thing to do

Finally, there’s the favorable treatment of trusts and private companies. The Howard government promised to reform this as part of the deal that halved capital gains tax, but never followed through. A consistent reform, pursued over several years, could raise billions of dollars a year in extra revenue.

All of these measures will be politically painful. But perhaps the recent brawl over carers payments has prepared us for some pain.

John Quiggin is an Australian Research Council Federation Fellow in Economics and Political Science at the University of Queensland.

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