This model, not good luck, is the reason Australia has enjoyed a fifteen year expansion…. It is defined by a floating exchange rate that operates as a shock absorber, a credible medium-term inflation target that governs interest rate policy at the discretion of an independent central bank, a shift towards a more decentralised wage-fixing system, and a permanent budget surplus strategy set at about 1 to 1.5 per cent of GDP.
Paul Kelly, The Australian, May 2006.
The central issues in tax reform, therefore, are slated for the third term at the earliest. And governments are hardly famous for third-term courage. This is a cautious approach. Rudd Labor offers no road map, no broad principles, no statement of intent on future reforms. The juxtaposition between the sweeping nature of Ken Henry’s 138 recommendations and Labor’s caution is conspicuous. Second, with Australia having escaped a recession, Labor’s new focus is to target the resources sector for a revenue redistribution. This is its chief tax priority. This decision will define Rudd Labor. Its presentation is critical yet the government is unsure whether to depict its tax as an economic reform or a populist "soak the corporate rich" mantra.
Paul Kelly, The Australian, 5 May, 2010.
The time has come," the Walrus said,
"To talk of many things:
Of shoes–and ships–and sealing-wax–
Of cabbages–and kings–
And why the sea is boiling hot–
And whether pigs have wings.""But wait a bit," the Oyster cried,
"Before we have our chat;
For some of us are out of breath,
And all of us are fat!"
"No hurry!" said the Carpenter.
They thanked him much for that.
‘The Walrus and the Carpenter’ by Lewis Carroll, 1872 from ‘Through the Looking Glass – and What Alice Found There’.
When the discussion turned to taxes, Reagan’s fist came down squarely on the table. "I don’t want to hear any more talk about taxes" he insisted. "The problem is deficit spending!" It is difficult to politely correct the President of the United States when he has blatantly contradicted himself. The $800 billion worth of deficits were the result of spending he didn’t want to cut.
David A Stockman, ‘The Triumph of Politics: Why the Reagan revolution failed’, 1986
Humpty Dumpty sat on a wall,
Humpty Dumpty had a great fall.
All the King’s horses, And all the King’s men
Couldn’t put Humpty together again!
An ancient Nursery rhyme, source unknown.
Quotes above: The Core Messages (note old journalistic adage – ‘90% of the message is in the head-note’)
- An excellent summary of the reasons for Australia’s record years of prosperity.
- When politicians use the words ‘tax reform’ and ‘fairness’ in a single paragraph you know they are engaged in a giant deception that will involve you the taxpayer paying for their mistakes. No evidence that Gillard Labor has rejected Rudd Labor.
- In public forums to ‘talk of many things’ constructively hardly ever happens because the terms of reference and the selection of the participants are designed to achieve a pre-determined, or pre-ordained, outcome.
- Some definition of the optimum share of government in the nation’s GDP might be a useful starting point to debate tax and spending policies.
- Now that the election is over, all of the King’s horses and all of the King’s men are silent no longer. In a crony capitalism society they have found their voice having lacked the courage generally to speak before the election, probably for fear of retribution. As Bill Hayden said: "Only the mafia bring you flowers."
OVERVIEW
Australia has had an ambiguous election result and the risk is policy grid-lock and inertia. The policy narrative in the election campaign from both sides was near fiasco with one side ill-prepared for leadership change and unable to talk about their economic track record over the past three years, and the other devoid of a policy narrative seemingly having forgotten the ingredients of their succesful past track-record in government. Everything is now on the table, all of the spurious election promises are null and void, and speed of productive policy delivery is of the essence. Promoting Keynesian falsehoods will lead to sub-optimal outcomes. Broadband on a blank sheet of paper, or the analysis hidden from view, will be counter-productive. Proper tax reform is essential to progress.
The election was a huge disappointment and the outcome is confusion. Briefly –
- Julia Gillard said nothing but said it well. We hope for improvement. She should stay.
- Tony Abbott lacked intellectual strength and rigour, and harped and carped. We hope for improvement. He should stay.
- Scott Morrison had a constructive narrative in and outside of his immigration portfolio responsibilities.
- Malcolm Turnbull did well in televised debates and was constructive and sensible.
- Andrew Robb was well suited to his Shadow Finance portfolio and performed very well.
- Graham Richardson showed his experience and his ability to communicate clearly and constructively.
- The Australian newspaper distinguished itself with the fairness, clarity and constructiveness of its coverage. Some others let us down.
- Joe Hockey shows no penchant for economics and finance and should be moved to a softer portfolio where his profoundly likable personality and abilities can blossom
- The Greens policies appear not to have been read by either of the major parties. Economics is not a religion, it is common sense. Labor’s alliance with the Greens is regressive paralysis.
- Tony Windsor has made a major error of judgement in his links with Rob Oakshambles. Mr Oakeshott is no doubt a decent human being but needs to have a bucket of water thrown over him in a parliamentary inner garden.
- Anyone not mentioned above, needs not to be mentioned, particularly Wayne Swan and Mr Rudd.
ONCE UPON A TIME
Once upon a time Ecinya was wrong to state its belief that Mr Hawke would not make a good Prime Minister but with the help of a gifted Paul Keating and a strong Peter Walsh, Mr Hawke succeeded magnificently and we were very pleased to be wrong. The Gillard government looks to be a substantial nonsense getting worse. We hope that we are wrong again, but we are concerned. Nearly all roads lead to tax reform, but real reform in an holistic way. Our Insight article on the Ken Henry tax reform package was published on 5 May 2010.
It’s conclusions were:
"ECINYA’S TAX REFORM PACKAGE
- Extend the Federal parliamentary term to a maximum of 4 years and a minimum of 3.5 years to give policy time to work (or to be modified, abandoned, or fine-tuned).
- Abolish direct donations to political parties by pooling them into a fund with a formula for distribution to retard the growth of crony capitalism and crony socialism.
- Expand the GST to food which will be a big tax, and compensate "the losers" such as pensioners and genuine welfare recipients.
- Capital gains on the sale of residential properties to be treated as ordinary income on a long-term sliding scale basis, say 7-9 years, and therafter profit on sale to be tax free.
- Abolish payroll tax collected by the states via a compensation system and many of the other taxes proposed to be abolished by Henry.
- Increase the tax free threshold and change personal and company tax rates as dramatically as is sensible.
- Have a target rate of total taxes to total GDP similar to the inflation targetting system e.g. 20% in good times.
- Introduce tax breaks on certain forms of savings particularly for younger people specifically saving to acquire a home.
- Have an exceptionally modest federal royalty tax on mining, say about 5% exceeded slightly by the mining royalties currently collected by the states.
KEN HENRY’S TAX REFORM PACKAGE
The key recommendations are set out below and we use the same numbers in our cross-reference commentary. We have ignored the 133 (non-key at this stage) recommendations not taken up by Mr Rudd and his Treasurer.
- Impose a 40% "resources rent tax" on the mining sector.
- Cut the company tax rate from 30% to 25%
- Flatten personal tax rates, increase the personal tax-free threshold from $6,000 to $25,000
- Replace state-based taxes such as payroll tax and stamp duty with broader consumption taxes including land tax on the family home.
- Curb negative gearing.
- Combine all family tax benefits into a single means-tested payment.
- Taxes on interest earned from savings be slashed by 40%
- Remove the medicare levy.
- Restore fuel indexation.
- Introduce traffic congestion charges.
ECINYA COMMENT
- Emphatically disagree.
- Agree.
- Agree.
- Emphatically agree, except that family home should not be subject to land tax.
- Disagree; in fact capital gains tax on residential investment properties sold should be phased out over a holding period of say 7 to 9 years e.g. gain 100% taxable year 1, 90% year 2, 50 % taxable year 5 etc. No deduction for taxable losses (?)
- Emphatically agree.
- Emphatically agree.
- Don’t know.
- Don’t know, but do not like indexing anything….. CPI numbers are too rubbery.
- Agree."
SELF INTEREST AND TAX REFORM
- Mr Kloppers wants a carbon tax. He probably also wants to export uranium and he wants his secret deal on mining taxes to go ahead. A hint of self-interest?
- Several weeks ago Mr Corbett ex Woolworths CEO and now Reserve Bank Board member expressed a ‘no changes to the GST’ view. A hint of self-interest?
There is a lot of real work to be done on tax reform and the gridlocked parliament may hinder real debate. But the real challenge is to look at tax reform in an holistic way without easy charges of self-interest able to be laid. If climate change is really about taxation (and higher electricity charges are a form of taxation) then let it be said, let it be acknowledged. If cheaper electricity is about nuclear power then let it be said. If growth is dependent on labour market flexibility then let it be said.
Keynes did not advocate wasteful spending and Mr Swan did not save Australia from the Global Financial Crisis. This needs to be said.
THE CAPTAINS OF INDUSTRY ARE NOW SPEAKING ( many of the King’s men are now speaking lest Humpty Dumpty Aussie might fall off the wall)
Humpty Dumpty has fallen off the fiscal and monetary wall in America and is not being put together again in a fashion or on a timetable that is universally recognised as positive. In Australia Humpty Dumpty is on the wall and many of the King’s men have arrived in today’s Australian Financial Review in a most constructive way. Pages 64 and 65 contain their messages on industrial relations, on threats to business, on a big Australia, on hiring intentions, on capital management, on Australia’s economic outlook. There is not a robust view of an unqualified economic outlook. There is an abundance of caution.
Pity that they were so silent before. But better late than never. The time has come the Walrus said to speak of many things.
A QUICK NOTE ON THE USA
We are fast turning to the view that the USA is far from a lost cause. The prophets of doom and gloom, in our view, are looking at America through a very narrow American-centric prism. The world needs America and we believe that once the mid-term election results are known America can make some structural adjustments alongside some constructive stimulus measures that will receive support from the surplus countries. The world may criticise America because they are the big kid on the block and over the few decades since Ronald Reagan have made some big blunders. We are hoping that the Tea Party will be seen to have failed at the mid terms and that Obama can swing to the centre and that the aspirational middle can emerge, energised and productive. Ecinya knows that "Wishful thinking is the enemy of hard work" , but it is time for America to have the express aim of being well regarded again. The world has not passed them by, the world has simply re-balanced, and for the better. Over the next few weeks Ecinya aims to write a few Insight articles on the world economy. We will start with China.
A QUICK NOTE ON THE MYER TAX CASE
In a former life our editor worked for Australia’s leading tax partnership. Though there are now more volumes of enacted law it is his understanding that the equity gains made by the Myer private equity partnership, on the public flotation of Myer, are taxable as ordinary income under at least two specific provisions of the Tax Act supported by well-decided legal precedents. The squeals of the partnership should be ignored and the efforts of the Australian Tax Office should be praised and endorsed.