Navigating the storm: can Chalmers deliver tax reform amid controversy?

With the Labor Government now riding high after a massive election win, treasurer Jim Chalmers has sent a clear message that we should prepare for a solid dose of tax reform.

That is arguably seriously overdue, given the lack of meaningful reform for many years but it is unlikely to lead to the sort of helpful consensus that the genial Chalmers is hoping for.

The road to meaningful tax reform is always rough, and the hope that people and organisations will look beyond their own self-interest and consider the overall picture is a noble but somewhat naïve hope.

Tax changes are always controversial

Almost all of the mooted reforms will be controversial – from higher taxes on family trusts to road usage charges for electric vehicles – and will need to be managed carefully if they are to survive the cut and thrust of politics, even with a massive electoral majority.

Other potential reforms such as winding back the 50% discount on capital gains, cutting corporate tax rates by trading off franking credits and putting more taxes on mining, energy and carbon will be met with howls of rage from those with the most to lose.

In this context, Jim Chalmers should consider some of the failures and successes of previous tax reform efforts in framing what looks set to be a comprehensive set of measures.

Broad, efficient taxes easier to sell

The first is that the broader the tax base and the more efficient the tax is, the easier it is to sell politically and to implement.

The GST is a prime example – it seemed almost impossible and incredibly complex at various stages of its development 25 years ago but after a while it became second nature and is barely controversial now.

Ironically, fiddling with the rate and coverage of the GST seems to be one area which Mr Chalmers has already ruled out – despite the fact it could a quick way to reduce the dependence on income taxes and bolster the Government’s financial stability.

Getting rid of GST exemptions for fresh food, health and education would add around $20 billion to the $90 billion the tax raises each year – enough to make a big difference to the Budget position over time.

Conversely, the proposed mining tax which was quite narrow in application and was literally cherry picked out of the wide-ranging Ken Henry reform proposals, led to a vociferous and ultimately successful campaign to dump it.

Good sales pitch will be vital

The other key attribute for successful tax reform is to have a really strong sales pitch, showing how the tax will lead to better and fairer outcomes.

This is where the genial Chalmers has a strong advantage and could manage to get even some controversial changes through using powerful arguments.

For example, a new EV tax could be explained by the need to replace the money raised from fuel excise over time to pay for roads as the electrification of transport continues.

That argument may be even stronger if fuel excise is scrapped and a new road user charge is introduced to all cars and trucks based on weight and usage, rather than adding an EV tax.

Naturally, the involvement of the states that hold the registration data will be a complication, and it may turn out to be easier to navigate a simple new EV tax if the state governments can be dragged into the tent to help.

Arguments for higher taxes

Likewise, increasing taxes on family trusts can be argued as a measure that will increase the fairness of the tax system, given it is an area dominated by wealthy taxpayers who often use trusts to redistribute income to different family members before tax is applied.

Changing the 50% discount on capital gains will be more difficult to sell, although it could also be argued as a means to make the system fairer by taxing capital more like income.

Extractive taxes can be useful

When it comes to taxes on mining, energy, and carbon, we all have a bit of lived experience to draw on, given our short-lived carbon tax, but the key will probably be to point out that all Australians own the underlying coal, oil, and minerals being extracted, so society should be able to claim back some of the sale price as a tax.

Fortunately, Mr Chalmers’ collaborative approach so far has the backing of former Treasury head Ken Henry who literally wrote the book (or 2009 report) on tax reform in Australia.

Using Ken Henry’s vast experience in analysing tax reforms and also drawing from his lived experience in what works and what doesn’t will be a valuable addition to Jim Chalmers’ undoubted skill in selling proposals, which may smooth out the rocky road to achieving meaningful tax reform.

Hopefully, the proposals will also serve to boost productivity and attract investment—two areas where Australia has been lacking in recent years.

Only time will tell, but don’t expect meaningful tax reform to be an easy road to navigate.