Tax is the key to Australia’s federal election policy fight

Tax is not one of those words that anybody likes to hear but it is central to the political fight for the hearts and minds of voters in this Federal Election.

It really warrants a very close examination too, because there are substantial differences between the major parties – the Coalition and Labor – in both the amount of tax the parties want to collect and who they want to collect it from.

It might be hard to find that information – particularly given Labor’s decision this week to remove detailed policy documents from its website and replace them with flimsy fact sheets – but the different tax approaches will mean substantial differences in how much money you get to keep each year.

Labor is for higher taxes and spending

In very simple terms, we know that Labor is the higher taxing and higher spending of the two alternatives, although by how much is still an open question.

Labor wants to paint its changes to negative gearing, capital gains tax, franking credits, family trusts and superannuation as fairly minor “fairness’’ measures but in reality, when combined they represent a major suite of tax reforms.

The Coalition has accused Labor of planning to impose $387 billion in new taxes, although the accuracy of that estimate is open to debate.

Estimate of $387b in new taxes

That number is based on treasury modelling of policies that are close to Labor’s official policy, although not identical, so that number is likely to be in the right ball park but is perhaps imprecise.

Labor, for its part, insists all of its policies have been costed by the independent Parliamentary Budget Office, although those official costings won’t be released until later in the election campaign.

They are likely to come in lower than the $387 billion figure but from opposition it is hard to be too precise with the numbers because you don’t have the resources of the treasury to make more accurate predictions.

As we know, even the treasury hardly has a peerless record of meaningful predictions.

Ostensibly the delayed release of Labor’s costings is so that treasury can release its pre-election economic and fiscal outlook (PEFO), so that both sides know what shape the budget is in.

Waiting until later in the campaign to release the numbers is also convenient because it gives less time for various lobby groups and the Coalition to find loopholes and errors.

In fact, these sorts of estimates are fairly woolly anyhow, because people change their behaviour in the face of tax changes which can dramatically increase or decrease the eventual outcome at the budget level.

Many of Labor’s proposals are certainly capable of creating that sort of shift, particularly the changes to negative gearing, capital gains tax, the tax treatment of franking credits, family trusts and superannuation taxes.

Coalition proposes flatter income tax

The Coalition is not planning changes in these areas but as we found out in the budget, it is proposing a flatter and simpler income tax system, in which everyone eventually pays 30¢ in the dollar on every dollar they earn between $45,000 and $200,000 by 2024.

That would make the tax system less progressive – another way of staying kinder to high income earners who pay the great bulk of income tax – so Labor has rejected the later stages of the Coalition’s reform package.

In the short term though, the tax cuts the Coalition announced in the budget have been matched quite closely by Labor so workers will be roughly getting the same deal in the first year or two.