Tax reform on the back burner as personalities rule the election

One of the more bizarre aspects of the current Australian federal election is that the battleground seems to be deliberately fought around personalities rather than policies.

Even the most dedicated policy wonk would be hard pressed to find much to differentiate between the major parties with a surprising consensus on most issues and a distinct lack of reform of existing policies or any new ones.

Of course, there are differences but they are more about emphasis than a contest of ideas around Australia’s future direction.

On Labor’s part, that seems to be driven by a small target strategy – to present few new policies to avoid the sort of crossfire that cost them the last election when Bill Shorten and his controversial policies on negative gearing and capital gains tax came under sustained and successful attack.

On the LNP side of the equation, the strategy seems to be a “more of the same” approach around the idea of “we need to continue the existing management of the country.’’

There has even been a jettisoning of previous unenacted policies like the proposal for a federal integrity commission.

Parties playing defence and not kicking goals

It has led to a fairly frustrating and timid election approach where everybody is playing defence by keeping the lines of potential attack limited to “gotcha’’ moments such as Anthony Albanese’s failure to know the cash and unemployment rates.

There are any number of areas where some fresh policies would be welcome – not least around climate change – but in a cross generational sense the most disappointing policy lack is on taxation reform.

Younger generations may be poorer than their parents

In simple terms, a lack of tax reform has now led to a situation in which the upcoming generations may lead poorer lives than their parents.

This has come about through an increasing over-reliance on personal taxation at a time when the large baby boomer generation is progressively entering retirement and will increasingly need support through government services such as hospitals and pensions.

The numbers tell the story with Australia getting 42% of its tax revenue from personal taxation, which is almost double the OECD average of 23% and still rising.

This sort of generational unfairness in which a smaller group of taxpayers will increasingly support government spending has spawned the “OK Boomer’’ insults and a fair bit of inter-generational sniping but it is a serious issue, made worse by the fact that many retirees have now been entirely removed from the personal tax system, with private pensions not being counted as income for those over the age of 60.

Boomers leaving the tax system

Indeed, some wealthy boomers are still able to claim large tax refunds due to franking credits on share dividends even though they don’t pay any personal tax.

The only real tax paid by this group is GST on purchases with the Howard era reforms to capital gains tax and super reducing the percentage of people aged over 60 paying income tax from 27% to 15%.

That has happened even as wealth in the retirement years has risen sharply, thanks to booming property prices.

Tax cuts won’t end dependence on personal taxation

Even with the current bipartisan and legislated stage three tax cuts to come into effect in 2024, the percentage of tax revenue  from personal taxation will continue to climb towards half over time.

Indeed, under those tax cuts, most of the benefits go to those earning above $200,000 a year, even though the tax rate for those earning between $45,000 and $200,000 will fall to 30%.

Average tax rates are what matters here and the stage three cuts won’t help the great mass of low- and middle-income earners and over time personal average tax rates will continue to climb.

The answers were there in 2015

Of course, there are answers to the generational inequity in the taxation system, including the recently revealed Treasury proposals which were presented to then Prime Minister Malcolm Turnbull and his then Treasurer Scott Morrison way back in late 2015.

These proposals included a radical move to eradicate state stamp duties by doubling council rates and increasing the GST rate to 15% and broadening what it is charged on.

There were also proposals to reduce negative gearing concessions, the capital gains tax concession and changes to marginal tax rates and the replacement of the tax-free threshold with an earned income tax credit plus tax concessions for saving.

In the end none of these proposals saw the light of day and when Labor lost the last election at least in part because it advocated negative gearing restrictions and capital gains tax changes, tax reform became the equivalent of political rat poison and has not been embraced by either side since.

Thoughtful tax reform can grow the economy

That is a great pity because tax reform has the potential to not only improve the balance between generations but also to improve how the economy works.

The proposal to eradicate state stamp duties by doubling council rates and increasing the GST rate to 15% and broadening what it is charged on was estimated by Treasury to boost economic growth by 2.5% – to truly grow the amount of pie to be shared.

It may well be right too, with the current system of massive and inefficient stamp duties effectively constipating and inflating the property market while the lack of a bigger and broader GST forgoes the chance to at least charge some tax to people who may not otherwise pay much.

We are paying the price for no tax reform

The lack of a meaningful wealth tax is also a major omission, given the rapid growth in wealth in Australia.

Governments need revenue to spend on essentials and to address what has now become a structural budget deficit and a debt mountain that reduces flexibility.

It is a shame if sensible reform that widens tax bases and improves efficiency by getting rid of nasty, narrow taxes is simply thrown into the bin because of a lack of political courage.

Voters who make knee jerk or hip pocket decisions also must take some of the blame for this lack of reform, although both John Howard and Bob Hawke pushed through major tax reforms through well-explained policies, so it can be done.