Tax reform down a rabbit hole

What if you started a process to overhaul the tax system — and all anyone wanted was a tax cut? And no one offered ideas on how to raise extra revenue?

Welcome to this country’s Alice in Wonderland approach towards tax reform that is on full display in the submissions to Joe Hockey’s Tax White Paper.

The White Paper is already in enough trouble, thanks to the Abbott Government which first pledged “everything would be on the table”.

This would be in stark contrast to the Henry tax review under Kevin Rudd and Wayne Swan, who immediately ruled out changes to the GST.

It didn’t take long for Tony Abbott and Hockey to follow in the Rudd/Swan footsteps. The GST, negative gearing and now superannuation taxes are all too politically hard to deal with in a discussion about the nation’s taxation and economic future.

But that’s politics. What’s really astounding is the flagrant self-interest in so many of the submissions from various interest groups. No one, it appears, gives two hoots about anyone else or how the overall taxation system might be improved. It’s all about me.

For sheer audacity it’s hard to get past the submission of the Australian Bankers’ Association. This group represents the nation’s biggest taxpayers —– our very profitable banks. The ABA’s submission is all about ways to make banks even more profitable.

On their wish list is a cut in the company tax rate, abolishing stamp duty on just about everything and extending concessional capital gains tax rate to bank deposits.

They also don’t want GST extended to financial services or the introduction of a financial transaction tax or an upfront payment by banks to cover them in the case of collapse. Oh, any move towards industry-based funding (such as a plan for contributions to the running of the Australian Securities and Investments Commission) should be ignored because its just another form of “taxation”.

Let’s unpack the cost of this request. Cutting the company tax rate 5 per cent would save banks almost $2 billion a year.

In terms of stamp duties, getting rid of the ones suggested by the ABA would cost WA the best part of $2.7 billion. That’s $2.7 billion out of $9.8 billion in State taxation this financial year.

Extending the capital gains tax concession to bank deposits is difficult to cost, but in 2012 Swan was forced to abandon his plans to halve the tax rate on interest (up to $1000).

Abandoning the policy, which was an idea out of the Henry tax review, saved the Government about $500 million a year.

Once you take into account the revenue raised by every other State or Territory in terms of stamp duties, then the ABA’s submission is effectively a plea for between $35 billion and $45 billion a year cut in taxes — without any idea on how to fill that hole.

Negative gearing, superannuation taxes and crackdowns on multinational tax arrangements are all couched in terms such as “more analysis” needed or for governments to work co-operatively (knowing full well that’s unlikely) in a search for political consensus. Oh, did we mention that the bulk of that $35-$45 billion would benefit the banking sector?

Even the ABA admits its stamp duty abolition idea could lead to higher house prices … which would benefit banks that would have to lend more money to potential buyers.

The Australian Chamber of Commerce and Industry used its submission to call for a cut in the company tax rate to 25 per cent.

Also on the ACCI wish list is a cut in the top marginal tax rate, regular adjustments of tax brackets to avoid bracket creep, the replacement of stamp duties and the reduction then eradication of payroll taxes.

In the case of the cash-strapped WA Government, payroll tax raises $4 billion.

Combined, the ABA and ACCI would strip WA of $6.7 billion of its $9.8 billion in tax.

At least ACCI has an idea on how to cover this shortfall —– lift the GST and broaden its base.

But to make up for that $6.7 billion in lost revenue for WA (not to mention the other States and Territories) would require a GST closer to 20 per cent with no exclusions. That would take GST collections, now about $55 billion a year, to more than $110 billion a year.

And who would pay for this?

The Federal Government would have to compensate ordinary taxpayers facing a huge lift in their cost of living. But with company tax cut and income taxes already reduced where would Canberra get the cash to stump up the compensation?

It’s not just the big tax issues at play here. Deloitte, joining with an organisation called Fitness Australia, argues that the fringe benefits tax exemption provided to firms that provide “recreational facilities” on-site should be extended to firms that help their workers join gyms or cycle at the local velodrome.

Notice the plea is for a tax break. The other option, of imposing a tax on fatty or sugary food (which would have much broader health impacts than just at a local firm that pays its staff’s gym fees), is not canvassed as an alternative.

So many of the submissions are rent-seeking self-interest pleadings without a thought to overall taxation, the provision of services by government or unintended consequences (giving banks more cash to pump out into a property market that is already under strain just seems a recipe for financial disaster).

At least H&R Block, the tax agent business, suggested abolishing all tax offsets which could then be replaced by increasing the tax-free threshold. It would tidy up the tax system, get rid of some of the lurks exploited by those who use an accountant for their annual tax return, and deliver an economic benefit via the change to threshold levels.

But this sort of suggestion is like finding a game of football that Carlton could win — almost unimaginable.

Getting tax right is vital to the economic future of this country. That means cutting or ditching bad taxes and finding more efficient and simple ways to raise revenue.

Swan and Hockey understood that. But Swan was derailed by his grab for a mining tax and Hockey is already a train wreck before leaving the station.

The submissions that will help guide the Tax White Paper show how vested interests with an inflated sense of themselves and their contribution to the economy see Federal and State finances. It’s a way to maximise their wealth at the expense of someone else or, indeed, the nation.