This episode examines the need for tax reform in Australia and debates various options for overhauling the country’s tax system. Host Gene Tunny is joined by Simon Cowan from the Centre for Independent Studies to discuss issues like bracket creep, the progressivity of the tax system, mining royalties, and negative gearing. They also analyse the political strategies around the stage three tax cuts. Cowan argues the tax system has become too reliant on income tax and higher-income individuals.
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About this episode’s guest Simon Cowan
Simon Cowan is Research Director at the CIS. He is a leading commentator on policy and politics, with a regular column in the Canberra Times newspaper, frequent interviews on Sky and the ABC, and multiple appearances before parliamentary committees discussing the budget, citizenship, taxation and health policy. He has written extensively on government spending and fiscal policy, with a specific focus on welfare and superannuation policy. He earlier work focused on government industry policy, defence and regulation.
What’s covered in EP228
- Australian tax system overhaul and cost of living relief. (0:04)
- Tax bracket creep and its impact on income. (5:14)
- Tax system and progressivity. (9:44)
- Tax cuts and political strategy in Australia. (15:29)
- Tax system in Australia, income tax reliance, and potential changes. (21:13)
- Taxation, welfare, and the burden on working-age population. (26:02)
- Tax reform and its challenges in Australia. (31:03)
- Taxation and resource extraction in Australia. (38:05)
- Australian tax system and potential reforms. (45:42)
Takeaways
1. Australia’s tax system has become overly reliant on income tax and needs to diversify its revenue sources.
2. Bracket creep is a real problem that has not been adequately addressed, particularly for higher-income earners.
3. Both major political parties have taken cynical, short-term positions on tax reforms that are not in the best interests of the economy.
4. Expenditure reform, including controlling the growth of programs like the NDIS, is needed to reduce the tax burden.
5. Lowering company taxes could boost business investment and economic growth in Australia.
Links relevant to the conversation
Simon’s article on the stage 3 tax cuts:
AFR article (pay-walled) “Royalty hike and IR overhaul threaten critical mineral pipeline: BHP”:
QLD Government announcement on coal royalty hike:
https://statements.qld.gov.au/statements/95467
Grattan Institute’s view on tax reform: https://grattan.edu.au/news/thats-not-tax-reform-this-would-be-tax-reform/
Transcript: Revisiting Ricardo: The Rise and Fall of Ricardian Equivalence
N.B. This is a lightly edited version of a transcript originally created using the AI application otter.ai. It may not be 100 percent accurate, but should be pretty close. If you’d like to quote from it, please check the quoted segment in the recording.
Simon Cowan 00:04
So people were expected to live. I think it was about 10 or 12 years in retirement in the 70s. Now that she goes above 20 And these are all years where, you know, people are healthy and consuming. I mean, it’s a fantastic story as a society, we haven’t yet figured out how to pay for it.
Gene Tunny 00:32
Welcome to the economics explored podcast, a frank and fearless exploration of important economic issues. I’m your host gene Tunny. I’m a professional economist and former Australian Treasury official. The aim of this show is to help you better understand the big economic issues affecting all our lives. We do this by considering the theory evidence and by hearing a wide range of views. I’m delighted that you can join me for this episode, please check out the show notes for relevant information. Now on to the show. Hello, thanks for tuning into the show. In this episode, I talk about tax reform with my colleague Simon Cowan, who is research director at the Centre for independent studies is widespread agreement the Australian tax system needs an overhaul. But there’s a big debate over what reform should look like. It’s a debate that’s heated up ever since the federal government redesigned a legislated tax cut earlier this year, the so called stage three tax cut it redesign a tax cut, so it provides more relief for lower income earners, and less relief for higher income earners. The government has been accused of class warfare by the opposition. But the government claims is doing this because economic circumstances have changed and that this is the best way to deliver cost of living relief. Now there’s speculation the government may change other tax laws, particularly those regarding the taxation of investment properties. It’s going to be a highly charged debate on the Australian tax system this year for sure. This episode, Simon cuts through the spin from both sides and provides some great insights into what tax changes would be good for the Australian economy and community. As always, I’d be interested to hear what you think about the issues we discussed in the show. So please get in touch and share your thoughts. You can find my contact details in the show notes. Right? Oh, we’d better get into it. I hope you enjoy my conversation with Simon Cowell from the CIS. Dom And good to have you back on the show. Yeah,
Simon Cowan 02:26
my pleasure to be here.
Gene Tunny 02:27
Excellent. Simon, you’ve written a really hard hitting piece. This was one of your regular op eds in the Canberra Times if I remember if I forgot that, right. Yeah,
Simon Cowan 02:39
absolutely channelled a bit of my inner anger at the tax changes.
Gene Tunny 02:44
Yeah. So Labour’s tax backflip, all the easier against an opposition with no spine. So you basically rip into both the governing party, so the Labour Party, which is in government at the federal level in Australia now. And the opposition. So the opposition originally opposed this, what they what became known as the stage three tax cuts, which involves a flattening of the tax, the progressivity of the tax system, getting rid of one of the tax brackets, and there was an accusation that they provided too much tax relief at the top end. So I’m keen to get your thoughts on why you’ve, you’ve come out strong about on this issue, I’m just wondering, should the stage three tax cuts have gone ahead as proposed? Or would you have been willing to have accepted some changes in the interest of cost of living relief? Look,
Simon Cowan 03:46
so I think my ideal situation is to add the labour lower income tax cuts on top of the existing strikethrough package. So I think, you know, one of the things it’s quite reasonable for governments to do, especially when their boss surpluses distribute some of that surplus to its taxpayers, and so I would have been okay with a change that resulted in additional tax reliefs being provided to people in middle income brackets. I think there were other potential options that could have been added on so for example, they wanted to eat extra tax brackets, while also perhaps reducing some of the benefit from the stage three casting that might have been acceptable to because at least then it would have fixed the problem that the stage three tax cuts will design to resolve. But at the end of the day, my biggest concern is that this entire debate has been filled with terrible information, terrible assessment, labour and liberals have both taken what I think quite cynical and short term pull legal positions. And as a result, I think they’ve, they’ve banned the use to manage the handling of this whole tax burden. Right. Okay.
Gene Tunny 05:08
So what were the what were those elements of the stage sort of three tax cut? You like? Did you like the fact that it was becoming less progressive is that? Yeah,
Simon Cowan 05:21
so I think there’s there’s probably two elements that I thought were were worth preserving and worth pursuing. So flattening the tax brackets, I think was a good idea. But I mean, a number of people in sort of PAMPs, classical liberal ideas and suggested flat taxes, that appears to be politically difficult to do, but I would have certainly advocated for flattening your tax structure, to a large extent where most people who were working are facing the same marginal rate. Obviously, that system remains progressive. It’s not a regressive system, but it would flat in the brackets. But I think the bigger issue here is that people are in the top quarter or so of the distribution hadn’t seen any substantial return of bracket creep since about 2010. So there was a small benefit provided as a result of moving stage two forward during the pandemic. But since then, inflation has been running at seven or 8%. So we’ve got this enormous, ongoing impact pre that has been focused on the topic of the redistribution, we saw taxes cut, at the lower end is repeatedly in 2012 13, carbon tax was introduced, that compensation was was retained. We saw, you know, the initial stage one benefits, we saw the introduction of low and medium income tax offset. So there’s been a lot of bracket creep return across other parts of distribution, but none of it has been returned to the top end. And I think, you know, stepping beyond the politics of just least tax cut, we’ve now established a principle that says that higher income people no longer deserve to be compensated to bracket creep. And I think that’s a terrible law to introduce into our tax system. Bracket creep is only fair. It’s a it’s a stealth tax. And it shouldn’t be allowed to just run rampant because you’ve got a fascination and fetish of higher income tax. Yeah,
Gene Tunny 07:29
so bracket creep is the process whereby due to inflation, you end up in a higher tax bracket, even though your real income may not be any higher in real terms, because it’s just the effects of inflation. And suddenly, the government’s getting more money from you that you’re facing a higher tax rate.
Simon Cowan 07:49
That’s right. So your real, your real income stays the same, but your tax bill goes up. As a result, your disposable income, your living standards go down. That happens every year, bracket creep wasn’t a massive issue in the latter half of the 2010s, because inflation is so low. But since they and the massive injection of stimulus from the Reserve Bank and the government in 2020 21, drove inflation up to almost double digits across the western world. And it that bracket creeps taking a significant hit on people’s incomes and and you know, stage three, I think we’ve got some work coming out soon and analyses the the cumulative impact of that stage three, when didn’t return all that bracketry that had accumulated over the course of those 1014 years. And now that compensations been cutting hearts. Right.
Gene Tunny 08:44
Okay. So this is CIS. We’ll have some research coming out on that. Great. Absolutely,
Simon Cowan 08:49
yeah, we’ve got some some really good work being done by some of my colleagues that looks at and try looks at the issue of bracket credit, but also tries to correct the narrative that’s been pushed forward of these stage three tax cuts, costing hundreds of millions of dollars, based on the incredibly unrealistic assumption that there would be no return of bracket proof for more than two decades that that was just, I mean, that was a ridiculous assumption to make. It was my Western liberal party that has a vested interest in higher taxes. And it’s been accepted wholesale by the media is, oh, the State Street tax cuts cost all leads. And we saw, you know, the height of absurdity when inflation went up seven or 8%. And all this bracket Creek was ripping off people. These are the cost of steaks three has gone up and over $4 billion. What what an absurdity.
Gene Tunny 09:45
Yeah, yeah. So this is one of the reasons I mean, you know, the bigger reason is the higher commodity prices and higher corporate profits, but this is it’s made a contribution to the budget surplus that the treasurer has declared, hasn’t it? Yeah, yeah.
Simon Cowan 09:59
You Yeah, well as Australia is incredibly dependent on income tax, I mean, we do receive significant swings in revenue as a result of commodity prices in particular. But Australia globally is highly dependent on income tax, and as a result bracket is highly beneficial to the government. It’s one of the reasons I think why, apart from a very short experimentation, indexation, if you give a 70s or 80s, it’s you ever really seriously be considered? Yeah,
Gene Tunny 10:29
yeah. Yeah, I want to ask you about the structure of our tax system in a moment. But before we get there, I want to ask about this point about having a flatter tax system and because equity is, is, is there an equity principles with tax design, there’s vertical equity, horizontal equity. This This relates to vertical equity, and this idea that if you have a greater ability to pay, you pay more, which, you know, there’s a community acceptance of that, or there’s community support for that. But from what do you see as the advantages of having a less progressive tax system? Do you think our tax system has been too progressive? What are the Why would you actually try and reduce that progressivity?
Simon Cowan 11:21
Yeah, so that’s, that’s a really good point. So for the first few states, the tax system has been becoming progressively more progressive for a number of years now. And it’s because every time any tax reform is proposed, everything is analysed through the lens of does any benefit go to higher income earners? And the answer is yes. And that’s wrong. And instead of the appropriate way, if it needs to be analysed as across the whole system is the system as a whole progressive, what we’ve sort of defaulted to is every individual measure has to always be more progressive. So the system has become more and more progressive over time. And what we’ve seen is that the percentage of people who are not next, net taxpayers has increased from I think, slightly below 50%, to more than 60%. Now. And so the the tax burden is concentrating more and more on the top end of town, you know, this, this idea that the rich people aren’t paying their fair share, I think flies in the face of a lot of evidence. So there’s that component, like why shouldn’t you know, we need to reverse some of that excessive focus on on vertical equity. I mean, I think there’s also a horizontal equity argument that suggests that people who are working should be facing roughly similar tax rates, I think that’s a fairly obvious point, if you’re, if you’re working a job and receiving an income, the your circumstances are at least comparable to people who are working, even if their incomes, the slightly less, I think there’s also an incentive argument here, where what we’re doing is bringing down the overall rate of taxation, trying to lower some of the distance agents at the top in which, you know, we saw the highest income tax rates, lower, he was really invitees to the level that they’re at now. But since May, we’ve had a number of ladies NDIS levy came in I income tax levy that Abbott introduced early in his tenure. So we’ve seen this sort of slow increase in the top rate aside, so you, we should bracket. And I think we get each or get, you know, people are facing, you know, effective marginal tax rates in the 50s or higher. And I think there’s a benefit to lowering that. So it’s not so much. I mean, I think there are arguments why you want to reduce the focus, even in some respects, and I think what you actually really needs to do is lower the tax rates across the board. And this is one way to start that process. Right?
Gene Tunny 14:01
And is that that’s to encourage work effort and innovation, entrepreneurship. Yeah,
Simon Cowan 14:07
so absolutely all of those students, but I think there’s also a moral argument to this, where, you know, the government is acting as if your income belongs to them, and you should be grateful when they allow you to keep some portion of it. And and, you know, the analysis seems to be that people who are receiving government benefits or low income deserve more of the higher income people’s income than they do. And I mean, you know, I think there’s a moral difference there. People who people should be entitled to receive as much of the benefit of their hard work as they care and a tech to redistribute from the perspective of trying to sort of equalise incomes, rather than try only to provide a safety net to be at the bottom it. I think the more that our tax system tries to create that, that equalisation for equity purposes, and the less that it focuses on, on, you know, sort of the issue of absolute inequality, the absolute poverty issues that people bought again, I think that’s a mistake. I think people should be entitled to keep their income, regardless of the income level. They’re right.
Gene Tunny 15:30
And why do you get stuck into the opposition? Simon, what did they do wrong in terms of prosecuting or trying to get this stage three tax cut up? Yeah.
Simon Cowan 15:43
So look, I mean, a lot of people talked about Labour’s broken promises. And I’m happy to put the buoy to them as well. But I think this situation coalition had established a tax cut package over an absurd period of time. They didn’t really prosecute the case for stage three, at any point, they stopped prosecuting the case for stage three, well, actually, before the 2020. Election, effectively, I think they adopted Labor’s position that it was unfair, and they were just hoping this political pressure here, but in all honesty, I mean, I don’t think they they were committed to that process. I think they passed the stage three cuts for largely political reasons. And I think they abandoned them. The first chance they got this was about trying to minimise the tail vote in 2022, was designed to try and bind high income earners to the coalition in 2019. It was designed to try and wedge labour whilst they want office falling 2022. And you know, then they just said, Well, we’re not we’re not going to bother even trying to really defend this, we’ll just roll over, we will allow them to pass their legislation on on I think, very flimsy grounds. And that’ll be that’ll be it. The thing is, the coalition had two fantastic opportunities to address this issue. And so when they won the 2019 election, they could have fast track the process for the tax cuts so that they occurred within the timeframe of that government. So that, you know, the, this is preganglionic prepaying. And they could have said we’re going to restage to forward to next year we’re going to bring stage three for the 2022. And at that point, those tax reforms they believed in, they would have been on before the call, and they wouldn’t be in Facebook coalition whatsoever. And then, so they didn’t do that, when the pandemic happened. And they shovelled the equivalent of 275 $300 billion out of the door. They threw money at every half baked scheme that they could take off. You know, they had they doubled unemployment benefits, they had all this pay for people who were out of work, we tried to companies to talk about them. So it’s about anyone out there was all of this stimulus to everywhere, right, they brought forward stage two, they had a massive deficit. But they did not touch the stage during tax cuts, they did not bring them forward at any point, even when the issue of deficits didn’t matter at all. And I think they did that for political reasons. And because they didn’t believe in what they had proposed. That I think for that reason, and the fact that they rolled over so quickly on it, I think they deserve almost as much blame as labour does.
Gene Tunny 18:28
Yes, yes. The interesting point about the TEALS. So they wanted to keep this to, or they wanted to signal that they at least supported this idea of eventually having this return of bracket creep to the higher income earners, because there’s they’re under threat from these independents. In the the seats, where there are a lot of wealthy residents, such as a Lego spenders seat is at Wentworth is that where are they and all of that? Yeah,
Simon Cowan 18:59
I actually think this is a this is a fascinating little sort of piece of political analysis. So I’d be inclined to just have a chat our way through is that you go back to the 1970s, right? And we’d look at the distribution of how people voted. And overwhelmingly higher income people voted for the coalition and lower income people voted for lately. I think a lot of that had to do with the prominence and trade union leave the class based analysis that the left of politics was enmeshed in right. What we saw in particular then as well was that the percentage of people who had a university degree was was relatively small. See, because high income earners for for most of history have trended right, but university graduates have trended left. And so, over time as the percentage of university graduates increased, and they went through the economy and became it, you see the higher income earner vote shift to the to the left. So these blue ribbon coalition seats in the, you know, the sort of north shore of Sydney and you know that sort of to rack in places in Melbourne that had voted for the coalition, which are 100 gig, it was suddenly at risk. Now, you know, and this, this trend has been going on for a decade or more give you looking at American political analysis, right, almost all the higher income earners in the areas we’re hiring come on as a vote Democrat, almost none of them vote for the Republicans. And that hadn’t been the case as much in Australia. So we saw a massive increase in university students starting to shift to higher income voters further towards the left coalition seems this demographic shift, they see the shifting votes, and they think to themselves, what am I going to do to fix this problem? And so what they did was say, Okay, we’re going to create a, effectively a political witch, we know that Labour will repeal these tax cuts, almost certainly they get it offence, will say the only way to get a $9,000 tax cut for you higher income earners in Wentworth and elsewhere in North Sydney, and all those other is to vote for the coalition. But not just in the 2019 election, he bought a boat to polish in 2022. And so, you know, I think a lot of this was very cynically aimed at trying to, you know, provide a massive benefit to these higher income people in these receipts. And, you know, I think one of the reasons why the coalition potentially roll over on this so quickly is tears picked up all of those seats nearly at the last election. And there’s no real indication that they’re all coming back to the coalition anytime soon. So the benefit to them of fighting on this score seems I think, to be somewhat less, but it’s a result of demographic and political shift that’s been in place for decades now. It’s just sort of manifested in the last, you know, really, obviously, in the last two election. Yeah,
Gene Tunny 22:06
yeah. Yeah, I think you’re right there. Right. So I might ask you about the structure of the tax system. I think you were suggesting this before. In OECD D data tend to back this up that were toward the top in terms of the reliance of our tax system on income tax, aren’t we relative to your direct taxes? Do you have any thoughts on? You know, what would that you know? Are you advocating for switch in the tax mix? What would that look like? What are your thoughts on that, Simon? So look, I
Simon Cowan 22:41
think that, fundamentally, that’s where things should go. And as the Australian state gets bigger, which seems to be inevitable at this point, unfortunately, again, despite our best, as the Australian state gets bigger, we can’t continue to rely on income tax to find that borrows in government spending and almost no other country, in certainly in the OECD funds, an enormous state, primarily through income taxes. You know, what we see is these these sort of European welfare states are, they provide a lot of benefits and a lot of benefits, I think that go to the middle class, not just people at the bottom. And, you know, there’s a wide spread of benefits of total social security with those things funded by large scale indirect taxes. So Australia started down that path in 2000. But the GST was then hobbled, because of the deal that had to be made to get it passed. So it was restricted from the sort of offsetting, or the state income taxes, state taxes that were supposed to replace, if then proven quite difficult to increase. And I think one of the main reasons for that is, as Malcolm Turnbull found during the two weeks that he will put this issue back in 2016. The vast majority of benefit from a taxi next week would have to be given an act to people in conflict, Lauren, one people in compensation. So you end up with relatively low revenue benefits from changing tax rates, because you ended up having to provide even more benefit to people, you’ve bought them off, and then you’ve got a you’ve got another problem there, which is that over time, as I said, I think I said before, over time, more and more people have become net tax recipients rather than that tax payers. Yeah. And there’s no real prospect of that changing. So, you know, a broad scale increase in an indirect tax would shift that, but that would then require someone to prosecute that argument. Let’s see. I mean, that seems unlikely.
Gene Tunny 25:05
Okay, we’ll take a short break here for a word from our sponsor.
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Gene Tunny 25:40
Now back to the show. Yeah, so I’m just for clarity with this, these net tax recipients or benefit beneficiaries of the tax system. So we’re talking about you look at what people pay in tax, and then what they get back from the federal government in terms of transfers. And it’s not. It’s Is it a lot of what is often criticised as middle class welfare.
Simon Cowan 26:10
Yeah, so some of you it is, I mean, a lot of it too, though, is in terms of like, benefits from education and free health care and those sorts of things. So there’s, you know, there’s, you look at the concept of direct transfers, and offset that against income, and that, that takes a significant portion of the population out of pay tax, and especially with superannuation be tax free in retirement, that knocks out a massive proportion of society. And then you have a lot of I mean, even sort of top income quintile, you still see some government benefits, especially eternities of things like, you know, government support for schools and government support for for health care and, and seniors health cards, for example, those sorts of benefits that that it all adds up, right. And what we what we see is, over time, the number of people who are a contributing contributors is staying relatively constant, the number of net recipients is increasing, and more and more people are going to have to shoulder the tax burden. Again, if you look back to the 1970s, there’s a dependency ratio of people who are overworked people who are not in work, but something like seven to wildland now that’s falling towards almost two to one three to one. And that results in a huge increase in the burden on people who are working to fund those who are not.
Gene Tunny 27:42
Right. So historically, we had, yeah, I don’t I can’t remember the exact figures. But you know, seven to one, so seven workers for every person who was retired, and it’s fallen to two to one or whatever it is. Yeah,
Simon Cowan 27:57
yeah, I think it’s I think it’s about it’s my recollection, last generation of borders, that it’s now gone, I’m sure that it’s going to head to three on potentially lower over time. Yeah. And that’s, I mean, that alone is a real problem. It’s one of the reasons why we’ve been so concerned about an ageing population. And there’s a whole bunch of factors that play to that. I mean, a lot of it comes down to increases in life expectancy, both at birth and life expectancy in retirement. So, you know, people were expected to live, I think it was about 10 or 12 years in retirement and seven years, now that she goes above 20. And these are all years where, you know, people are healthy and consuming. I mean, it’s a fantastic story as a society. We haven’t yet figured out how to pay for it, or Yeah,
Gene Tunny 28:48
exactly. And particularly this NDIS. That’s hugely costly. And we’re struggling to control the cost of that as well. On the the switch in the tax system toward more indirect taxes. I mean, Australia has a GST of 10%. But it doesn’t apply to fresh food. It doesn’t apply to health and education. That’s that deal you were referring to with the Democrats. The other thing is, yeah, the the other point you’re making is there would be compensation. I mean, given the politics of it, they’d have to compensate lower income earners, because it’s going to fall. Well, they that lower income earners a higher proportion of their their income spent on consumption, and so therefore, they’re going to it’s going to affect them more in proportional terms. Right. Yeah, exactly.
Simon Cowan 29:41
And I think so the bargain, it’s been at the European particular, is effectively that they’ve been willing to accept higher taxes on the middle class, in exchange for a broader based welfare system. And, I mean, it’s like an explicit deal, obviously, but that wasn’t Basically how all this was was done, and it wasn’t done in the last 10 or 15 years, this is the process has been in place for decades now. And what we have is a portion of Australian politics was effectively trying to create the spending half of that deal. But funded by taxation on only the quote unquote, Rich. So and it’s it creates a fundamental mismatch to the I keep getting given this idea that you can get more from government, on average, and give to government on average. And that simply can’t be true for the bulk of the population. That’s a systemic debt problem. If, if that’s the way that things are organised, but we keep being told that, you know, for example, we can, the NDIS can grow at 40% a year and Social Security can continue to grow, and pensions can be next to wages, all of these things can happen. And the rich and multinational corporations and somehow pay for it all. And I’d say I think that’s a very short sighted and unrealistic approach to a tax system. But, you know, we’ve had a number of attempts, increasingly futile, in the last, I would say 1515 years to reform to undertake a wholesale reform of the tax system, which would allow us to move a lot of pieces at once, rather than try to move any individual piece. Yeah, those attempts have been frustrated. Time and time again. I mean, you only have to look at the Henry Tax Review. Where I think the Rudd Government cherry pick one of about 70 Something he recommendations and, you know, we had Joe hotkey to cover his own tax review. And I don’t even think that got to the point of making recommendations before it was cancelled. Yeah,
Gene Tunny 31:56
that’s because yeah, Turnbull came in and cancelled it. It was a bit. Yeah, it was really, it was actually I think they were doing a good job because I was just on my old tertiary colleagues were Roger brake, and Graham Davis, were running that. And I’d often catch up with them. When they’re in Brisbane, I thought they were doing a great job. They’re going around the country, talking to people and finding out what they thought about the tax system. But when Turnbull got any word interested, sadly, yeah,
Simon Cowan 32:22
and I think that’s, I mean, that’s sort of part of the background raising why why I was so harsh on the coalition in relation to this tax reform package, because I think, you know, they had an opportunity to reform spending through the commission of audit, and they bungled that because the West Australian Senate rerun in 2014, they had an opportunity with the tax reform process, and then their, their leadership spills No, as adequately captured on this, this a recent ABC programme nemesis, fundamentally undercut a whole suite of policy reforms plus a number of different areas. We had this supposedly, broad tax, the stone foam package that was introduced in sort of 2017 2018 that a lot of that is now not going to happen. So when was the last time we had a substantive? Like a real look at that tax system? It’s, what 15 years? Yeah,
Gene Tunny 33:17
that’d be right. Since? Yeah, the Henry review, which would have been started in Yeah, it must have been an OA because I remember contributing to some of just one of their early documents. I can’t remember. Yeah, so it must start at? Oh, 809 10. Yeah. So yeah, yeah.
Simon Cowan 33:33
Well, that’s because it’s Kevin Rudd, when he came into office, started two fairly substantive processes. One was the review on welfare spending in 2009, that resulted in effective and locking in a massive increasing age patient for decades on end. And the Henry view was sort of the other bookend of that. But we ended up with a locked in spending and the tax reform sort of got abandoned. And now what we see is people who are trying to increase the size of the state and increase revenue are effectively trying to pick off individual tax bases one at a time. So you know, and see the push, having overturned the stationary tax cuts a week ago, we’re now already on to negative gearing and capital gains tax reforms. And, you know, I saw a tweet today from from a researcher at competing think tank, the effectively said, you know, none of these reforms are going to have a big impact on house prices, we should just do them so we can get the revenue. I mean, I think that that sort of explains a lot about how we’ve gotten to where we’ve gotten on on our tax reform process. Yeah,
Gene Tunny 34:41
yeah. I think I saw the same thing on LinkedIn. If it was from Brendan Coates was, yeah, Brenda’s I’ve had Brendan on the show before. So Brendan is an old colleague of mine, but yeah, I mean, gratins got a particular view on what they see is, you know, excessively generous concession And to landlords and also on Super. So I mean, that’s, like, broadly what do you think about all of that? Simon? I mean, the, like, if you look at the tax expenditure statement from the treasury, they will be reporting significant amounts of money in in well, they’re not tax expenditures, they report the concession for negative. Yeah, or the deductions for negative gearing, and then they report tax expenditures on things like super. I mean, what are your thoughts on those items and the logic of making changes there? Well,
Simon Cowan 35:37
I think a number of those measures are deeply unrealistic. They are effectively and should so you know, look at the numbers that are applied with superannuation concessions, and they assume that you’ll play a full marginal rates on your contributions, you’ll pay full marginal rates on your earnings in the farm, that you buy full marginal rates and earnings at the back end. There’s no retirement system in the world. The South even vaguely like that. Yeah. Right. So so this idea that there’s this massive honey bonds, people have money that can be taken from I mean, if you apply punitive taxation rates to saving and yeah, you might be able to get some revenue from that. But that doesn’t make it a good idea. And it doesn’t make it a realistic comparison. And so, you know, when you see it applied to a more realistic benchmark, the cost of those concessions fall dramatically. I think there are a number of reasons why super should have been reformed substantially during the last term of government, I would have identified a slight strolling increase in the compulsory contributions, because I didn’t think that was a good thing for people, especially when incomes were growing at such a low rate, why the government would force you to contribute that income to effectively an industry super fund seemed like a bad idea to me. But it went ahead anyway. That I see a lot of these tax measures and the tax expenditure statement, and the idea that, you know, this measure costs x billion dollars is set against such an unrealistic benchmark, it creates an expectation that, you know, that people would be able to just pull in this massive increase in revenue. So what I mean, what’s the alternative? We have no discount to for capital gains to reflect that that returns are impacted by inflation? We have no ability to offset losses against other income. I mean, these are non controversial measures in most tax systems. And they are they seem to be controversial here because we analyse them, at least in part, because we analyse the limits this unrealistic standard that says they cost way more than they actually do.
Gene Tunny 38:05
Yeah. Yeah. On the deduction of losses against you can deduct it from other, you know, reduce your taxable income, if you lose money on your rental property, which is what we call negative gearing. I mean, historically, they did try to get or get rid of negative gearing or let you only, like, reduce your rental income to zero. So sorry that they don’t. Well, yeah. So if you made a loss, you couldn’t then use that to reduce your other taxable income. So labour income, so you pay less tax, you could you could, you could effectively pay no tax on your rental income, but they wouldn’t let you get a benefit. Or the Yeah, so that’s, that’s the idea. But they did reduce, get rid of it in the 80s. And they’re all these headlines about, you know, as causing problems in the Sydney rental market. And as rents are going up, you can’t get a property with landlords were withdrawing. So I mean, my feeling is a chamas is probably bright enough not to go down that path. And he’s probably I think he’s still, you know, talks to Paul Keating regularly, so expect Keatings probably advising him on that not to go down that path. And
Simon Cowan 39:22
rents have been increasing ignore this too, right? Why would you take a chance on that? But I mean, just on the fundamental principle here, so if you want to quarry, see your income from property so that you can assess your losses are going steady income, that’s fine. Right. But what you can’t do or you shouldn’t be able to do then is assessed positive positively geared property on top of YG income. So right now, all of the if you may, if you’re if your property makes a A guy that is taxed at your full marginal rate. The converse of that is if you make a loss, then it’s deducted for your tax at your full marginal rate. Yeah, yeah, I’m okay. If you want to say, Well, look, you know, Rental property income should be quarantined. So you get a second, you know what, you get a tax free threshold and you pay when you might make $1,000 a month, you pay no tax on that. You want to do that? That’s fine. Right? I’m okay with that. What I’m not okay with is saying, on the one hand, if you make it gay, we’re going to tax that as much as we possibly can, on the other hand and make a loss, then you just got to you’ve got to eat. Right. I mean, that just seems like fundamentally unfair approach to it, where the government wins no matter what. And, you know, I’m not a big fan of the government winning no matter what.
Gene Tunny 40:54
Exactly. So yes. Yeah, there’s a Yeah. You know, it’s gonna heat up again, it is heating out that debate. And yet, I think the the, the logic behind what’s called negative gearing is is is lost, it’s absent from that debate, sadly, becomes, yeah, yeah.
Simon Cowan 41:12
And I mean, the Henry review, looked into this and proposed what seemed like a relatively good solution, because there is an issue with different types of saving being taxed different ways. So you know, there’s some things that are very incentivized, like, for example, owning your own home, there are some things that are strong, but not as strongly incentivized, like superannuation, and probably investing in, you know, in retail property. And there’s some things that are highly disincentivize, which is a lot of other types of savings. If you want to equalise a lot of that stuff in a way that reflected the, you know, some of the risk profiles on the longevity of holding those those instruments, that’d be fine. But that’s not the debate that we’re having. We’re not talking about having a coherent the fair tax system across the board. We’re just saying this one thing we cherry picked, this looks unfair to me, therefore, we should get rid of it.
Gene Tunny 42:13
Yeah, yeah. That’s the debate we’re having for sure. What about resources? Simon, have you thought about that? Because I mean, one of the things you often hear is ours, we haven’t, we’re letting these mining companies rip us off, and we’re not taxing them properly, or the the royalties aren’t high enough. We’re not taxing their super profits. And we’ve missed the opportunity that the Norwegian, you know, the Norwegian set up this huge sovereign wealth fund. That’s worth I don’t know, however many hundreds of 1000s of dollars for every Norwegian it’s, it is mind blowing. What do you think of that? The What do you think about resources, taxation? Have we missed an opportunity there?
Simon Cowan 42:51
So look, I’m very sceptical of anyone that says the word super profits, because I think super profits are defined as any amount of money that I think is big enough that I could take. So I don’t like that concept. I mean, I think he’s there an argument that the states have systemically underpriced the world is that they have charged in order to incentivize people to set up mining operations in their state, particularly up where you are. Yeah, I think that’s probably right. The states could have charged way more for their resources than they did. They chose not to do that. That’s a choice that they get to make. I’m you know, I’m, I’m sort of somewhat always it’s pause when I see a proposal that federal government take even more revenue from things that were traditionally revenue for the states. So, you know, I think if there’s an issue, we underpricing those royalties in the state, should we increase their royalties, and that would result in them having them having some more revenue that they could spend. And then I mean, when it comes to deductions, this idea that there are companies that are paying no tax, and therefore that’s unfair. So offsetting your tax liability against past losses, which is what’s happening with most of these 90 enterprises, is completely non controversial, and not a drama really, of any kind. So if your operation makes losses for 10 years while you are searching for mineral deposits, and then you eventually find one, you get to offset those 10 year losses against your first year of profits. And, you know, you have to tax a profit, not a loss. So that’s, that’s, you know, that’s, and that accounts for so much of these super profits that are being offshored or, you know, but people are worried about I mean, it’s just offsetting tax against previous losses. There is an issue around structuring global tax operations in a way that minimises your taxable liability. However, as Kerry Packer once famously said, you know, minimising your tax you’re, you’re an idiot, everyone minimises their tax. So, if the system is set up to allow people to minimise their tax, they will. There’s a lot of smart tax lawyers and accountants who can set things up in a way that minimises those, those taxes. And that’s being done completely legally. And if you want to change that more than then go ahead, but you’re going to struggle with the fact that you’ve got to force other countries to play ball with you on that score. And if you raise your domestic taxation of global companies too much, all disappear. Yeah, yeah,
Gene Tunny 45:42
that’s one of the concerns we’re having. I mean, I’m old. I’m all for making sure that these companies aren’t, you know, they’re not doing things that are sketchy. And they’re actually they are abiding by the law. And the Australian government has introduced measures to ensure that there’s work at OECD the BEPS initiative, whatever it is, I was just thinking about that point you make about discouraging investment and that yeah, that is a risk. And, you know, historically, we, like Queensland, for example, where I am, and you’re talking about Queensland. Yeah, I mean, the Treasury at the time, they probably did have they set really competitive royalty rates to attract the investment. And we were after the investment to develop these export industries, which have been usually beneficial economically for our region’s for the state budget. And that sounds like a good thing, doesn’t it? Yeah. Yeah, I’d say so too. And I guess we’ve had this competitive federalism. Yeah, yeah. And we’ve had this controversy recently, where the state treasurer, it was a bit of a surprise, Cameron dick, you know, introduced this more progressive royalty system for coal, and now we’ve got the highest royalty rates for coal in the world. And, you know, it was almost motivated by being a super profits tax. And now the the resources sector is saying, and BHP has come out and said, all this is, yeah, we’re not going to invest in in Queensland anymore. Other companies have said similar things. I’ll have to put some links in the show notes to make sure I get the details. Right. But then, you know, the government’s gonna go well, they would say that I mean, that’s, that’s, you know, that’s big mining. So, you know, when?
Simon Cowan 47:27
Yeah, and I mean, ultimately, right. Why? Because I’m a big believer in competitive federalism. Yeah. States have a right to run that experiment. Yeah. You think they would, they would just say that they do it. See what happens? Yeah, yeah. But where the consequences? Right. That’s, that’s the thing that annoys me a lot in the debates about state tax and issues with state state budget issues is the way that the GST distribution is set up, actually discourages states from taking those initiatives. Because if they do the right thing, and they create all of this additional growth, they lose sight of their GST distribution in effectively offset, you know, for for doing the right thing economically, you’re far better off to just as the West Australians did just take the aeroplane down the camera and say, please fill up my pipe with a lot of money, Mr. Prime Minister, because we have been unfairly denied our fair share of GST revenue. And you know, that without wanting to get to sort of jargony technical about it, that vertical fiscal imbalance between the states and the federal government causes a lot of efficiency issues, I think in the way that that that we deliver locally, our tax system and the way that we deliver our services. And so, you know, I’d be a big fan of fixing, like, if there was to be a large scale tax reform, aside from lowering the overall tax burden, the biggest thing we could do is shift a whole bunch of revenue options to the states, allow them to compete with each other for business and growth. But remove some of that vertical fiscal imbalance and stop the big ego. Yeah,
Gene Tunny 49:10
absolutely. Stop the blame game. Stop them. Yeah, saying, Oh, we don’t have the money. The federal government’s got all the money. Give us them all. Now. It’s
Simon Cowan 49:19
I mean, it’d be NFS across so many areas, right. Have a look at have a look at what it’s done to defence policy in the last 15 years. You know, that because of the South Australia invests money in the defence industry and the need for governments of both sides to buy votes, he said, Australia, there’s this constant pressure to spend defence procurement dollars in South Australia. And that result seems suboptimal procurement decisions all the time.
Gene Tunny 49:48
No doubt about that. Okay, we’ve we’ve had a wide ranging discussion about the Australian tax system. So I’m going to wrap up what are your what would be your broad parameters or broad themes or Have a genuine tax reform. Okay.
Simon Cowan 50:02
So I mean, I think the first thing that we should do is rely on the bracket played somewhere and say, this is going to be sure bracket great. If you want to increase taxes, you have got to get people to vote for it, not just have it happen automatically over over and over again. And then I would love for us to attempt to resolve some of the efficient taxes in economy, particularly some of those leftover state taxes that that were still around from the GST. switchbacking in 2000, I think there’s still some some sort of workers compensation insurance and other things at the state level that could be gotten real. You know, we always talked about the stamp duty for land tax, which I think there’s a, there’s a, there’s an issue with that. Overall, I’d love to see a lower company tax rates substantially, to attempt to increase business investment, need Australia, I’d be taking a company tax rate down to 20% or lower. And then I think we need before we were to do anything more substantive than that we need expenditure reform, so that we could go about reducing the tax burden substantially. And part of that, I mean, a big part of that, I think is getting in control of what’s happening in the IRS, and elsewhere. Reforming and sort of shifting the debate around things like education and health care away from how much money can I spend to what am I getting for, for my investment. And then also around, you know, around infrastructure, we spent so much money on infrastructure, that’s that’s just horribly inefficient, and poorly designed, managed and operated. And we could, because a lot of it sits off the budget. It’s not visible, but I’m sure that we could do things a lot better than we are right now.
Gene Tunny 51:58
Yeah, absolutely. I mean, we can certainly do things better than that snowy, 2.0 project where we’ve got a boring machine stuck in the tunnel. What an absolute debacle. Yeah. Well,
Simon Cowan 52:11
so you’ll be interested to know your listeners will be interested to know we’ve just stood up a programme on on energy. Yeah. And, you know, one of the big focuses of that programme is to bring some transparency to the investment decisions that are being made by GFI in the clean energy space. I a lot of climate change and climate change person by any means. But I’m a big believer in government, doing things in accordance with the rules and the principles, right. I don’t think you get to skirt the rules because of the desire to have a particular political outcome. I’m actually a lot of that tapping energy. So that’s a big deal for us. Yeah,
Gene Tunny 52:52
very good. Okay, Simon. Awesome. Thanks so much for your time. It’s been it’s been terrific good to catch up with a colleague and to chat about the big issues of the day. So, Sharif, thanks again. Thanks, buddy. Appreciate. Right. Oh, thanks for listening to this episode of economics explored. If you have any questions, comments or suggestions, please get in touch. I’d love to hear from you. You can send me an email via contact at economics explore.com, or a voicemail via SpeakPipe. You can find the link in the show notes. If you’ve enjoyed the show, I’d be grateful if you could tell anyone you think would be interested about it. Word of mouth is one of the main ways that people learn about the show. Finally, if your podcasting app lets you then please write a review and leave a rating. Thanks for listening. I hope you can join me again next week.
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Credits
Thanks to Obsidian Productions for mixing the episode and to the show’s sponsor, Gene’s consultancy business www.adepteconomics.com.au. Full transcripts are available a few days after the episode is first published at www.economicsexplored.com. Economics Explored is available via Apple Podcasts, Google Podcast, and other podcasting platforms.