The Coalition has boxed itself into a ridiculous corner on tax

March 18, 2016

18 March 2016

By Warwick Smith

Malcolm Turnbull and Scott Morrison are reportedly considering applying limits to how much can be deducted from taxable incomes for work-related expenses.

The supposed reason would be to simplify tax returns, but the real reason would be that they’ve boxed themselves into a corner and have few genuine reform options left.

Under this policy, instead of detailing all work related expenses, every taxpayer would receive a standard deduction of perhaps $500 or $1,000. This would be a blow to those with high genuine work-related expenses and a boon to those with none. It would save the government a few billion dollars a year at the most. This might seem like a lot, but it’s pocket change for a Government with an annual budget of over $450 billion.

The policy is a half-implementation of one of the recommendations of the 2010 Henry Tax Review that suggested an opt-out standard deduction for the great majority of taxpayers, eliminating most compliance costs. Under that recommendation, “to ensure individuals with more complex affairs or high expenses are not disadvantaged, taxpayers would still have the option of substantiating a claim for all eligible expenses”.

The Henry Tax Review recommendation would simplify the tax system for the vast majority while not penalising those who have high genuine work-related expenses. Of course, there’s value in examining the criteria for what qualifies as work-related expenses to reduce the extent to which they are used for tax minimisation by the wealthy, but it’s small fry compared to offshore tax havens, superannuation tax concessions, discretionary trusts and the structuring of company vs personal income.

Meanwhile, the Government has been fiercely attacking the Labor Opposition for its policy of limiting negative gearing deductions (where losses from real estate investments can be deducted against unrelated personal income). It would be the height of hypocrisy if they were to limit legitimate work-related expense deductions while continuing to allow unlimited non-work related deductions from property investments.

Make no mistake, the Coalition Government has boxed itself into a ridiculous corner. “There isn’t a revenue problem, there’s a spending problem” is one mantra, while others include “no new taxes” and “no tax increases”. The reality, of course, is that there is a revenue problem, with company tax receipts plummeting alongside falling commodity prices.

We can’t raise taxes – ‘cos that’s bad. We can’t introduce new taxes – ‘cos that’s bad too. We can’t cut expenditure too much because we tried that in the 2014 budget and got our fingers burnt. So what are we left with? Reducing tax expenditures (i.e. tax deductions). And what would be the real impact of reducing tax deductions? Increased taxes, of course. Let’s call a spade a spade.

We need a new relationship with tax, in line with what US Supreme Court Justice Oliver Wendell Holmes Jr said in 1927: “Taxes are what we pay for civilized society.”

Instead of treating all new taxes and all increased taxes with hostility, we should consider what we get in return. While taxes may not be necessary in order for the Federal Government to spend, they do create the spare capacity in the economy needed for substantial government expenditure.

Per Capita’s annual tax surveys have repeatedly revealed that Australians do not feel overtaxed and are willing to pay higher taxes for things they think are important, like education and healthcare. Indeed, we are a relatively low-taxing economy by OECD standards.

This is significant enough that it’s worth repeating. The majority of Australians would be happy to pay higher taxes in return for improved services. Does this mean we’d be happy to have work-related tax deductions limited? No, it’s a cheap workaround rather than real reform. There are lots of good ways to raise tax revenue, some of which would actually improve the economy.

To their credit, there are encouraging rumours that Turnbull and Morrison may indeed be considering greater borrowing and greater use of land taxes to pay for infrastructure. It’s only one more step from there for Scott Morison to stand up on budget night and say, “We know you want a world-class education system. We know you want a world-class health system. That is why we have decided to increase the overall government tax take because we know this is a price Australians are willing to pay for civilisation.”

What does it say for the state of politics and of our democracy that it’s completely implausible that the government will announcing on budget night something we know the majority of Australians want?