#budget2013: Analysis of the Taxation Reform Road Map #auspol

Have you ever wondered why the Opposition’s Budget response speech is a few days after the Budget is announced?  It’s because the Budget takes a while to read through and analyse.

Due to Channel 10 breaking the Budget embargo (more on that in a second), there was negative time between the Treasurer announcing the Budget and the commentariat going into hyperdrive.  And the commentariat wasn’t really all that insightful, resorting to ‘bellyfeel’ type impressions about the ‘politics’ of it all.  Was it strict enough?  Was it too flabby?  Were there too many handouts?  Was it — in the words of the Greens leader, Christine Milne —

Discussion of the Budget is usually weak because the Budget is big and our attention spans are small.  What I’d love to see one year is a group of actual policy experts sit around with a copy of the Budget and just casually walking everybody through the big picture.  Freak me, that would be amazing.  Instead of ‘Boohoohoo, the Baby Bonus is getting cut!’ we could have a discussion about Budget priorities, strategy, and policies relevant to key areas.

Actually, in my Fantasy Land of Actual Political Discourse, it would be a fortnight-long event including the week running up to the announcement and the week after the announcement.  Almost like a short course on Budgets.

Also in my Fantasy Land of Actual Political Discourse we get rid of the media embargo.  While the usual vultures were locked up with the Budget, the documents spilled on to the Internet at 7.30pm.  It was great.  While people were discussing whether or not the Treasurer’s speech was adequately emotive, I was watching The Spy Who Loved Me, eating a steak, and reading through the documents (multitasking, ftw).  The only benefit of the media embargo was that we had about an hour where we didn’t hear from the usual ratbags and halfwits of the media gallery.  There was zero — zero — benefit to the media embargo, and it appeared that most people had drafted their reactions to the Budget before entering the lockup.  In my Fantasy Land of Actual Political Discourse, people can download an app on their iPad or tablet or whatever which is interactive and you can see what’s going on by exploring.  As the Treasurer goes through the speech, it brings up the associated notes on app and you get a better feel for the context.  ‘We are going to scrap the Baby Bonus’ doesn’t actually mean very much unless you have a bunch of other notes about the Baby Bonus’ purpose, how it fits in with other strategies, and the background information from A Fairer Tax System (the Henry Tax Review from a few years back).  All the stuff about aged care lacks any sort of sense unless you have the attendant details about what the problem is that we’re trying to fix.  Et cetera, ibidem, ditto, and so forth.

So when I see knee-jerk reactions like Milne’s (will we really lose much when the Greens are all but wiped out in September?), I was a bit puzzled at the context-free opining because it makes absolutely no sense to respond to the Budget in this way.  You don’t do Budget analysis through ‘feelpinions’.

I can’t stand the ALP at the moment and I’m looking for any excuse to vote for the LNP — unfortunately, I’m cursed with this thing called a ‘brain’ and the current LNP is banking on traditional conservatives remaining mostly uninterested in politics while it pursues populist garbage — but even I have to acknowledge that the ALP is trying really hard to do something meaningful with the Budget.  Mostly failing, but trying.  It sort of has this image of where it wants things to go, but it gets trapped at the rhetoric stage.

Forget spending for a moment.  The big picture item is to make the tax system more efficient.  That’s exceptionally difficult when you have to wind the tax system around our ridiculous federal structure and the ALP can’t just declare ‘The States are funking the system up for everybody’ without getting into a sook- and whine-fest from Premiers.  Case in point: States agreed to a new funding structure for health, with everybody forecasting a particular result —

— a quick moment about forecasting here.  It is spectacularly difficult to forecast anything at the moment.  We are having trouble with it in nearly every public policy issue because of massive instabilities in global economics and politics.  For example, nobody guessed that the GFC would result in a reduction in greenhouse gasses (in retrospect, it makes sense: when the economy shrinks, production also shrinks, which means less externalised costs as a result of production).  So the projections for things like the Kyoto Protocol targets are now slightly wonky — are governments really achieving lower emissions as intended, or will things bounce back to normal?  Or is this ‘down’ time a good opportunity to piggyback new options?  But doesn’t that expose policy makers to the risk that an increase in emissions when the natural bounce returns will be attributed to those emission reduction strategies?  In conclusion, when somebody starts to have a cry about how Swannie got the forecasts incorrect or whatever, ask them: ‘And what were your forecasts at the time?’  This is particularly important in the case of Joe Hockey who repeatedly stated that he couldn’t tell us what LNP policies were because he was yet to uncover the state of the books, even though he had identical information to the Government through the various stages in the Budget cycle.  How many people picked him up on it?  None.  Oh, except me over Twitter, so Joe Hockey blocked me.  See above about trying to find any excuse to vote for the LNP —

— when the gamble didn’t pay off in favour of the States, they whinged at the result and tried to blame the ALP for sapping money out of the system.  A basic fact check by some journos would have made the story go away, but instead we had the sook- and whine-fest.

Into this arena, we have the Tax Reform Road Map.

Continuing the process of tax reform is key to being able to ensure that, as a community, we are well placed to meet these challenges and opportunities. That is why the Government has pursued tough reforms such as introducing the Minerals Resource Rent Tax; reforming the personal tax system to provide a fairer reward for effort and lift workforce participation; improving the fairness and sustainability of the superannuation system; and strengthening the integrity of the corporate tax base in a modern economy [page 3]

And this starts the ball rolling on what will later be an avalanche of problems.  When we talk about tax reform, we’re really talking about the fundamental structural things.  But the ALP has stuffed up the discussion about the fundamental structural things — the Carbon Tax, for example, which was about creating a mechanism for internalising the costs of production so that the public didn’t have to pay for the private gains of polluting companies, was actual reform, and it burnt the ALP.  The MRRT isn’t really a reform of any kind.  Tinkering with the personal tax system and superannuation aren’t really big potatoes reform either.

What we really need either in this opening speech or in the first few pages which follow it is an explanation of the problem the ALP is trying to solve.

There are a few (non-mutually exclusive) views on what the problem might be:

1. The Government isn’t raising enough revenue in taxes because of ‘structural’ problems in the budget, by which we mean that there are systemic reasons why money is flowing through the economy but it’s not translating into tax revenue.

2. The Government isn’t raising enough revenue in taxes because the economy is not performing as well as it should, by which we could mean that the Government is a poor economic manager (for example, it might be stimulating the wrong areas of the economy and hampering other areas).

3. The Government is raising enough revenue but is spending it poorly, unwisely, or improperly.  The wrong people are benefiting from Government policies, thus getting rent-seekers and parasites.

4. The Government is raising too much revenue and should stop taxing the people who create all the wealth, blah, blah, voodoo economics.

Although these aren’t the only options (by a long shot), the best analysts will have an opinion that’s a mix of something like 1, 2, and 3.

But the ALP doesn’t reveal its hand on what problem it thinks it’s solving.  The Treasurer has repeatedly said that revenue hasn’t been as great as expected, but he hasn’t really said why.  It’s sort of like you going into the doctor complaining of a bit of a wheeze, and the doctor says: ‘Yes, you do indeed have a wheeze.’  We already knew that bit; we want the doctor’s diagnosis of why we’ve got the wheeze.  In this analogy, the Treasurer is the doctor.

Fortunately, the Treasury is far greater than the Treasurer and, even if the Treasurer isn’t going to diagnose the problem, Treasury is in the best place to get us a cure.  Although this creates an interesting question about the consent of the patient…

The Tax Reform Road Map sets out three ‘principles’ which, like most principles put forth by the ALP, aren’t really very good principles:

  • A Stronger Tax System
  • A Smarter Tax System
  • A Fairer Tax System [page 4]

You’ll never guess which ideas link to which three-word slogan.  While you might think that a system which collects taxes in the most efficient way possible is a smart system, it actually fits under the ALP’s ‘Stronger Tax System’ principle.  Not creating incentives for people to duck out of working would surely be part of a fairer tax system, but it’s actually found under ‘A Smarter Tax System’.  And although taxing people a sensible amount would be part of a smarter tax system, you’ll find it under the third principle.

The ALP becomes something of a self parody when it comes to communication.  Here’s a three principle system that would have made more sense:

  • A System Which Collects Taxes Efficiently
  • A System Which Creates Incentives To Work
  • A System In Which People Are Confident That Individuals And Companies Are Paying Their Share

Sure, it’s not as snappy as three-word slogans, but it makes more sense.  You could even add in ‘A System Which Creates Resilience In The Economy’ or something if that’s what you wanted to achieve.  These principles should give the public a really clear idea about the vision you’ve got.  The three I smashed together up there would be the principles of a Government that was focused on increasing the labour output of the Economy.  A Government that I led might look at other options particular to my political philosophy: A System Which Promotes Incentives For Cultural Output, for example.  And then my policies would be about moving people away from manufacturing or whatever into knowledge-based jobs, with media being a key export of my grand economic design.  And so on and so forth.  You might disagree with my glorious policy, but at least you could say why.  With the ALP’s three principles, you’re left with: ‘Nah!  We should have a Weaker, Dumber, Inequitable Tax System!’

The take home message here is that the language we use to summarise our policies into snippets radically affects the sort of debate that we end up having.  These principles show that the ALP isn’t interested in leading a discussion (or, if it is, it is incompetent at leading the discussion).

Another example of this inability to lead a discussion arises on page six.  Here we have a graph which has circulated social media several times without many people asking precisely what it means.  First up, it’s two years out of date; on the other hand, it’s probably the latest source of information.  More importantly, the document states that Australia is one of the lowest taxing nations in the developed world, but we’re down the end of the scale with Mexico and Chile.

[Source: Tax Reform Road Map p. 6]

[Source: Tax Reform Road Map p. 6]

Is being a low-taxing nation ipso facto a good thing?  Do we want the quality of services commensurate with those experienced in Mexico, Chile, and Korea… or would we prefer to live like Austrians, Norwegians, and Germans?  I don’t know.  Would we still be a lower taxing nation if Swannie hadn’t boned up the MRRT (lesson to Treasurers: don’t make deals when you don’t have Treasury officials in the room to advise you)?  If we fixed the structural problems in the Budget, would we be a higher taxing nation?  Wouldn’t that be a good thing?

The ALP does a fantastic job of handing everybody a whip to flagellate them later.  Here on page 6, we see:

The Australian Government remains committed to keeping tax as a share of GDP lower, on average, than the level of 23.7 per cent of GDP it inherited in 2007-08. As revenue recovers, tax receipts as a percentage of GDP are expected to rise from 21.5 per cent in 2012-13 to 23.2 per cent by 2016-17. [page 6]

Why — for the love of all that is holy and good — would you make this promise?  Remember how we said that forecasting has gone belly up over the past decade?  There was an equal chance that some freak global occurrence caused particular areas of our economy to thrive, increasing the tax receipts as a percentage of the economy.  Even now, the forecasted amount for 2016-17 is only 0.5 per cent lower than the benchmark.

Page 9 is genuinely a good news story for the ALP, but they’re not drawing attention to it.  Here, we have a discussion about how certain multinational corporate structures allow for tax dodging.  Here’s the message that we should see: ‘Every time one of these companies dodges its tax bill, you either have to pay a little bit more in your tax or you have to forgo a service.  The ALP won’t stand for this kind of garbage at the expense of hardworking Australians.  We don’t skip out on shouting our round at the pub; multinationals shouldn’t skip out on paying their fair share of tax.’  Let Abbott try on the ‘Boohoo, you’ll hurt the economy if you make companies pay tax.  Here’s more of my voodoo economic policy’ line as a response and see how far it gets him.

By page 13, we no longer care about the principles mentioned earlier as the whole thing becomes a bit of a mish-mash: ‘A stronger, smarter and fairer personal tax system’ (I’m being charitable here; I skipped over ‘A stronger, smarter and fairer business tax system’ on page 8).  Irritatingly, this page does not really talk about any kind of reform at all.  Instead, it provides an opportunity to have a splash box showing how much money families will get.  You can’t have a Budget policy without patiently explaining to the breeders how they’ll benefit.

‘Removing barriers to participation’ on page 14 should get more people outraged than it will.  The assumption behind the piece is that an incentive not to work (for whatever reason) is a barrier that needs to be torn down.  Thus we get the change to the Dependent Spouse Offset Tax:

which dates back to a time when male breadwinners maintained a housewife. [page 14]

There are several hundred different ways to express this idea without being quite so tactless.  Who cares if this Dependent Spouse Offset Tax dates back to a time when male breadwinners maintained a housewife?  The relevant point is that people who choose (that is, they can afford) to have one partner working while the other does not should not do so at the expense of others through the tax system.

Pages 16 and 17 are trying to tell too many different stories at once, probably in reaction to the frankly moronic public debate about the issues.  There’s a big question that lurks beneath the surface here: what is the Government’s role in encouraging the generation of families?

From a conservative perspective, we frame it in terms of social good.  We want to encourage and support families because we believe — regardless of data or science — that families are the building blocks of society.  I even tend towards Confucianism on this point.  We want social order and harmony, and the best way to create upstanding citizens with great moral virtues is to raise kids in loving families (straight or gay or unconventional or whatever).  But nasty economic pressures make it more difficult to maintain good family environments: parents might have to work excessive hours so they don’t have enough time to encourage social virtues in their children, or they’re super stressed from economic pressures, or whatever, whatever, and whatever.

From a progressive perspective, you might frame it in terms of the economy.  We want to encourage women to be financially independent from their partners, so we support families so they have the option of seeking divorces and still being able to raise their kids without falling into poverty, et cetera, et cetera.  I don’t really want to create a strawman here.

From an economic rationalist perspective, you might frame it in terms of productivity.  Each worker has a capacity to undertake labour, and GDP represents how effectively the State can translate that capacity for labour into output.  But even if you’re really efficient at translating labour into GDP, you can always increase that output by increasing the amount of potential labour.  Thus, immigration policy and encouraging fertility.  But if you encourage fertility, you take mothers out of the workforce and so can’t turn their capacity for labour into GDP.  So the net increase in population from fertility has to be greater than the loss arising from maternity.  Thus, you need policies which encourage fertility but also encourage mothers to return to the workforce quickly.

So page 16 and 17 end up talking about two of the three most contentious policies in this space: the Baby Bonus, Paid Parental Leave, and the reduced eligibility for the Parenting Payment.  They are related ideas but very few commentators put them together.

The Henry Tax Review showed that the Baby Bonus is inefficient:

In addition to [Famility Tax Benefit] payments, families may receive the Baby Bonus, which is provided to assist with the costs arising from the birth or adoption of a child. The Baby Bonus in effect covers more than the additional direct costs around the birth or adoption of a child and can be considered to assist with forgone income as well. The latter objective will in effect become redundant from January 2011 with the introduction of [Paid Parental Leave]. [Source: A Fairer Tax System – Report to the Treasurer p. 570]

This is a good example of excellent policy analysis.  The Baby Bonus had two objectives: to assist with the costs arising from the birth or adoption of a child; and to assist with forgone income.  But it does this inefficiently and there is another policy option which more effectively targets the second objective.  Thus, we should scrap the Baby Bonus in favour of something which assists with the costs arising from the birth or adoption for efficiently.

Oh, hey.  That’s what we’ve got here:

To target assistance to where it is needed most, the Government is also introducing reforms to ensure the sustainability of the family payments system. From 1 March 2014, the Baby Bonus will be replaced by an increase to Family Tax Benefit Part A (FTB-A) of $2,000 on the birth or adoption of a first child and $1,000 for subsequent children, also reflecting the recommendations of the [A Fairer Tax System] review.  [page 16]

This is great policy.  Instead of being a story of ‘We’re scrapping the baby bonus’, it’s ‘The Baby Bonus was inefficient, so we’ve transitioned it into a better system.’  But, no.  All we get is ‘Boo frickity hoo, the Baby Bonus is being scrapped.’  This is why we can’t have nice things.

What did Joe Hockey have to say about this proposal?

Shadow treasurer Joe Hockey says the coalition will look closely at the details before announcing its position on the baby bonus. [Source]

Has Hockey not read A Fairer Tax System?!  Perhaps that might be considered an informal requirement of the Shadow Treasurer position.  What a nong.  Exactly how many years has he had to come up with a position on this?

Thus we get to the very curt comment on page 17:

eligibility requirements for Parenting Payment have been aligned following a six-year transition. [page 17]

Here we have the reverse side of the family policy question: once you’ve successfully encouraged somebody to start a family, how do you return them to the workforce?  Under a fair system, we might argue, people in the same situation would be treated similarly.  There wouldn’t be one group of people who were treated favourably because they received a payment earlier than the next group.  Yet that’s what was going on here, with a very noisy group of parents benefiting from a grandfathering arrangement which allowed them to receive a payment long after the kid was of schooling age.

Regardless of the politics, it shows how difficult it is for the ALP to advance any kind of strategy in this space without upsetting people who are benefiting under current arrangements.  There was no way to justify the grandfathering clause, yet we had inches and inches of newspaper columns dedicated to complaining how unfair it was that the Government was no longer going to provide this particular support for families.

But it should also strike us as weird that this is part of a document about taxation reform.  What precisely is the bigger picture?  On page 17, the Parenting Payment is considered some kind of barrier to workforce participation.  Again, it’s this view that incentives not to work are a kind of hurdle.

Superannuation policy is interesting, but when the word ‘reform’ refers to little more than ‘increasing the compulsory rate’, you have to wonder which dictionary the ALP is using.  Oh, and keeping people in the workforce for longer.  At this rate, I’ll be 120 before I’ll be allowed to retire.  Super policy occupies an interesting space on the cusp of workforce and health policy — more people are reaching retirement age than ever before and more people are living longer in retirement than ever before.  At the same time, we’re getting increased rates of dementia and Alzheimer’s, &c.  Should super be redesigned to be more like a Health Savings Account but specifically for aged care needs?  Should super be redesigned to help fund reskilling so that a person in their 50s can move into the ‘knowledge-economy’?  In other words, why do we assume that superannuation should be specifically linked to funding an extended holiday in retirement?

The dumbest page of the document is easily page 24 (and there are blank pages in this booklet):

PROTECTING THE INTEGRITY OF THE WINE PRODUCER REBATE

The Government recognises the importance of wine producer rebate to small winemakers, as well as its ongoing integrity. The Government improved the integrity of the wine producer rebate by ensuring that wine producers cannot claim multiple rebates where wine is blended or further manufactured. [page 24]

There is no excuse for this being in a document about taxation reform.  How is this part of your big picture strategy?  Seriously?  Seriously.

Page 25, in comparison, is much, much better and should be compulsory reading for anybody who thinks that the States should continue to exist long after their use-by date.

The AFTS review found that some of the most inefficient taxes levied in Australia are state and territory taxes. It identified reforms to improve or abolish existing state and territory taxes that are a drag on the economy. In all, the AFTS review made 26 tax-related recommendations requiring state and territory or intergovernmental action. Many of these recommendations have been echoed by state and territory tax reviews in recent years, such as those of New South Wales, Victoria and the Australian Capital Territory.

To its credit, the chart listing ‘sources of state and territory tax revenue’ was kind enough to not itemise ‘corruption’.  At the same time, this page reveals the sheer impotence of the Government in prosecuting its bigger plans of creating a world-class taxation system.  You can’t do big things when you’re held hostage to the warlord premiers.

Pages 26-29 outline the implementation of the Henry Tax Review and it’s an interesting read.  Perhaps some of the biggest strengths of this budget are revealed only when it is considered in the context of a multi-year plan.  Because the destination is not clearly known, it makes it difficult for voters to believe that the ALP doesn’t live Budget to Budget.  I know I’m asking far too much, but it would be interesting to hear if the Coalition has a similar picture of where it wants to go — beyond Special Economic Zones and greater tax burdens on natural persons.  The Coalition’s plan, remember, is to just cut spending.  As we’ve seen in Queensland, it’s an inelegant policy option which fails to really confront the bigger questions.

There are parts of the road map missing from this document.  Housing — perhaps one of the most diabolical problems in Australian economic policy (it has intersections with a dozen different portfolios; I was genuinely shocked to discover housing investment appear as part of aged care health strategy) — is only mentioned once in the report (page 26, in reference to something that happened in 2008).  If you’re serious about fixing structural problems and presenting a comprehensive strategy for taxation, you have to have a plan for housing.  Do we continue to protect it, or do we let the system crash as per market forces?  When Howard and Costello did everything they could to get more investors in the housing market, I doubt any government would be willing to be the one that let the bubble burst.  In many senses, that’s the tragedy of the GFC — we had the opportunity to let the bubble burst along with other areas of the economy.  Instead, we protected this particular bubble because the short term gains were politically good.

If the voting population weren’t actively stupid when it came to the Budget, this document would be a good first draft for a conversation on the topic.  So we’re back to the recurring question of the Gillard Labor Government: is this a government which can’t communicate, or is there no point trying to communicate when the public is so obstinately ignorant?

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One thought on “#budget2013: Analysis of the Taxation Reform Road Map #auspol

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