Opinion & Commentary
Why reform worked in 1985
THIS week, as we reflect on the early achievements of the Hawke-Keating government, it is worth thinking about tax reform.
The idea of the 2011 tax summit, which evolved into the tax forum, was inspired by memories of the Hawke government's 1985 summit. But the 1985 summit was as much a failure as a success. It led to significant income tax reforms, but it also buried Paul Keating's planned broad-based consumption tax for another 15 years.
Successful tax reform depends on the right political and economic conditions. The Howard government's burst of tax reform between 1998 and 2000 occurred without a summit. It would be difficult to argue that the outcomes would have been any better, or even as good, had there been a summit. In 1985, summit or no summit, reform had a lot more going for it than in 2011. The summit faced a menu of more obvious flaws in our tax system than exist now. There were big gaps in the personal income tax base, marginal rates were as high as 61 per cent, company tax also was much higher, dividends were subject to double taxation, and there was no broad-based consumption tax.
Twenty-six years later, the tax system is still flawed but less so than in 1985. Much of the low-hanging fruit has been picked, and it is harder to argue the case for picking what is left. The arguments for reform identified in the Henry review of the future tax system are for the most part more subtle and theoretical. A leading theme of the report is that economic efficiency is best served if the weight of taxation is calibrated to the economic responsiveness of the different tax bases. This is what led the review to recommend a reduction in taxes on capital while leaving labour income taxes at higher and progressive rates, and a shift to heavier taxation of mining and land. Those recommendations have obviously proved highly controversial.
The 1985 summit was also held when the world economy was in much better shape than now, and income taxes were being cut in other countries. Hard-nosed economic rationalism was in the ascendancy. In contrast, the background in 2011 was one of financial crisis, with governments conserving revenue, increasing taxes in many developed countries, and with economic rationalism under attack.
Public finances in Australia are in much better condition and there is no reason for us to mimic the trend in other developed countries to increase taxes. But that trend inevitably affects the atmospherics here, and makes life easier for those who don't want to lower the tax burden or want to increase it. The government's insistence on revenue-neutrality in tax reform makes reform that much less likely to occur, because revenue-neutrality pits losers against winners.
The most important contrast between then and now is in the tax reform agendas that the governments of the day brought to the respective events. Although the 1985 summit was prime minister Bob Hawke's idea, treasurer Keating had a bold plan (his option C) centred on a broad-based consumption tax, took that plan to the summit, and shaped the agenda accordingly. Keating would rather have implemented it without the summit, but he attempted to use the summit to push through a concrete and far-reaching plan.
In contrast, the government did not go into the 2011 forum with a bold plan. It certainly has policies -- such as the mining tax, the carbon dioxide tax and associated re-jigging of personal income tax -- but they were presented as a fait accompli, not up for discussion. Apart from those policies, the government had no plan to put on the table, it did not control the agenda, and the discussion went off in many directions.
There were few concrete outcomes. Apart from Wayne Swan's surprise announcement of a further lift in the tax-free threshold to $21,000 (at some unspecified time), the conclusions were largely about process and review that may or may not lead to further tax policy change.
Summits may be viewed cynically as a harmless embellishment of the tax reform process, giving everyone remotely relevant to the process a platform on which to be heard before the government does what it would have done anyway. But the risk is that they will take over and derail the process (as in 1985) or give voice to various narrow sectional interests and miss the broad public interest (as in 2011).
The recent forum favoured the interests of claimants on the public purse rather than contributors to the public purse. There were also a few vocal little Warren Buffetts, pleading to be taxed more heavily. Defenders of the public interest and the general taxpayer were thin on the ground.
A better model for the tax reform process is a review appointed by, but independent of, government, followed by a green paper, a white paper and targeted consultation.
If summitry is not the key to tax reform, what is? History suggests that reform is most likely to progress when one or more of the following conditions are met: the government is fresh, has reformist zeal and feels electorally secure; there is bipartisan support for at least a substantial part of the reform agenda, or the opposition at least goes quiet on it; there is a pervasive sense of economic crisis that makes reform imperative; or the government's fiscal position is comfortable, allowing some surplus revenue to be used to grease the wheels of reform. In this situation, reform is revenue-reducing, and the number of losers is minimised.
Clearly, none of these conditions applies at present. The tax forum in Canberra last year was widely criticised as a talkfest that produced few concrete outcomes. As a participant, I would agree, but it is doubtful whether such gatherings are ever capable of advancing the kind of tax reform that is in the broad national interest. It is difficult to achieve a ``consensus'' on good tax reform among the wide range of conflicting vested interests brought together to make such events fully ``inclusive''. The times are such that good tax reform faces an uphill battle.
Robert Carling is a senior research fellow at the Centre for Independent Studies.
