Both sides ignore our $20 billion con

Australia's tax system is distorted to the tune of $20 billion. While it means some short-term political gains for Kevin Rudd, many of his 'gifts' are just smoke and mirrors.

Labor’s decision to hand $450 million to schools in outer suburban areas to help them provide before-school and after-school care to children is smart enough policy, and it will win a few votes. However, it is also another example of tinkering with a tax/benefits system that needs a total overhaul.

To the poorer families who will benefit – families in which parents are travelling long distances to work to balance domestic budgets – the ‘gift’ from the government will give them new respect for Uncle Kev. That rotter Tony Abbott isn’t matching the gift, so Labor scores a few easy points at the start of the 33-day campaign. 

That’s all pretty simple stuff in voter land. But for those who actually understand fiscal policy, there is an opportunity for one or the other side of politics to finally confess to the Australian public that our tax/benefits system is a fool’s paradise. 

Whatever you think of big ticket spending plans such as the Labor or Coalition versions of the NBN, the clean-energy investments of Labor’s carbon pricing scheme, or federal funding of Disability Care and the Gonski eduction reforms, there is ‘fat’ in the budget that doesn’t need to be there. 

One of the big areas for reform stems from the fact that we take in more tax than we need, then hand it back as ‘family payments’, or other perks such as the direct funding of childcare places. 

This is a recycling of tax revenue that distorts the budget to the tune of $20 billion a year.

While the expenditure in the budget on ‘Income support for seniors’ is, literally, a tax and spend process – which costs tax payers $39 billion a year (and nobody’s begrudging pensioners that) – the family payments systems works quite differently. We take tax dollars from struggling families, and then give it back again and pretend it’s a gift. 

Crunching the numbers from the federal budget shows that the tax/GDP ratio for 2013/14 of 23.6 per cent would be just 22.3 per cent if the money-go-round of family payments was excised from the budget. 

The overwhelming majority of Australians want a progressive tax system, up to a point – somewhere around 47 per cent is about the highest marginal tax rate we can ask for before highly skilled workers decide they’re better off working part-time. 

But at the lower and of that scale, we’re taking tax dollars from, most often, Dad, and then putting money in Mum’s bank account as federal government largesse. That’s a money-go-round, and it’s an accounting illusion. With a few tweaks to the PAYG tax system (or to provisional tax for the self-employed), that money would never have to be handled by the government. 

Then Mr and Mrs Outer-Suburbia could look at their low, low marginal tax rate and their incomes and see how much money is left to pay for childcare. At the moment it’s all smoke and mirrors. 

This election is going to be, on both sides of politics, a grand exercise in avoiding real tax reform (including bulking up ‘efficient’ taxes such as the GST), and buying votes with after-school care, paid-parental leave and the like. 

As David Murray, former Future Fund chairman and Commonwealth Bank chief executive, says in today’s papers, “The chance of the structural deficit being addressed in this election campaign is zero.”

Indeed. Perhaps the next opposition, whoever that might be, could take a really good look at the tax reform and get it on the agenda for the 2016 election. 

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