The deficit levy isn’t 'tough', these four budget reforms are 'tough'

The government could be well on the way to a surplus if it bit the bullet on a couple of politically controversial issues.

Graph for The deficit levy isn’t 'tough', these four budget reforms are 'tough'

Part iron-man, part parliamentarian. Surely Tony Abbott knows the definition of the word ‘tough’. Image: AAP

In recent years, despite the prosperity of the mining boom, Australia hasn't experienced an 'easy' budget.

We’re told that every budget will be 'tough', to the point where it's so ingrained in our political culture that now the phase 'tough budget' has become a political cliché that many Australians simply ignore.

Of course, this makes it hard for the Coalition to sell its proposed deficit levy on the basis that it's 'politically tough, but the right thing to do'. And this was reflected in the Galaxy poll over the weekend, which found that even core Coalition voters feel betrayed by the move.

Sure, this new 'levy' (which in case you didn’t know is government speak for 'tax') may defy the Coalition’s "no new taxes" pledge, but it makes sense. Alan Kohler picked it back in December after the government’s mid-year economic fiscal and outlook statement.

"The simplest and fairest thing would be to simply raise the marginal income tax rates," he said. And here we are six months later, staring down the barrel of a proposed income tax add-on for Australia’s wealthiest workers. The government will make a final call on the levy during the budget next week.

It’s funny that the Coalition is looking at to introducing a levy to equal out Australia’s budget. Earlier this year, Callam Pickering aptly described Australia’s tax system a leaky sieve.

Surely there are plenty of other holes we could plug. We outrank some of the world’s most inefficient developed countries in terms of missed taxation opportunities. Just look at the chart below from a recent IMF report on tax expenditure in Italy. But as Pickering points out: "No other advanced country foregoes more tax revenue, through 'differential, or preferential, treatment of specific sectors, activities, regions or agents', on an annual basis than Australia".

Graph for The deficit levy isn’t 'tough', these four budget reforms are 'tough'

To put this year’s budget and the deficit levy into context, here are four other policies that would be far tougher to sell to the voting public.

1. Cut super tax concessions

By changing the way superannuation is taxed, the Grattan Institute estimates the government could generate an extra $6 billion a year in income tax.

As it stands, everyone under the age of 60 is taxed 15 per cent on super profits. For those over 60 years of age, the government waives this charge.

The Grattan Institute’s John Daley says such a reform would only be "tightly targeted at people who are doing very nicely". However, this reform would likely be opposed by anyone not keen on the idea of paying tax all the way through their retirement.

A recent Australia Institute report found that superannuation tax concessions will become the single largest area of government expenditure by 2016-17. Australia’s ageing population may force action on this front sooner rather than later.

2. Cut or reduce negative gearing benefits

If the government really wants to hit voters where it hurts, then they could change the rules around negative gearing.

According to the Grattan Institute, stopping investors' ability to deduct losses they make on investment properties as a tax writeoff could save the government as much as $4bn a year in the short term and $2bn a year in the long term.

But as the Australia Institute's David Ingles points out, property investment is booming for Australia’s middle class. Changing the rules could upset more than a few voters across multiple demographics.

He adds that when former treasurer and prime minister Paul Keating tried to abolish negative gearing back in the 90s, it caused rental prices in Sydney to spike to new highs.

3. Axe or reduce the capital gains tax break

According to the Grattan Institute, cutting the 50 per cent tax break Australians receive off capital gains tax would contribute about $5bn per year to the budget. The institute's chief executive John Daley says that this rule "overwhelmingly benefits" the top 2 per cent of Australia's income earners.

Again, these rules largely affect property investors and may not be well received by middle-class Australian property investors. Removing the break would really wind back the clock on this tax, which was first introduced in 1985 after the Hawke/Keating tax summit. The 50 per cent tax break was introduced by the Howard government in 1999. 

4. Broaden GST, but lower income and corporate taxes

This reform has been floating around for a couple of years and was suggested by the OECD back in 2012. While it wouldn’t directly affect the budget’s bottom line, it would reshuffle the tax system to improve corporate investment and raise productivity.

As seen in the chart below, Australia’s tax system largely relies on income tax and, to a lesser extent, company tax. 

Graph for The deficit levy isn’t 'tough', these four budget reforms are 'tough'

Broadening the base of the GST would give the government more room to move with lowering the corporate tax rate (which current sits at around 30 per cent of revenue) and cutting income tax. In return, the government would drive tax revenue by broadening the base and increasing the rate of the GST to encompass more products. The Grattan Institute estimates this will improve economic output by up to $25bn a year.

Given the lasting ramifications of all of these reforms, it’s no wonder why the government appears to be opting for a simple (but likely effective) income tax increase.

But if we are indeed in a "budget emergency" -- to the point where we must achieve a surplus at a cost -- then shouldn’t unpopular but potentially effective reforms be canvassed by government prior to budget?

In truth, the budget isn’t 'tough' -- it’s just tricky. Neither party wants to be remembered as the government that raised taxes. But at the same time, they want to prove that they are prudent fiscal managers by delivering a token surplus.

Here’s the key question: will a surplus at any cost really benefit Australia?

Further reading before next week’s budget:

A pocket guide to the Australian tax systemThe Australian Treasury
Broaden GST and cut industry subsidiesThe Conversation
What we talk about when we talk taxBusiness Spectator
Why a permanent budget surplus is a poor fiscal modelBusiness Spectator

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