What lies beneath the Vic election: tax

The big tax squeeze is the key to the Victorian election results.

The key political issue of our time, and the one that underlies the Victorian election result, is the tension between global tax avoidance and the refusal of citizens to pay regressive taxes on consumption.

Corporations and the rich are increasingly able to choose their tax domiciles. As a result, company and personal income taxes are being forced down as nations compete to hang onto mobile capital.

As Treasury Secretary Martin Parkinson said in a speech last week, “In contrast to the focus of our public debate, comparator countries are lowering personal and corporate income taxes, and shifting the tax mix in favour of more efficient tax bases, in order to better compete globally. The consequence for Australia of maintaining a 1950s tax mix in the 21st century should be self-evident.”

The only way countries can fund the growth in spending demanded by the ageing of the population is to tax domestic consumption instead of income.

This has been evident since the Asprey Committee of 1975, which first proposed a broad based consumption tax. It took Australia’s dysfunctional political system 25 years to do it, even though Asprey was obviously right.

The debacle of this year’s Federal Budget shows that the politics of taxation remain very difficult indeed.

In fact, the Victorian election seems to have been a kind of proxy Federal election. They say all politics is local -- well, perhaps not this time. If the State election was a referendum on anything, it was the 2014 Federal Budget.

Treasurer Joe Hockey’s first budget was an attempt to return the budget to surplus while reducing company tax and not collecting the effect of fiscal drag on personal income tax. The only increase in taxes on the rich was a temporary budget levy.

Apart from that, the budget measures were regressive and arguably unfair. Populist parties in the Senate have refused to pass most of them and the Victorian branch of the Coalition was voted out even though the state budget is in surplus and Victoria is the only state with a AAA credit rating.

Governments are increasingly getting squeezed between the ability of companies and rich individuals to move money to lower tax locations, thereby subverting progressive income taxes on the one hand, and the refusal of voters to pay regressive taxes on consumption on the other.

This trend has been apparent for years, but there has been a complete failure of the politicians and econocrats in Canberra to deal with it.

Despite 23 years of economic growth, the Budget is in deficit and the gap is now widening dramatically as the company tax windfall from the mining boom diminishes rapidly.

This is the result of roughly a decade of fiscal mismanagement, including the complete failure of successive Federal Governments to prepare for the inevitable end of the mining boom.

The most remarkable thing of all is that even though Labor was in power for most of that decade, the Victorian election result suggests that Coalition has managed to direct the blame for both the mess and solution onto itself, by not using the budget process to explain the problem but instead to try to and bring in some long-nurtured ideological ideas that have now failed.

As a result, Government debt has increased by $75 billion over the past 12 months and, according to Deloitte Access Economics, the forthcoming budget update will reveal a deficit blowout of $35 billion over four years caused by weaker than expected economic growth and company tax collections.

The impact of those factors is now greater than the savings that were proposed in the budget, which have, in any case, been rejected by the Senate -- so a double whammy: weak economy and budget savings blocked.

In this morning’s Australian, Adam Creighton quotes Deloitte Access’s Chris Richardson as saying: “The opposition and minor parties have washed their hands of setting­ out detailed alternatives, preferring populist posturing.

“It looks to us like a nation that can’t handle the truth: a temporary boom has come and gone, and a sustainable path for our national social compact requires some tough decisions.”

According to the Australian Financial Review, the Prime Minister Tony Abbott spent Sunday -- as the new Victorian Premier Dan Andrews selected his Cabinet -- “bunkered” in his Canberra office finalising the details of a tax reform discussion paper, as a prelude for the Tax White Paper.

For 40 years, tax reform discussion papers, committees and White Papers have all been designed to persuade the nation to accept more indirect taxation -- either more GST, land taxes, death duties or excise duties. That is -- the things that can’t be avoided by moving money offshore.

This one is likely to be no different. Is there any chance that any of this White Paper’s recommendations to increase the indirect tax base will get through the Senate? None.

The only thing it will do is put off the need for big spending cuts to health, welfare and education for a few more years, while we debate the White Paper’s call for an increase in the GST.

By which time the deficit will be mountainous.

InvestSMART FORUM: Come and meet the team

We're loading up the van and going on tour from April to June, with events on the NSW central & north coast, the QLD mid-north coast and in Perth, Adelaide, Melbourne, Sydney and Canberra. Come and meet the team and take home simple strategies that you can use to build an investment portfolio to weather any storm. Book your spot here.

Want access to our latest research and new buy ideas?

Start a free 15 day trial and gain access to our research, recommendations and market-beating model portfolios.

Sign up for free

Related Articles