Tax Reform A False Start In Pursuit Of Economic Growth

The new Turnbull government should stop talking about tax reform.

Tax reform is a poor use of its political capital. It is a waste of the goodwill Malcolm Turnbull brings to the prime ministership. The challenge Turnbull faces is not to make our tax system slightly more efficient. The challenge he faces is how to make the economy grow.

When he became Treasurer, Scott Morrison stated that the Commonwealth has a spending problem, not a revenue problem. That is, the government wants to focus on spending cuts rather than tax increases.

This is excellent, as far as it goes. But in truth our real problem is growth.

The International Monetary Fund estimates that the Australian economy is going to grow just 2.5 per cent this year. Back in the Howard years, growth averaged 3.7 per cent a year. The Reserve Bank governor has publicly speculated that our lower growth might be the new normal.

If you want to blame the stubborn budget deficit on anything, blame it on this. John Howard, Kevin Rudd, Julia Gillard, Tony Abbott, Malcolm Turnbull: they’ve all been riding the waves of our growth figures.

Some governments have made the problem better and some have made it worse, but the simple fact is that policymakers can no longer rely on the same level of growth that once delivered windfalls to the Commonwealth budget.

The focus on tax is a distraction. Ever since Kevin Rudd commissioned his own Treasury Secretary to conduct a “root and branch” investigation of Australia’s tax system in 2008, tax reform has been an obsession of governments. Joe Hockey was only following Labor’s lead when he launched the Coalition’s tax reform process.

It is true that the tax system could be made more economically efficient. It would be more efficient for taxes on income to be further replaced by taxes on consumption. This is why many economists have said that the GST should be raised and personal and company tax reduced. Morrison has been talking about this possible trade-off already.

But it’s hard to see why this is a national priority. Efficiency isn’t the only thing we want from a tax system. Indeed, a theoretical insistence on efficiency was what gave us the Rudd government’s mining tax; a tax which was understood by a tiny fraction of the population but was the inexplicable and unhappy centrepiece of Labor’s economic agenda.

And while efficiency makes it easier for governments to extract more money out of us, is that really such a virtue? We ought to know when we are being taxed. Voters need to know what their government is doing. They need to know how taxes are raising the prices of the goods they buy and reducing the money they have to buy those goods.

A budget emergency is the worst time to conduct tax reform. There’s not a person in the country who believes the economy will escape this round of tax reform with a lower total tax burden.

Every incentive in the Treasury department is to edge taxes up. That’s why Joe Hockey cracked down on so-called corporate tax “avoidance”. That’s why the GST is now to be levied on online purchases. And anybody who thinks eliminating superannuation “concessions” will help the economy has rocks in their head.

It’s all incredibly counterproductive because the fixation on revenue and tax increases actually holds back the growth we need to encourage. Taxes take money out of the productive parts of the economy. Perhaps the government thinks it might be able to use its revenue to lay the foundations of growth – by investing in infrastructure and private education. In practice, too much of this investment goes to white elephants and degree mills.

Governments – directed as they are by professional politicians with their eyes on marginal seats and swinging voters – aren’t that good at spending our money wisely. Turnbull needs to be careful his interest in innovation doesn’t become a stream of taxpayer-funded boondoggles. Much better to revitalise the Coalition’s flagging deregulation agenda, refocus on industrial relations, and eliminate any regulatory burdens holding back employment and production.

Even the constant drumbeat of tax reform is likely to be harming growth. We’ve been talking about tax reform for nearly a decade. Uncertainty about Australia’s future tax regime makes companies less eager to invest. They know the tax system is probably going to change. They don’t know when, or how.

But there’s a deeper reason Turnbull should fixate on growth rather than taxes. Higher growth means increased living standards. Higher growth means a more prosperous Australia and more prosperous Australians. This – not spending, not revenue – should be what keeps Malcolm Turnbull and Scott Morrison awake at night.