Treasury tax paper ignores virtually every new idea in tax policy since the 1970s

John Quiggin writes (The Guardian, 31 March 2015) that the worthwhile ideas in Re:think on tax are right out of the 1975 Asprey report on taxation reform.

This paper, boldly entitled Re:think, promises something new, more appropriate to the changing world we live in. Moreover, “the government will be considering every worthwhile idea, even if it does not fit neatly with the existing set of major taxes we now have”.

Sadly, the paper does not live up to either of these promises. With the exception of some passing references to the digital economy, there is little here that would have surprised the authors of the Asprey Review, delivered in 1975.

The primary conclusion of the Asprey committee, repeated almost verbatim 40 years later, was that Australia relies too much on personal and company income tax and that we should shift to more reliance on broad-based consumption taxes (that is, the GST).

Transfer pricing, and its use by transnational corporations to avoid taxation, is presented as a new discovery. Perhaps for the Treasury it is one. Leftwing critics like the late Ted Wheelwright were pointing out the problem decades ago. About the only new thing here is the invention of the acronym Beps – for base erosion and profit shifting.

Even the mistakes are old ones. It has been pointed out many times since 1975 that international comparisons of income tax rates are misleading if they include the social security taxes that are levied in most other countries.

Despite the claim of exceptional openness, the review ignores, for one reason or another, virtually every economic development since the financial deregulation of the 1970s, and virtually every new idea in tax policy that has arisen in response to those developments.

Most notably, the Global Financial Crisis seems to have been forgotten entirely. The assumption that the global financial market is both permanent and beneficent is taken entirely for granted. Other 21st century problems – like climate change and the resurgence of inequality – fail to rate a mention.

As regards tax options, the most obvious exclusions – carbon taxes and resource rent taxes – reflect the political sensitivities of the current government, which abolished these revenue sources on gaining office.

The foreword to the paper (unsigned but presumably written by Joe Hockey and meant to be read as such) asserts that “Last year, the government abolished the carbon and mining taxes, which were a drag on growth”.

This claim directly contradicts analysis previously published by Treasury, and is implicitly contradicted in the paper itself. The Treasury analysis of carbon pricing, published under the last Labor government, showed that the impact of carbon taxes on economic growth would be minimal.

The current government has proved the analysis right by direct experiment. The removal of the carbon tax not only had no positive impact on economic growth, it was followed almost immediately by a sharp downturn in most of the affect sectors, as well as in the economy as a whole.

The turnaround on minerals resource rent taxes is even more striking. This was, of course, a Treasury idea, the centrepiece of the Henry review, and the only item in that review to be adopted by the former Labor government.

Naturally, there is no explicit consideration of this “worthwhile idea” in the discussion paper. However, Treasury did manage to sneak a coded reference to “profit-based royalties” into the paper. A moment’s consideration shows that there is little or no difference between a resource rent tax and a profit-based royalty.

The government’s initial response to the paper makes it clear that their primary agenda was an increase in the GST, achieved through some combination of higher rates and the elimination of exemptions. It is already obvious, however, that this is not going to happen.

The fallback position, on which bipartisan agreement looks feasible, is a scaling back of the massive tax expenditures on superannuation. If that is the only outcome of Re:think, the exercise will have been a worthwhile one. 

(Editorial note: Re:think takes a neutral position on superannuation taxation - it does not advocate a scaling back of tax expenditures on superannuation)