A form guide to Labor’s bold tax plans

 

Taxation has been a bigger issue in this election campaign than in any other since the GST-dominated elections of 1993 and 1998.

Labor is upfront about seeking a net increase in taxation. This is a major point of differentiation from the Coalition, which although not shy about increasing some taxes in office now proposes larger reductions in personal income tax than Labor.

Both sides like to talk about amounts to be raised or given away over 10 years, but these 10-year aggregates are designed more to shock or impress  as the case may be than elucidate.

For a more meaningful picture, let’s fast forward to 2024-25 for a comparison of annual figures.

On the heroic assumption that estimates so far into the future are reliable, Labor is planning to collect in round terms $42 billion more than the Coalition. This is a very substantial amount, resulting in the equal highest tax-to-GDP ratio in recorded history.

Shorten’s tax increases as well as going after the ‘top end of town’  are clearly designed to finance a bigger government sector. The problem with this is that government is already too big and doesn’t need to grow bigger.

There is waste and inefficiency in existing spending, and a Labor government focused on efficiency could make room for its spending priorities without imposing net tax increases.

There are also concerns about the individual tax measures. The largest dollop of extra revenue comes from repealing the Coalition’s lowering and reshaping of the income tax scale, and instead making the $1,080 low and middle income tax offset permanent.

The offset distorts the income tax scale and even fails to correct for the many years of bracket creep since the last rejig. In addition, Labor plans to impose on high earners a 2% ‘budget repair levy’ that can no longer be justified on budget repair grounds.

The next biggest revenue raiser is the proposal to cancel franking credit refunds. As well as being highly discriminatory in its impact and hurting some people on modest incomes quite hard all of which has been well aired this measure has no basis in principle.

The ‘no tax paid, no refunds’ slogan is disingenuous humbug. The logic of the imputation system is that the benefit of franking credits flows to everyone, whether as cash refunds or as credits against tax payable.

Labor lumps negative gearing and capital gains tax discounts together as if they were natural twins, but they are quite different and need to be assessed individually.

Negative gearing, on one view, is simply an application of the principle that expenses incurred in earning income are deductible against income for tax purposes. However, a case can be made for negative gearing losses to be quarantined and carried forward to be offset against future capital gains.

In contrast, the case for the existing 50% capital gains tax discount is strong and Labor’s proposed halving of the discount represents a savage tax increase that would give Australia the steepest capital gains tax ever and one of the steepest in the world.

In many cases, a 25% discount won’t even compensate for inflation, so people will be paying tax on purely inflationary gains. Effective tax rates on real gains will be extremely high. Further, Labor presents its capital gains tax policy as a housing policy, but the tax applies to all assets including shares and unit trusts.

The plans for another tax raid on superannuation have no basis other than one-upmanship following the Coalition government’s raid in 2016.

In general, the outstanding feature of Labor’s tax plans is that they have a laser-like focus on income from saving. Some $15 billion extra tax would fall directly on saving.

While there is a case for reforming tax on saving to make it more uniform across different forms of saving, no case has been made that the overall tax take from saving is inadequate.

In 1993 and 1998, the party with bold tax plans lost ground in the election. Let’s see if this time will be different.

Robert Carling is a Senior Fellow at the Centre for Independent Studies