Crispin Hull: Tax

Thursday December 5th 2013

Crispin Hull's Portico: Tax

Oh no, not the family home. How can the Grattan Institute even dare to mention the sacrosanct family home in the same sentence as tax or means testing? Don’t these people understand anything about Australian “battling” and “doing-it-tough” families?

The institute joined a long line of government bodies, think tanks, economists and others warning that something must be done to fix Australia’s impending government debt crisis, and in doing so dared to look at the family home.

It suggested that we have a problem. We do. But it is not the problem posed by the Coalition in the recent election campaign. In the campaign the Coalition posed a picture of a government wallowing in debt. In fact, the debt raised to meet the global financial crisis was well spent. Without it, total debt would have been far worse because we would have had a recession and government revenue would have collapsed. The debt to meet the GFC, in a sane environment, has always been manageable.

So the problem is not the one posited by the Coalition during the last election. Rather it is a different debt problem. It is long term and has been created by the way both sides of politics have put their very similar stories to the public. They have both perpetuated four storylines in the past decade which together are a recipe for financial catastrophe:

1. You are doing it tough.

2. Elect us and we will make it better.

3. We will give you even more in the form of extra spending on education, the disabled and maternity leave.

4. And we will not increase taxes. (In fact, the Coalition wants to remove two taxes).

In the medium term, this is the path to unsustainable debt. It is made worse by an ageing population.

The worst of these four storylines is the first – that Australian families and businesses are “doing it tough”. The other three have been part of the political lexicon since Federation: our party is better; we will give you more; we will not raise taxes. No sensible voter has ever taken any of those three seriously. But, tragically, far too many people in Australia now believe the first of the four: the “doing it tough” storyline.

It is factually wrong. Incomes have risen faster than the cost of living in the decade since the creation of the Howard battlers and the perpetuation of that myth with Kevin Rudd’s mantra, “I know that Australian families are doing it tough.”

In fact, if you are a permanent resident of Australia you have won the lottery of life. Once the Rudd Government extended “the Howard battlers” storyline, the nation’s public finances were lost. The storyline is demeaning and debilitating.

If you are “doing it tough”, life is a struggle, there is no surplus, no money or time to look around to see others, to aspire to greater things, to look at the worldwide picture. Under that mantra, “We are too strapped just to survive, without worrying about anything else.”

That would be a perfectly understandable perspective from people who really were doing it tough, struggling from one day to the next on a few dollars. But it is not a legitimate view for the broader Australian community who have never had it so good and who are better off than people on nearly every other nation on earth.

It is a great puzzle how this storyline has been so readily adopted and has shaped our politics so profoundly, even unto paralysis on major policy items, particularly on tax. About the only policy change it has not affected is the savage cut to foreign aid.

We are doing it so “tough” that we cannot help people who really are doing it tough so barely a squeak was heard when the foreign aid budget was slashed. But the storyline has been accepted, and it is paralysing attempts at sensible reform.

“Doing-it-tough” grey-haired couples in their mid-60s with a family home worth $1 million or $2 million could not possibly have their pension “rights” affected. And their “doing it tough” children could not possibly pay capital gains tax on the windfall when they inherit that home as they approach an absurdly low retirement age. In the face of this “doing it tough” storyline, no government can tackle the revenue side of the budget.

Indeed, this Government is not much interested in revenue and tax. The terms of reference for its National Commission of Audit are skewed towards cutting spending rather than raising taxes. This is a pity. We will not get recommendations for an imaginative structural change in the tax system. Instead, we will most likely get an inward-looking, mean-spirited set of petty cuts in government spending.

But despite all these difficulties and despite the horrible false conditioning that people are “doing it tough”, a long-sighted first-term government should look at the history. It has been more than 80 years since a first-term government was tossed out. So why not bite the bullet on the tax changes that so many have suggested.

Some practical method would be needed to bring the family home into the pension means test – double the rateable unimproved value, perhaps. Whatever the mechanism, as a matter of fairness, why should people with a massive asset in the family home not have that considered when calculating their aged pension whereas the assets of someone without their own home result in a lower pension?

The pension is there for those who cannot look after themselves. It is not a right.

We will need some means of ensuring that the threat of capital-gains tax on the family home does not prevent people from moving to more suitable housing – some delaying mechanism perhaps. It is not as if the family home has always been outside the tax system. Remember that in 1999 it was brought into the GST system. After 1999, all of the materials and nearly all the labor that went into the construction of housing was made subject to the GST and caused the price of a new dwelling to rise by about six per cent.

If sensible adding tax to the family home could be done then, it can be done now. The retirement age could be pushed to 70, with some mechanism to alleviate the difficulties for people relying on physical strength for their income. We could have the equivalent of indexing the retirement age against rising longevity.

The idiotic Costello tax-free superannuation for people over 60 could be reversed. The Costello capital gains tax changes could be revisited. More importantly, a raft of industry subsidies could be abolished – particularly propping up a third-rate car industry.

And so it goes on.

All that said, the most significant difference to the environment of reform of the Hawke-Keating Governments and later times was the egregious, erroneous, self-serving creation by John Howard of the “battler” who in earlier years would have been dismissed as a “whinger”. And this was followed by Kevin Rudd with the equally egregious mantra of “doing it tough”.

Normally skeptical Australians constantly fed this belittling tripe began to believe it. And now tragically, we have no stomach for the economic reforms which left undone will really make us “do it tough”.