Photo by Tobias Moore on Unsplash

Was the 2019 election a referendum on taxing capital and labour? And if so: where next for tax reform?

Labor’s package of tax changes would have increased tax on capital – these included tightening negative gearing, halving the 50 per cent capital gains tax discount, taxing discretionary trusts at a minimum 30 per cent and further tightening superannuation tax concessions.

In contrast, government tax policy (such as it is) cuts tax on capital. This might be useful if it really does stimulate economic growth but as currently proposed, it is more likely to undermine progressivity without having much impact on investment.

Josh Frydenberg has a mandate for the income tax cuts that were introduced in the budget in 2018-19. While the bracket for the 19 per cent rate will be raised, as is usually done to return ‘bracket creep’, the reduction of the 32.5 per cent rate to 30 per cent, and removal of the 37 per cent rate by 2024-25, will flatten the personal tax rate structure in Australia more than ever before. We won’t see an increase in the top marginal tax rate back to 47 per cent either.

Although presented as tax cuts for middle-class workers, these changes push the tax burden towards the middle of the income distribution and away from the top. Indeed, the Coalition has cut tax on capital gains for many investors to 15 per cent. Those on top incomes benefit substantially from these rate cuts – and they earn most capital income and gains. Most retirees will pay nil or below 10 per cent tax on any capital gains.

Two-earner families still face high marginal and average effective tax rates from net childcare costs and tapering of the childcare subsidy on joint income. The LNP does not propose any more support for childcare further to its 2017 childcare subsidy. It has been niggardly with early childhood investment. Second earners, mostly women with young children, face a strong disincentive to continue in full-time work. This holds the income of those families down, reducing their consumption.

The funding for the government’s personal tax cuts – and to ensure a surplus – is supposed to come from growth in the economy. But growth is a challenge for the government. There is an opportunity for the government to expand childcare support, accelerating much-needed productivity gains from removing barriers to women’s paid work.

Small businesses only deliver a fraction of economic growth, yet they will benefit from a lower tax rate as well as immediate expensing for capital assets up to $30,000. Complicated line-drawing about what is an active business will stay, as will tax planning using small companies and trusts. It is almost impossible to see the LNP tackling trust income-splitting – although this was considered by Joe Hockey as Treasurer many moons ago. Apart from funds to build Australian Tax Office capacity and crack down on the black economy, there is no compromise reform package here to secure and broaden the tax base.

The biggest challenge for Frydenberg is corporate tax at the big end of town – where most corporate revenues come from. The corporate tax burden falls largely on foreign investment, and stimulating that investment is a goal of a rate cut. Globally, the competition for capital continues.

It’s hard to see the government trying again for a 25 per cent rate, but at present the LNP has a policy vacuum. It is currently tightening up the research and development concession – will it move in the other direction by copying Labor’s up-front Australian Investment Guarantee capital asset deduction?

Meanwhile, the G20-OECD Base Erosion and Profit Shifting project is about to move decisively towards crisis or consensus on taxing the multinational tech giants. The Treasurer has initially rejected a digital services tax, but will need to decide whether to follow the US in calls for reform of the allocation of multinational digital profits. Base erosion using interest deductions and service fees will continue to be a pressure point.

There is a glimmer of hope for policy on climate change, although the ideal approach of a carbon tax is implausible. The income tax regime could be retargeted towards more environmentally efficient low-carbon options. The government’s electric car plan does not have any policy – what about directing any income tax asset subsidy in this direction?

State governments of whichever stripe might be glad to see the end of Labor’s negative gearing and CGT proposals. A kick in the property market will lift their stamp duty revenues. The government should consider the lower tax rate on build-to-rent institutional investment in housing, which was an important and less visible part of Labor’s reform package. The failure to shift towards a land tax and away from stamp duty continues. For that to succeed, we might need to consider the broadening of the base, or raising the rate, of the GST. Those words are not on any politician’s lips right now.

First published at the Australian Financial Review on Monday 20 May 2019.

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