Malignant Pickpockets In Australia’s Economy

Australian 100 dollar bill_lge

Yesterday, the government released its tax discussion paper, which was designed to ‘get the conversation started’ on tax reform. Already the lobby groups are out in force, arguing the case for their own little special interests. Don’t you just love how democracy works in a rentier economy?

The ideal outcome would be that we end up with a tax system that works for Australia. But the reality is that we’ll end up with one that suits the squeakiest wheel…or wheels. Property groups and banks are usually the squeakiest.

The government hasn’t helped by saying that all options are on the table. It should have at least started the conversation by directing it a little better, highlighting the taxes that really need to change.

A good start would have been to target negative gearing, capital gains tax concessions and superannuation as a starting point. (Speaking of super, my colleague Kris Sayce has been all over it). Instead, the government has been weak and in some ways petulant about the process.

For example, they put changes to the GST on the table but said it will only happen if Labor and all the states agree on it. That’s not leadership; that’s buck passing.

At the very least though, the discussion paper will raise the important issue of just how skewed tax incentives are in Australia.

After we have the ‘conversation’, or more likely self-interested bickering, there will be a ‘green paper’ released in the second half of the year that will focus on likely solutions and reforms. Then, in 2016 we’ll get a ‘White Paper’ containing the tax reforms that the government will take to the next election, sometime in 2017.

It’s a laborious process, and one that doesn’t guarantee any positive change. When you open everything up for consideration, without providing leadership or direction, it increases the chances that you’ll end up with a piecemeal tax system that benefits special interest groups at the expense of the country as a whole.

Even so, any changes to the system won’t happen until around 2018, and that’s assuming the LNP gets in again. This is very long-term change and given our economic trajectory, it won’t be a panacea.

Over the next five years, the budget will continue to get worse and household debt will continue to climb as low interest rates and a skewed tax system encourage debt accumulation. When the next global shock hits our shores, we’ll be in a much worse position than in 2008.

But no one really cares about that now because it’s too hard to see it coming. Back in 2008 or 2009, the Queen of England asked why no one saw the financial crisis coming. The answer: ‘a failure of imagination’. No one in a position of power wanted to see it coming or think about the awful consequences.

Now, with a global financial system arguably even more fragile than it was in 2007, no one wants to entertain the thought of another systemic seizure.

But that’s a topic for another day. Getting back to the discussion paper, here’s the basic problem of Australia’s tax system: It has a heavily reliance on taxing productive activity. Consumption taxes and indirect taxes make up a much smaller proportion of the overall tax take.

That is, the federal government raises most of its revenue through personal and company income tax. The states raise most of theirs from payroll tax and stamp duty.

Taxing labour income and the income from productive enterprise (company profits) act to discourage production, or at least marginal production. It’s simply easier to set up productive facilities in places with more attractive tax regimes (like Southeast Asia). And stamp duty is a tax on labour mobility, which makes it a very inefficient tax too.

Australia ranks second highest amongst OECD countries when looking at company and personal income taxes as a percentage of total taxes. In other words, Australia’s tax base is both narrow and focussed on taxing the productive side of the economy.

So it makes sense to focus on taxing consumption more, right? Or at least talking about it. But when Treasurer Joe Hockey put changes to the GST on the table yesterday, shadow Treasurer Chris Bowen shot it down immediately.

So much for a conversation. If the government just throes its hands up and blames Labor for not cooperating, it doesn’t deserve to govern. It needs to come up with a solution and sell it to the electorate.

Taxing consumption over production is a sensible thing to aim for and one the electorate should accept in principle. The aim then is to come up with an increase in the rate of GST that enables a cut in personal or company tax rates, while not disadvantaging the lower paid. It’s a tricky mix, but that’s what governing is about.

Given the tax system’s long term rewarding of consumption over production, it’s not surprising that Australia runs a constant current account deficit. Having a current account deficit is another way of saying that we consume more than we produce, and we’ve been doing so since the 1970s.

In order to maintain this excess consumption over production, we’ve had to borrow or sell off assets. Our accumulated net debt since the 1970s now stands at $866 billion. In other words, when you net out the foreign assets that we own with the Aussie assets foreigners own, you’re left with a deficit of $866 billion.

Thank goodness for our large superannuation assets that are invested overseas; otherwise, the numbers would be much worse.

Changing the tax structure to encourage production at the expense of consumption isn’t going to change that overnight, but if Australia wants to stop digging its debt hole deeper and deeper, we need to make these changes.

But raising the GST and cutting personal and company taxes? That sounds like a tough political sell. As the discussion paper points out, Australia has enjoyed 24 years of uninterrupted economic growth. Most people just don’t see the need to make these sorts of necessary structural changes.

If it ain’t broke, there’s no need to fix it, the saying goes. But the problem is that when an economy is broke, you can’t necessarily tell right away. The atrophy takes a while to show up, especially when you can use debt and asset price speculation to mask the underlying weakness.

While we’re taking the best part of four or five years to work out what changes we need to make to the tax system, the pollies keep tinkering around the edges.

In the latest money grab, Joe Hockey has revived a 2013 Labor proposal to impose a tax on bank deposits. In doing so, he blamed Labor for the policy! Talk about weak. This is how short term budget repair looks, folks…go for the easiest grab that both sides of politics will support.

On the surface, the tax is supposed to be a fee for the government’s guarantee of savers’ deposits, brought in during the financial crisis in 2008. Here we are, over six years later, and now savers have to pay for it? If it was so important, why wasn’t it done much earlier?

And besides, was it savers who brought the crisis about? Or was it the banks lending recklessly? It was the later, of course. But instead of imposing greater restraints on lending (by increasing the capital banks must set aside against loans), what does the government do? It taxes the savers even more.

Brilliant, just brilliant.

Saving used to be a virtue. Now it’s a vice, discouraged by all forms of policymaking. If you’re a saver and want to fight back, we’ve been working on something for you. Check it out here.

In the meantime, keep your eye out for more cynical tax grabs. The sad reality of this world is that governments ALWAYS spent more. To do so, they need to tax more. The pickpockets on the street seem benign in comparison.

Greg Canavan+,
for The Daily Reckoning Australia

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Greg Canavan
Greg Canavan is the Managing Editor of The Daily Reckoning and is the foremost authority for retail investors on value investing in Australia. He is a former head of Australasian Research for an Australian asset-management group and has been a regular guest on CNBC, Sky Business’s The Perrett Report and Lateline Business. Greg is also the editor of Crisis & Opportunity, an investment publication designed to help investors profit from companies and stocks that are undervalued on the market. To follow Greg's financial world view more closely you can subscribe to The Daily Reckoning for free here. If you’re already a Daily Reckoning subscriber, then we recommend you also join him on Google+. It's where he shares investment research, commentary and ideas that he can't always fit into his regular Daily Reckoning emails. For more on Greg go here.

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5 Comments on "Malignant Pickpockets In Australia’s Economy"

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Raoul Duke
Raoul Duke
1 year 6 months ago

Negative gearing: heads, I win; tails, you lose.

slewie the pi-rat
slewie the pi-rat
1 year 6 months ago
“So it makes sense to focus on taxing consumption more, right? Or at least talking about it.” i’m not entirely familiar with some of the terms in the preceding break-down, leading to this conclusion, which makes it difficult [for me] to agree about the logic. but i do have a bias! i do not like taxes on consumption b/c they tend to be regressive, and kick those on the lower rungs the hardest. there seems to be a rhetorical aspect, involved: we are taxing “production” more, so let’s try taxing “consumption” more and making it more “even”… (?) the same… Read more »
slewie the pi-rat
slewie the pi-rat
1 year 6 months ago

i think that last bit might be better as:

“…but the lower earners and the poorer people would suffer the largest percentage tax increase per capita PER DOLLAR OF INCOME, would they not?”

slewie the pi-rat
slewie the pi-rat
1 year 6 months ago

in other words, even though this is not an “income” tax, it can be expressed as one, per capita, per dollar of income, over income ranges, and large numbers of taxpayers.
i think.

and, as such, it seems to me that it is, clearly, “regressive”: the lower earners and poorer people end up getting the higher percentage tax increases, per capita, per dollar of income.


1 year 6 months ago
The pi rat…. i likke it! I guess they could vary the tax rate…. ie food and the essentials are lower…. etc But i was thinkng the artical was more talking about lowering the cost burden on business and enterprise which then creates a greater amount of activity that inturn…. creates economic spin off that is real earnings for australia …. but i dont want to take away from your point on how we keep the lower class from a cycle of poverty trying to pay the basics…. but to slug profitable productive business over our ever growing consumerism seems… Read more »
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