Labor eyes ambitious tax reform but it must be ready for vicious backlash from vested interests

The Guardian

4 hours ago

There was a hint of frustration in Anthony Albanese's voice when he spoke to the Canberra press gallery for the first time after Labor's thumping election victory on 3 May.
In the prime minister's courtyard at Parliament House, he was asked if he planned to use his soaring political capital for major reforms of the tax or superannuation systems. Badly needed, and often talked about in the abstract, this kind of action had waited for a long time for the necessary political ambition.
Albanese said he wouldn't get ahead of himself in the opening weeks of his second term in power. He insisted Labor had already been bold, delivering on its promises in the first three years.
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Fast forward to Wednesday, while the PM was pressing the diplomatic flesh at the G7 summit in Canada, the treasurer, Jim Chalmers, showed the first signs of that reform ambition.
In a speech to the National Press Club in Canberra, Chalmers signalled Labor was willing to consider changes to the tax system at the looming productivity summit in August, recognition that fixing longstanding problems was needed to right the budget's structural deficit.
The speech was an implicit recognition that Labor's tax changes in the first term barely touched the edges of deeper structural problems in Australia's tax system.
Chalmers, a student of economic reformer Paul Keating, said any progress on productivity or budget sustainability would be impossible without proper consideration of tax reform, a challenge he conceded would be 'hard and contested' with benefits that were not always immediate.
Even someone with a passing interest in federal politics should know the scale of the problem is vast: some $1tn in government debt and soaring spending, held up by a system overly reliant on income tax from an ageing population – a problem that will only get worse due to the ageing population.
For years Chalmers has been eager to point out the five main pressures on the budget are not going to get any easier without proper attention.
Spending on health, aged care, the national disability insurance scheme, defence and interest from government debt will keep treasurers and finance ministers up at night for years to come. The government's revenue base is being eroded from declining fuel and tobacco excises, and in the long term will take a hit from lower tax receipts from fossil fuel extraction.
The early stages of Labor's plans seem to include lower income taxes, but no changes to the 25-year-old GST. Chalmers is upfront, saying tax overall needs to rise. Whether it is indeed possible to meaningfully lower income taxes without broadening or raising the GST is unclear.
Economists argue taxing consumption through mechanisms such as the GST is efficient, while taxing incomes isn't. Parliamentary Budget Office figures show the GST causes about 8 cents in economic loss for each dollar gained, compared with 24 cents for income tax or 40 cents for corporate tax.
Two major pieces of work should be the starting point, acknowledging that any change which makes it into law will inevitably create some winners and some losers.
Chalmers was working for then treasurer Wayne Swan when Ken Henry handed his landmark tax review to the Rudd government in late 2009. Both men marked up copies of the document over the course of the summer, leaving them to 'disgorge' sand from the beach by the time they made it back to Canberra.
Many of the review's 138 recommendations never saw the light of day. Today, the former Treasury secretary says, the system is in even worse shape.
Henry has called for wholesale reform, including increasing the GST to pay for company and personal income tax cuts, as well as comprehensive road user charging, replacing stamp duties, increasing taxes on super profits from the mining sector, an economy-wide price on carbon and changes to fringe benefits and superannuation taxes.
Henry's review is best remembered for recommending the mining tax, an idea which prompted a furious campaign of resistance against the government. Chalmers has acknowledged the politics of the review were mishandled, that it was kept secret too long before ultimately crashing into Labor's leadership wars.
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The second substantive report with proposals ready to go is the white paper released by teal independent Allegra Spender in the last term of parliament.
In a different political reality, Spender would be part of the Liberal party's economic team, and her significant work comes with buy-in from Henry and other leading tax voices including Robert Breunig from the Australian National University's Tax and Transfer Policy Institute, and Robert Carling from the Centre for Independent Studies. Chalmers assigned a staffer to monitor the white paper process, at a time when Spender was one of the few MPs actually prepared to talk about meaningful tax reform.
The Wentworth MP wants the coming reform push to look at business investment and corporate taxes, the under-performing petroleum resource rent tax, road user charging, indexation of income brackets, unhelpful state taxes and the GST.
Spender has more guts than either of the major parties in one specific area as well. She has called for a review of Western Australia's insanely generous GST deal, which respected economist Saul Eslake calls the worst public policy decision of the 21st century.
WA's state Labor government handed down a budget with a $2.5bn surplus this week, but taxpayers from every other state are paying $54bn to the state due to perceived unfairness in the grants commission process. This special treatment agreed by then treasurer Scott Morrison and locked in by Anthony Albanese to maintain Labor's political stocks in the West will see the nation's richest state receive an extra $21.1bn from federal taxpayers over the next four years alone.
Family trusts, the legal tax structures used by millions of Australians to lower their tax liabilities, also look likely to come under increased scrutiny as part of the latest reform push.
Chalmers and Albanese will convene their productivity summit in the cabinet room on 19 August. If they want their record to be considered alongside the Hawke-Keating and Howard-Costello governments, the political conditions could hardly be better.
Labor must prepare itself for the predictable backlash from vested interests unwilling to countenance changes to cushy arrangements and handy loopholes. Only a serious government prepared to expend political capital will be able to make the system fairer and fit for a 21st century country facing major demographic and economic challenges.
If Labor really has the ambition Anthony Albanese insists it does, meaningful tax reform might become the make-or-break test of the government's second term.