I was asked about my attitude to tax reform by ABC RN this week.
Host Fran Kelly made a fair point that Labor had made themselves a big target by releasing some significant tax policies well ahead of the election and, if they did win, shouldn’t the Senate allow them through.
It came on the back of Shadow Treasurer Bowen claiming Labor would have a mandate to legislate their policy agenda. The online dictionary defines a ‘mandate’ as an official command or a go-ahead and a winning politician claims their victory is the official order.
But what about the other people elected on a different policy platform? Don’t they have a mandate too? In the Senate, what about those who aren’t being voted in at this election? Surely their previous mandate holds.
That’s the problem with claiming unbridled power in politics. Every individual politician will take a permission structure that suits their agenda and it can scarcely be lost that many of those claiming a mandate have previously failed to respect others’ claims to the same.
Labor’s tax desires focus around three important policy areas – negative gearing, capital gains (CGT) and penalty rates. They are proposing significant changes and their motivation has less to do with good policy rather than a hunger for more taxpayers’ money.
Negative gearing is the simple principle that if you borrow money to invest you can deduct the interest cost from your income. It is an important part of encouraging investment and applies to individuals and businesses alike. In Australia, most people think the term only applies to residential housing but the tax code allows for it to be used for any income producing investment.
As far as I know, Labor have yet to announce if their proposal only relates to the housing market or to all investment classes. I’ve asked them many times but never get a clear response. The press seem to have given them a free pass on this important question.
If it only applies to housing, then the result will simply be fewer houses available for rent because people will choose to invest in other asset classes like shares or commercial property. If the limits only apply to individuals then different structures will emerge to achieve the same ends. If the ban is universal then an important part of growing our economy (borrowing to invest) will virtually disappear, resulting in fewer jobs and less prosperity.
If Labor truly think the tax system is being gamed by some individuals through negative gearing there is a solution – but you can bet they won’t like it. Here it is: Lower taxes.
If the government cut taxes, the tax benefit for individuals derived from negative gearing would be reduced. In fact, the tax issues would virtually disappear for most people which would encourage deals focused on the investment return, rather than tax benefits.
Naturally, this won’t suit Labor’s agenda because it wouldn’t provide more money to the Treasury.
It’s the same with penalty rates. Labor wants them restored to ‘put more money in the pockets of low wage earners’. That’s a laudable aim but it isn’t necessary to put wages up to achieve it. Cutting taxes would provide the same benefit to employees at no extra cost to employers. It would also simplify and streamline the tax system.
When it comes to CGT, Labor are being opportunistic tax predators.
When introduced, investment costs were indexed annually to establish a new ‘cost base’. When the asset was sold, the newest cost base was used with CGT paid on the difference between cost and sale price. It was clunky and required complex record keeping. Eventually, common sense prevailed and the government simply taxed half the gains on assets held for a year of more. This basically accounted for inflation with some winners and losers along the way.
Labor propose to reduce this concession to only 25 per cent, using the low inflation environment as justification. Of course it is just another tax grab and fails to consider the potential for a substantive rise in future inflation rates. When it rears its ugly head again, inflation will take off, leaving investors to pay the price for the diminishing value of their money.
Once again, it will engorge government by taking money from the productive part of the economy – private enterprise and investment.
All of the above is basic economics and Labor knows exactly the consequences of their policies. It has nothing to do with stopping rorts, fairness or protecting our economy. It is a desperate money grab directed at transferring individual wealth to a bloated, inefficient bureaucracy to fund the dystopian socialist vision.
If it wasn’t, Labor could simply promise to cut taxes and that would be a mandate for both of us!
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