Tax and tax reform in Australia – appearance on Radio National’s Rear Vision


I was one of four guests on RN’s Rear Vision special on tax reform. You can download the audio here.

A sample my contribution to the program is below.

Keri Phillips: Warwick Smith is a research economist at the University of Melbourne and at Per Capita, a think tank focused on progressive policy reform. The Asprey Review of the tax system had been commissioned in the 1970s by the McMahon coalition government.

Warwick Smith: The Asprey Review had a pretty similar reception to the Henry tax review initially, that most of the recommendations were rejected. But over the coming 35-odd years, almost all of them were implemented, and the GST was the last significant one of those. And many other OECD countries have what they call value added taxes or goods and services taxes, and it was considered an important element to add to Australia’s tax mix.

The GST is considered desirable, for one thing because it’s difficult to avoid, and so we know that there are tax minimisation strategies for a lot of wealthy people, but it’s much more difficult to avoid the tax they spend on their consumption.

The GST is on its own regressive, but it’s always acknowledged that if you introduce the GST or increase the GST or broaden its base, that you’ll have to compensate those who are at the bottom of the income and wealth distribution. And the compensation can be generous enough such that the net effect is positive for them. So it’s really important that we consider the entire tax and transfer system when talking about progressivity and impact on the poor. And that debate was really lost when the GST was introduced because we had a proposal from the then Howard government that the GST would be on everything.

And there was an outcry, and the main complaint was you can’t put GST on fresh food and education and these are critical things for the poor. But if in fact the original proposal had been accepted, the tax on food and education and health would have applied to the wealthy as well as the poor, and then the poor would have been compensated for it. That compensation was already written into that proposal. So the poor would have been no worse off under that total package. So the removal of those things in effect just took the GST off education, fresh food and health for wealthier Australians.

I mean, it’s important to say I’m not in favour of increasing or broadening the GST necessarily, and that’s not because I think it’s a terrible idea but I would say it’s probably number four or five in terms of good, effective tax reform, and we are not doing one, two, three and four and that’s primarily because I think that they would cause too much upset amongst people who have a lot of wealth and as a result quite a lot of power.

Keri Phillips: One of the other ways in which Australia’s tax system differs from many other OECD countries is that we don’t pay a tax on wealth we inherit when relatives die—death duties or estate taxes—although we did have such taxes until the 1970s, when Queensland decided to get rid of them, sparking their abolition everywhere at both the state and federal level.

Journalist [archival]: It looks as though death duties are to be abolished in Queensland. The Premier, Mr Bjelke-Petersen, is keen to see them go and it’s fairly certain that the joint Liberal and National parties will vote to have them scrapped in the forthcoming August budget.

Journalist [archival]: Mr Premier, why are you advising people how to get out of paying death duties?

Joh Bjelke-Petersen [archival]: I spoke in terms of the hardship that probate and succession duty was creating for many people, and then went on to say that I myself had organised and arranged my affairs so that it wouldn’t actually affect my people as much as it affects many people who fail to take any action in arranging their own affairs.

Warwick Smith: The book by Thomas Piketty that sort of took the world surprisingly by storm a couple of years ago talked about the inevitability of rising inequality based on the current paradigm. And the only way that he saw to claw that back was through wealth taxes because his argument was that wealth accumulates wealth, as we well know, and that if you’ve got money then your rate of income growth is larger than if you don’t. The return on investment of capital is higher than the growth in wages. And so the result is that the wealthy get wealthier at a faster rate than wage earners. So an estate duty or a death tax or whatever you’d like to call it is one of the potential ways to prevent that ever-widening gap between the rich and poor. There are challenges with estate taxes and death duties in terms of enforcing them and preventing evasion. But other countries certainly use them, and those challenges can at least to some degree be overcome if the design is clever enough.

Neil Warren: The logic of estate and death duties is to say, look, if you were able through your life to accumulate substantial wealth through tax advantage, then estate and death duties kind of claws some of that back. So it’s just not a lifetime redistribution issue, it’s an equity issue. You know, that we want to claw that back rather than pass it on to the next generation and empower them to have even more money to tax advantage themselves into bigger houses and all sorts of advantage. So estate and death duties in other countries is used to close off income tax loopholes, to say, look, you’ve made all that money through advantage, through all sorts of things. Now, that will enter the debate about property taxation and the future of property taxation in Australia. It will be like this is a de facto way of trying to capture property which is not highly taxed, that is your residential untaxed property, owner-occupied house, one way to try to claw something out of that. That’s a very common objective for estate and death duties and why it really needs to be there to close the system off in terms of tax advantage.

You can read the whole transcript or download the audio at RN’s web site.

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