Welcome to the tax election. The fairness election. The enterprise election
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Welcome to the tax election. The fairness election. The enterprise election

With five certain byelections and a possible general election this year, Australian voters have a stark choice over key economic policies.

Pauline Hanson stumbling over the words "government" and "budget" to produce “budgernment” (pron. budge-a-munt) seemed strangely appropriate for a week when the two constructs became indistinguishable anyway.

The slip-of-the-tongue did little to clarify her party’s final position in the febrile tax policy battle between the government and the opposition.

Whatever she decides, the battlers who make up One Nation’s base stand to gain, because the one thing the major parties agree on is relieving cost-of-living pressures for the bottom end. After that, the class war is on for young and old.

Welcome to the tax election. The fairness election. The enterprise election. The election which, perhaps more than any in decades, invites voters to stand on one side or other of a gaping ideological chasm.

The choices are indeed stark: Malcolm Turnbull’s proudly low-tax, pro-business Coalition, determined to lift the dead hand of the state from companies and individuals, or Bill Shorten’s poll-leading Labor opposition, proclaiming an end to the failed neo-liberal experiment of ever-smaller government and the hoax of trickle-down economics.

The oft-muttered suburban lament about all politicians being the same may now be somewhat outdated.

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John Roskam from the right-leaning Institute of Public Affairs is one of many in the Liberals’ “base” who welcomes the Turnbull government’s new-found muscularity on top-end tax reduction.

Roskam says Liberals were buoyed by the commitments in the budget to flatten out the income tax system and to stick with the company cuts despite the difficult politics. “There’s a feeling they’ve got something they can campaign on, and there is a feeling they are sharpening the differences between Labor and Liberal, and they are sharpening the differences on liberal terms,” he says.

“They’re happy to have a fight on entrepreneurship, and enterprise, and working hard, and while I don’t think they’re going hard enough on things like the top marginal rate, it’s a start.

He welcomed what he called a “growing difference in basic economic philosophies”.

Hanson’s linguistic inventions were merely part of the bizarreness of budget week, which included Treasurer Scott Morrison railing against “unbelieva-Bill” and former treasurer Peter Costello firing the opening shot against the budget for not doing enough to pay down debt and  ignoring the “forgotten people” on high incomes.

“I think the Liberal Party ought to remember them. These are people paying 47 cents on $200,000. They're paying 39 on $100,000 … I think those forgotten people, those people that don't have organised lobbyists to speak for them, also ought to be in the calculation of the government at the moment,” he told the ABC’s 7.30 program.

The intervention raised eyebrows within the government, with some complaining that, at the time of the interview, he had not seen the budget When the budget was delivered, it prompted one Labor adviser to comment drily, “Costello’s forgotten people weren’t forgotten for long!”

Treasurer Scott Morrison is congratulated by Prime Minister Malcolm Turnbull after delivering the Budget speech.

Treasurer Scott Morrison is congratulated by Prime Minister Malcolm Turnbull after delivering the Budget speech.

Photo: Alex Ellinghausen

Malapropisms aside, Hanson’s decision on the government’s tax plan will be significant in setting the initial terms of an election fight framed by Morrison’s budget and Labor’s commitment to discontinue “$80 billion” in corporate tax cuts.

While Hanson told The Australian Financial Review on Wednesday that One Nation would be demanding a reduction in Australia’s immigration cap from 190,000 to 75,000 in exchange for its decisive Senate support for the government’s tax cut legislation, by Thursday’s Sky News interview, she was admitting the government would never give her that, so she would seek to support the first two tranches, but not the third.

It left nobody confident of Hanson’s final position, even if the government remains hopeful of her support in the end. Her votes would make the government's $140 billion personal tax plan law before July 1, dissolving Labor’s charge that Turnbull would “have to be re-elected twice for a tax cut on the never-never”.

But getting to this happy state of certainty is far from assured.

Crucially, the government insists its tax-cut plans for the poor initially, and the rich by 2024, constitute a package deal which must be voted on holus-bolus.

Labor’s Chris Bowen wasted no time on budget night agreeing to the first element which would deliver tax relief of up to $530 a year to low- and middle-income earners via an income tax offset mechanism. And since then, Labor has gone further, much further, almost doubling the offset entitlement with another $398 in some cases.

“In our first term of government, a teacher on $65,000 will be $2780 better off under Labor - an extra $928 a year,” Opposition Leader Bill Shorten said in his budget reply on Thursday.

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The sense of the election as a tax auction is palpable.

Morrison's formula included tax cuts for most workers, forecast a return to surplus earlier than expected and predicted a steady decline in net government debt. The list of immediate “budget losers” was short.

But by Thursday, as independent modelling of measures emerged, questions were being asked about the overall fairness of the government's unconventional three-stage tax-relief plan.

The first step of the seven-year blueprint targets 10 million low- and middle-income workers with an annual income tax offset worth up to $530. Together with slight tweaks to the tax thresholds, this will mean tax cuts of up to $665 a year to those earning between $20,200 and $125,000.

The second step, from July 2022, locks in the initial tax break for lower-income earners by lifting the top threshold of the lowest 19 per cent tax bracket from $37,000 to $41,000 and increasing the low-income tax offset. In addition, the top threshold for the 32.5 per cent bracket will be lifted.

Under the third part of the plan, which kicks in from 1 July 2024, the current 37 per cent tax rate will be completely abolished, reducing the number of income tax brackets from five to four. The vast majority of Australian workers will pay the same marginal tax rate of 32.5 per cent, on income from $41,000 all the way up to $200,000 a year. The top marginal tax rate of 45 cents in the dollar will remain unchanged but the threshold will be lifted.

“By 2024‒25 about 94 per cent of taxpayers are projected to face a marginal tax rate of 32.5 per cent or less,” the budget papers said.

The government says the plan will cost $140 billion over 10 years but has declined to provide any detailed breakdown beyond the budget’s four-year forward estimates.

Analysis following the budget points out that while tax cuts favour low- and middle-income earners in the short term, it is high-income earners that will benefit disproportionately over the longer term.

In the past tax relief  has often returned the effects of bracket creep to workers by changing the thresholds at which different tax rates apply. But the last part of Morrison’s scheme (step 3) is far more radical because it changes the tax scales.

Opposition Leader Bill Shorten prepares to address his MPs ahead of the budget-in-reply speech on Thursday.

Opposition Leader Bill Shorten prepares to address his MPs ahead of the budget-in-reply speech on Thursday.

Photo: Alex Ellinghausen

The last modification the rate structure, rather than the bracket thresholds, was in 2012 when the Gillard Labor government made the tax-free threshold much larger as part of its carbon emissions compensation package.

Melbourne University tax expert professor Miranda Stewart says the third phase of the government’s tax plan will be the “least progressive” income tax rate structure the nation has ever had.

“Australia’s progressive income tax, where the burden rises as income rises, has been a critical part of our tax system for more than a century now,” she says. “And this changes that dynamic. Most of the other taxes in our system are flat, or regressive, so the income tax delivers progressivity in the middle and at the top of the distribution.”

The government’s new tax-rate structure is similar to that proposed by the landmark review of taxation chaired by former Treasury secretary Ken Henry in 2010.

But Stewart says the government’s tax plan does not combine its flatter tax-rate structure with the broader tax reforms envisaged by the Henry Review.

“The problem I have is that we’re making a structural change to progressive income tax and we’re doing that without broadening the base of the system elsewhere, so without doing tax reform.”

In his budget speech Morrison claimed the changes would make income tax simpler and reward effort. “You must not punish people for working hard and doing well,” he said. “This is what underpins our plan.”

So will this plan motivate Australians to work harder?

Stewart says there is little evidence that tax rates between 35 per cent and 50 per cent – the rates targeted by the budget tax changes – create any disincentive to work, saving or investment by individuals.

“In fact the empirical evidence goes the other way,” she says.

“In my view there isn’t really a case in either equity or efficiency grounds to flatten that structure in the middle.”

A briefing paper released by left-leaning think tank the Australia Institute following the budget said this tax cut is “a fundamental change” to Australia’s system of taxation which will deliver about 40 per cent of the benefits from the seven-year tax cuts to the top 10 per cent of income earners. “It is not simply an income tax cut; it will move Australia to a flat tax for over 80 per cent of workers,” it said.

But Australia National University economist, Ben Phillips, who has modelled the effects of the tax cuts, says the long-term nature of the tax-cut plan makes it more difficult to assess the distributional effects.

He says the impact on the progressiveness of Australia’s tax system is “a more complicated story than what many are suggesting”.

Economists point out the politically attractive combination of tax relief, an early return to surplus and an improving debt position relies on some relatively rosy economic forecasts.

And the government’s projections for wages growth has raised eyebrows.

Despite being stuck at around 2 per cent, or lower, for several years the budget predicts wages growth to improve strongly over the next two years and reach a healthy 3.5 per cent by 2020-21.

“I would call that optimistic,” says Phillips.

Some have also questioned the government's ambitious target to limit expenditure growth over the next four years. Spending is supposed to grow by a mere 0.7 per cent in 2020–21 and 0.5 per cent in 2020–21, after adjusting for inflation.

The strength of the world economy has made an important contribution to Australia’s improved budget position.

“Global growth has risen to its fastest pace in six years, with widespread strength across both advanced and emerging economies,” the budget papers said.

Australia’s return to surplus and improving debt position depend heavily on these favourable global conditions persisting.

The budget warns “financial challenges” may weigh on the global outlook over a longer-time frame.

In China high levels of debt and potential financial imbalances continue to pose a major economic risk to our most important trading partner.

And while American growth is fairly healthy a lot hinges on how the US Federal Reserve manages interest rates in the wake of the Trump administration’s recent tax cuts.

A lot will have to go right if the plans outlined in Scott Morrison’s 2018 budget are to remain intact.

Even before any of its economic impacts are felt, the political impact of Budget 2018-19 is apparent. In the space of just days, Australian politics has been transformed with the duelling declarations of economic policy and the almost immediate exposure of those competing plans to voters through an  unprecedented five byelections.

Those contests are required after the High Court ruled on Wednesday that Labor’s ACT senator Katy Gallagher had not conclusively relinquished her British citizenship before being elected. That ruling forced the immediate resignation on the same grounds of three lower house Labor MPs and an independent from South Australia.


Now the citizenship fiasco rolls on in 2018 as a pre-election campaign gears up.

As things stand, Shorten’s embarrassment is limited to the inconvenience, cost, and disruption, of the byelections and the questions this raises about his political judgment.

But that embarrassment would be dwarfed by outrage within Labor if it loses any of the contests.

Remember, none of the five seats is held by the government so it can really only go forward.

Alexander Downer's daughter Georgina will likely contest the seat of Mayo.

Alexander Downer's daughter Georgina will likely contest the seat of Mayo.

Photo: Facebook

Labor on the other hand, is vulnerable in Longman in Queensland which it secured in 2016 by a margin of just 0.79 per cent. With Hanson’s Queensland-based One Nation party preferencing the Liberal-National Party ahead of Labor this time, Longman is anything but safe.

The government also has good prospects of reclaiming the Liberal jewel of Mayo in South Australia against the Nick Xenophon-aligned Rebekha Sharkie. It may be aided in that by the selection of Georgina Downer, daughter of Alexander and granddaughter of Alick both of whom represented the Adelaide Hills area.

One Liberal describes the combined implications of Liberal wins in Longman and Mayo as so “existential” for Shorten that it would present Turnbull with the Bob Hawke/Bill Hayden equation. “Does Malcolm go to an election before Labor moves on Bill Shorten, who knows?” he says.

Nothing much rides on all of this, except perhaps the "budgernment".

Mark Kenny

Mark Kenny is the national affairs editor for the Sydney Morning Herald and The Age, based at Parliament House

Matt Wade

Matt is a senior writer for The Sydney Morning Herald.

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