As a society we get the tax system we want: ideas and values are what dictate change

The Mid Year Economic and Fiscal Outlook (MYEFO), released yesterday, presents an interesting close to a year that commenced with a glimmer of hope of grand tax reform. We learnt in February of a meeting in January where the then new Prime Minister and Treasurer, four months on the job, agreed not to pursue changes to the goods and services tax (GST). This would always have been a hard ask given the timing was not theirs. To their credit they did pursue superannuation and company tax reform.

Superannuation reform has been a success. Some would say a qualified success, but in terms of the bigger picture, it shows that our democracy can produce relatively dramatic change where the arguments for change are sufficiently cogent.

Corporate tax reform, at least viewed as a reduction in the company tax rate, has proven to be more difficult. In hindsight, making this an election issue may have not been the best politics, but these are very difficult judgments. Our increasingly uncompetitive rates are an issue that will not go away.  Indeed, if the policies of President-elect Trump were to be adopted by Congress, even in a watered down form, it would put increased pressure on us for change.

This year a person with great experience of both our tax system and other systems throughout the world and also the difficulties of reform said to me “You know Grant, ultimately we as a society get the tax system that we want.”   I have thought a lot about those words. This is a very profound thought and goes to the very deep question of how ideas and values dictate change.

There are two 2016 works on my holiday reading list that focus on this issue in the US and Europe. The first is The Hillbilly Elegy: A memoir of Family and Culture in Crisis by J.D. Vance which deals with low-income white culture in the US (sold out in the major bookshops in Sydney at the moment). The second is The Euro and the Battle of Ideas by Brunnermeier, James and Landau (an economist, a historian and a former Deputy Governor of the Banque de France respectively). This work finds the challenge to the single EU currency to be grounded in the realm of conflicting French and German ideas arising from the Second World War.

MYEFO – and possibly the slightly ho-hum reaction to it – ties closely to the notion of ideas, values and the thought that we ultimately get the system that we want as a society.

I will leave you with a statistic here. If you go back just over 3 years and look at the budget changes since the 2013 Pre-Election Fiscal Outlook you will find a net $4b improvement in the Budget position arising from policy changes from 2013-14 to 2019-20 on a fiscal balance basis.There are a lot of ups and downs in that $4b. On the other hand the sum of “deteriorations” or what Treasury calls “economic parameters and other variations” is $142b.

Put simply, we are not dealing with our real circumstances in not confronting our deficits. We would rather borrow from the future. Or, put emotively, our children. Somehow, we don’t think of structural deficits in that way. At least, yet. The domain of structural deficits hasn’t yet become part of the realm of values. But I think it will.

Enjoy the break.


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