Thursday, February 01, 2018

Follow the money - it won't make you communist

Anyone would think I'd gone communist. Along with John Howard.

As soon as the Treasury released its tax expenditures statement last week, I and others who reported it were accused of wanting to ape Eastern Europe, of going "Peak Orwellian".

"The author has raised an interesting concept, everything belongs to the government and one has no individual rights or assets," wrote one of my kinder correspondents.

"The left regards tax not gouged as government spending," wrote another. "Since when has retaining your earnings been a government handout?"

The short answer is: since at least 1998. That's when Howard made it mandatory for the Treasury to report tax expenditures as if they were cash expenditures.

On taking over as Coalition prime minister after 13 years of Labor government, he set up a Commission of Audit to tell him what to cut.

It told him that government programs were delivered in two ways: as direct payments which hurt the budget, and as tax breaks which also hurt the budget.

Although often functionally identical (parents don't care whether they get the family tax benefit as a payment or a rebate, patients don't mind how they get the private health insurance rebate, and most wouldn't know whether the baby bonus was a payment or a tax break) the two get treated quite differently.

Payments get put in the budget of individual ministers as a line item to be scrutinised and reviewed in the lead-up to every budget.

Tax breaks go on no one's budget and become part of the furniture. As the Henry tax review reported later, they can be "difficult to contain".

Accounting for them once a year, in the same way as direct payments are accounted for twice a year in each budget and budget update, lets us know what they are and what they are worth.

It doesn't mean (necessarily) that they are at risk, any more than accounting for the annual cost of the pension means it's at risk.

This year the Treasury found 289, from the huge (the $74 billion cost of exempting the family home from capital gains tax) to the unquantifiable (exempting charities, hospitals and trade unions from income tax) to the odd (exempting ministers of religion from fringe benefits tax) to the small but growing (the farm management deposit system, which is expected to double in cost this year from $245 million to $560 million).

The correspondents who think that I'm a communist for publishing these figures, presumably along with Howard and Treasury and the government-dominated committee that decided they should continue to be published this way, argue that letting people keep their own money is different to handing them government money.

But it is identical if you tax some people at standard rates and give a special deal to others. That's how tax expenditures are calculated, by working out what's normal (such as the standard income tax rates) and then working out the cost of concessions (such as tax-free redundancy payments, which cost $2.4 billion a year).

Sometimes it's hard to know what's standard, and the tax expenditures statement reflects this. The standard company tax rate is 30 per cent. Small and medium-size businesses with turnovers of up to $50 million will eventually get a lower rate of 25 per cent, which is in the books as a tax expenditure of $2.2 billion a year. But if the government gets its proposed cut for all businesses through the Senate and the general rate comes down to 25 per cent, costing much more, the statement won't record a tax expenditure at all, except >for any discounts from the new lower standard rate of 25 per cent. The statement says so.

Its critics claim that its estimates are exaggerations because if, for example, superannuation contributions were fully taxed people would contribute less to superannuation and the government wouldn't get back what it thinks it's losing. But when the Treasury put these claims to the test and calculated so-called "revenue gain" estimates of what it would get back in the real world, it found the numbers were little different.

For superannuation, that's partly because contributions are compulsory. To the extent that people wind back extra voluntary contributions they'll divert their money into other investments that are likely to be more fully taxed and get hit with income tax before the money goes in. So although the Treasury wouldn't get back the full $16.5 billion it loses because of the concessional tax on super contributions, it believes it would get back almost all of it, $16.3 billion, although much would be in other forms of tax.

The costs of these concessions are real, just as real as the $23 billion the government pays out each year in Medicare, or the $12 billion it pays out in pharmaceutical benefits. But the beneficiaries aren't always as deserving. The biggest superannuation and capital gains tax concessions are directed towards the highest earners, something we wouldn't tolerate if they were delivered as cheques, paid into accounts.

Which is why they want them hidden. Which is why they talk about communism. They are embarrassed.

In The Age and Sydney Morning Herald