Red herrings in the not-so-great tax debate

What passes for the tax debate has taken some weird turns. The voters will be the ultimate judges, but so far the commentary awards more points for announcing a proposal — any proposal — than for its quality. Having itself raised expectations about the scope of tax reform, the government may disappoint and pay a political price. But we should not just allow, but expect, it to take the time methodically to work through the options in the context of an actual budget — and make decisions that pass the quality test.

Meanwhile, the debate sometimes looks like a contest for the least relevant point. A couple of recent entries have introduced the gender card. There has been a claim that increasing the $80,000 income tax threshold would unduly favour ‘wealthy males’. Another claim is that negative gearing should not be changed because 45% of it is done by women. Leaving aside the veracity of these claims, what they have to do with anything escapes me. They will resonate with some people, but are red herrings when it comes to judging the policies in question.

At a more general level, there is an unhealthy focus on distribution, or who will gain or lose most from this or that change. How many times has it been said in recent weeks that the top 20% of taxpayers gain 60 or 70% of the benefit from some policy, such as the capital gains tax discount? The point is not that distributional aspects are irrelevant to policy, but that claims such as this are being presented as the clincher argument, as if distribution was everything.

It is hardly surprising that policies favouring saving and investing on economic efficiency grounds (and that’s what they are) will be of most benefit to those with the largest capacity to save and invest. That is not the key issue for tax policies on capital gains, superannuation or investment in rental housing. Rather, the issue is whether such policies are supported by tax principles grounded in economic theory and analysis. If they are, then let the chips fall where they may. Asserting that the capital gains tax discount should be cut because the top 20% get 70% of the benefit isn’t good enough on its own. Let’s have a proper argument about the strength of the case for putting the discount there in the first place. (Clue: it wasn’t done to favour the top 20%.)

You will never hear those focusing on distributive justice acknowledge that the top 20% already account for over 60% of net income tax paid or that this percentage has been rising. This is the share after accounting for the benefits of negative gearing, the capital gains tax discount and so on flowing to the same group. Their share of tax paid is around one-third larger than their share of taxable income. That is the result of a progressive income tax system, and the tax-transfer system as a whole is even more progressive, but a little more acknowledgement of just how progressive the tax system is already would not go astray.

People who complain about the ‘regressive’ distribution of tax concessions don’t say it directly, but the implication of their complaints is that the system should be more progressive than it already is. Let’s have that debate informed by the facts. It would be another matter if they wanted to curb the concessions and cut the top marginal rate at the same time, but that’s not their position.

In the meantime, those who haven’t already switched off should watch out for more red herrings in the not-so-great tax debate.

Robert Carling is a Senior Fellow at the Centre for Independent Studies and author of Right or Rort? Dissecting Australia’s Tax Concessions.