Squeezing The Tax Trigger

by Michelle Grattan - The Age

Politicians are always giving answers in their endless media chatter, but often they just throw up more questions.

John Howard has a fixed formula about his future, but periodically varies from it - like last week when asked about retirement - and then has to jawbone his way back on course.

His deviations can be read variously as mistakes, unsubtle signals to Peter Costello, or trailing his subconscious - a longing to stay in the job. Take your pick.

Pre-budget talk is of a different ilk. It has to be a guessing game. But with Howard and Costello never off the airwaves while not wanting to say too much, there are both clues and questions out there on the big issue of the May 9 budget - what will be done on tax.

This is still a work in progress: Costello and Howard will talk soon about detail. The total package goes only to the most senior ministers.

We can, however, sift out a few pointers from the often confusing messages.

It has been plain for months that the budget will contain more tax cuts (beyond those already factored in). Even Costello has stopped being coy about this.

And there have been plenty of hints the cuts will be directed broadly, so those on lower and middle incomes get the benefit. "My Government places the low- and middle-income families of Australia squarely in the foreground of our policy lens," Howard said in a major speech on tax to the Menzies Research Centre last Tuesday. (Peter, note the "my".)

Howard has indicated there won't be a rise in the $6000 tax-free threshold, because that gives the same benefit to everybody and isn't the best way to target assistance.

The Government is also signalling that it will shy away from radical structural change, despite intense pressures since the 2004 election from business, some of its MPs and sections of the media for another overhaul of the tax system.

This doesn't preclude some tinkering. For example, Costello has said there is a case for liberalising capital gains tax for longer-held assets, in line with overseas practice.

"We have got to make sure we stay in front of the pack in all areas - business areas, income tax," he said releasing what has been dubbed the "Wendy" Report, done by businessman Dick Warburton and business lobbyist Peter Hendy, which compares Australia's tax system with those of other countries.

That study found Australia's top income tax rate (48.5 per cent with the Medicare levy) just marginally higher than the OECD average (46.7 per cent).

So depending on revenue and inclination, Costello has a case to shave this rate or leave it. A lower top rate is one of the key issues for many tax reformers, but they think it should be slashed, not pared.

But the Government's overall message, to the horror of those urging change, is that "tax cuts" equal "tax reform".

"What's the difference?" Costello shot back, after being pressed at a recent news conference.

In 1998, when Howard went to the election on the GST, Costello would have scoffed at the question he now poses.

Of course there is a big difference, and it has to do with both substance and politics. Geoff Carmody, co-founder of Access Economics, gave a neat summary in a speech this month. "Tax cuts are . . . easier to sell: all winners and no losers. But they must be paid for . . . Tax reform is self-financing right away. That's its fiscal strength and political weakness."

Thus, said Carmody, "political realities suggest tax reform must be 'sweetened' with tax cuts".

Those arguing for reform say the Government has enough money for "sweetening".

But both Howard and Costello are focused on the politics. And that suggests it's best just to give the punters their cake, rather than try to reslice it as well.

It's significant that we don't have a gung-ho treasurer pushing a reluctant PM. Indeed some observers believe that Howard could be more inclined to make changes than Costello. On Friday, Howard said he was "in favour of further reform and nobody should suggest that further reform is off the agenda", expressing surprise that his Menzies speech had been read as implying that.

Government sources, however, believe there isn't any difference between the PM and Costello on the issue.

Costello may fear he is not going to be the leader going into the 2007 election, but in case circumstances change, he doesn't want to be saddled with tax measures that have caused angst.

The Opposition would have a field day. And Costello would not have much time to remake his image.

If Howard is to stay, he too wouldn't want unnecessary risks. Rows over tax restructuring, which can easily involve the backbench as well as powerful lobbies, would be an unnecessary distraction that could carry into election year.

A few years ago Howard was telling people that tax change was "good for your country" as well as "good for you". But then he was spruiking his big picture reforms - now the system is the one he put in place.

Howard is very much at home in the tax debate - together with industrial relations, it has always been one of his policy preoccupations. In his Menzies speech, he declared government in Australia should be "lean and not mean", lauded and defended his generous Family Tax Benefit system, and put the boot into Labor.

Labor might be right in principle in saying Family Tax Benefit B - which goes to families with a stay-at-home parent - should be means tested. But by putting that proposal out there by itself, rather than waiting until it could be rolled into a wider alternative package, the Opposition gave Howard a familiar opening (remember the schools hit list).

Howard cast the Family Tax Benefit system as symbolising "the great philosophical divide in Australian politics", a stretch in anybody's language, but an emotive political point, especially when combined with the claim that Labor would start with a modest means test but progressively tighten it.

Howard himself has two arguments for those who rail against the middle-class welfare now in the tax system. Family Tax Benefits are "nothing of the kind", he says. "They are tax relief for a universal reality - that it costs money to raise children."

When quizzed on the universality of Family Tax Benefit B, Howard (unconvincingly) said a problem of having income tests on everything was that people had different views about what was a high income.

One political argument against further extensive tax reform is that it would be implicitly accepting that the system the Government implemented has flaws.

Beyond that, significant "reforms" - such as expensive rate reductions partly funded by removing some concessions and cutting spending - create losers as well as winners. And the pain can't necessarily be masked by the sweeteners.

As Howard said bluntly on Friday, "most of the reform plans that are put to me, and to the Government, are from people who want to rearrange the tax burden - basically get somebody else to pay a bit more so they can pay less".

As the critics call for more change, the Government remembers the backtracking it had to do on some of its business tax reform, and how it had to abandon a push against trusts when the Nationals kicked up.

Costello and Howard want to keep the surplus big enough to provide a buffer if economic circumstances deteriorate. That would limit how much "losers" could be bought off.

Ingrained in Howard's mind is how Paul Keating over-reached on tax, only to claw back after the 1993 election. It was the beginning of the rot for his government.

Most importantly, the Government judges that reform is rather like heavy food - best not to over-indulge and strain the digestive system - in this case the electorate.

The Coalition has just brought in one big reform package - the industrial relations changes. It is not clear yet how much these will bite politically. It is, however, very clear that ministers don't want to create another set of losers who could give it a big kick on election day.

While some Government MPs have been in the tax reform lobby, there are probably fewer than a year ago. "There's no constituency in the party room for doing the hard things," says one Liberal MP. As the election approaches, MPs start to feel reform fatigue coming on.

Costello can draw on the "Wendy" Report at budget time to argue that he didn't need to make more drastic changes. The report said Australia had the eighth lowest tax burden of OECD countries.

But its detail also gives grist to those arguing for restructuring - among them Hendy and Warburton. Quite why Costello chose this pair, given their views, is a mystery.

After the budget, "Wendy" may be walking both sides of the street with its authors, whose credibility Costello has elevated, among those criticising the Treasurer for shying away from being bold.