Taxing the Truth

If Australia's 2019 Federal election campaign will be remembered by economic historians for anything, it will probably be over a fascinating debate over taxation policy. The governing LNP coalition, after a six-year stint which has witnessed three leadership spills and three different prime ministers, announced a budget just before the election which would include tax cuts, and a promise to return the budge to surplus, which itself is a bit of a sticking point since they have managed to double the net debt in that period. In contrast, the opposition Labor Party has come out with a strong redistributive program, including significant funding for public transport infrastructure, subsidised childcare for low-income earners, extra public school funding, and renewable energy funding, etc. Interestingly, Labor also has announced a budget surplus that's more than twice what the Coalition has promised.

How they can make such a combination of projection and promises lies at the heart of the fiscal difference between the two parties. Unlike the Coalition, Labor intends not to pass on the tax cuts that are slated to those earning AUD$180K+ per annum, a decision that will save $77bn over ten years. Further Labor is planning on closing some amazing tax loopholes that are special to Australia, including negative gearing, capital gains, and full franking credits refunds. Explaining these very quickly:

(a) Under negative gearing, any expenses and losses made on a property can be offset against other income for tax purposes. This has meant that the Australian property market is increasingly monopolistic, and housing prices are increasingly unaffordable to others. Labor wishes to restrict negative gearing to new properties only, which should shift investments to increasing housing supply.

(b) Under capital gains tax, one normally pays a tax on the difference between the sale price of an asset and the purchase price of an asset. This includes most property, except when it is your principal residence which is exempt. Other capital gains however are subject to a 50% discount, allegedly to account for inflation. But because inflation is so low, it's become another source of "unearned income" for the investor class. Labor wants to reduce that to 25%.

(c) With franking credits, these are reductions in one's income tax where company tax has already been paid. This system of dividend imputation was introduced in 1987 to prevent "double taxation" and could reduce one's income tax liability in zero. In 2000, franking credits became fully refundable, meaning that they could reduce taxation into negative levels, i.e., the recipient received a tax refund, even though they paid no income tax. This becomes additionally enticing because superannuation income is not counted as taxable income, leading to a situation where many wealthy people on very high incomes, are receiving an income tax refund despite not having paid income tax. Labor wants to abolish the fully-franked system and return to the pre-2000 legislation, with the exception of pensioners.

These are substantial policy differences and it is unsurprising that they have been a focus of the election. Labor has taken a rather brave position by presenting big policy ideas and therefore a big target for campaigns of fear, uncertainty, and doubt. Unsurprisingly, some of the beneficiaries of current arrangements have been squealing like stuck pigs, even to the extent of one person being subject to social media ridicule as they whimpered that Labor’s policy was so unfair that it would reduce their ability to buy their ninth yacht.

Whilst it is all fine and well that policy positions are considered and debated, but what has become a feature of this campaign is the deliberate attempt by the government to mislead and lie. The treasurer, Josh Frydenberg, has persisted in describing Labor's desire to close loopholes and not pass tax-cuts to the highest income earners as representing some $387bn in new taxes. In addition, the government has persisted in claiming that Labor has a plan to re-introduce death duties (who have been subject to a run of fake news stories), which are not uncommon in OECD but haven't existed in Australia since the late 1970s. For what it's worth they are actually considered a relatively good tax by economists, who find themselves asking, rhetorically, Are any of the Coalition's claims of new Labor taxes actually true?. Even the Treasury had to tell the Coalition to stop lying when it came to negative gearing claims.

So extreme has been the campaign that consideration must be given in the next parliament for the introduction of advertising standards in elections. Remarkably, elections are one field of public life where such standards do not apply, and as a result, voters are often provided information which is neither true, factual, or even with honest intent, which of course reflects in decisions at the ballot-box. It is of little wonder that Australian are losing faith in democracy, with all the dangers of extremism that situation entails.

The time has therefore come that political campaigns in Australia should be subject to the same criteria of honesty that is required for other goods and services and to end false and misleading claims. This is not such a radical proposal and state at least, South Australia, has it on their statute books (section 113, Electoral Act, 1985. Penalties include fines for statements that are "inaccurate or misleading" with the requirements of withdrawing and retraction of such claims. For a brief period in Federal elections, in 1984, there was also a requirement for truth in political advertising, s329(2) introduced by the Australian Democrats. It was repealed the following year (p7-8) on the grounds that it could "seriously disrupt the orderly process of political campaigning". The South Australian experience, however, does not concur with this prediction.

There has been some progress on the Federal level over the years. In times past, election costings were subject to a campaign unto themselves with governments using official treasury figures and oppositions using accounting firms of their own choice to cost their policies, which were somewhat less credible (and sometimes released very late in the campaign). In 2010, at the insistence of cross-bench MP negotiations on government formation, the Parliamentary Budget Office was established as an independent, statutory office, designed to give proper costings of opposition policies. It uses the same budget assumptions as Treasury, and as it results its costing carry the same weight. The days of oppositions having rubbery figures in Australia are over thanks to the PBO. Given that truth in advertising does work in some Australian states, that the PBO has proven that truth can work on a federal level, perhaps the suggestion that there would be an improvement in political discourse and decision-making if politicians were subject to legal sanction for deception is not so radical, and then ye shall know the truth, and the truth shall set you free.