Government funds are not ‘taxpayer money’ — media and politicians should stop confusing the two



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Jonathan Barrett, Te Herenga Waka — Victoria University of Wellington

Rhetoric plays an important role in tax debate and therefore tax policy. If your side manages to gain traction in the public imagination with labels such as “death tax” or “dementia tax”, you have gone a long way to normalising the labels and winning support.

Some truth underpins these particular labels — an estate tax is triggered by a person’s death, and the United Kingdom’s abandoned levy for end-of-life care would have been particularly relevant for dementia sufferers.

Nevertheless, these tags are essentially political messages and we should expect unbiased media to use neutral terminology. Fair reportage would not, for example, repeat the extreme libertarian claim that “tax is theft” — a baseless slogan incompatible with the rule of law.

However, both reputable media and politicians of every stripe invariably use the phrase “taxpayer money” to describe government funds, despite the phrase having no constitutional or legal basis.

This article argues that truth-based media should avoid the phrase, and progressive politicians should recognise they fall into a conservative trap when they repeat it.

Taxpayers don’t own their taxes

Richard Murphy, one of the founders of the UK’s Tax Justice Network and author of The Joy of Tax, explains that “taxpayers’ money” is the money left in our pockets after we have paid taxes that are legally due. Money payable through taxes is the government’s property.

This is quite easy to prove — try not paying your income tax and see if the courts will enforce government property rights in that money.

Murphy also observes that “taxpayer” is typically understood as “income tax payer”, thereby implicitly preferring high income earners while excluding beneficiaries. But a goods and services tax (GST) ensures everyone is a taxpayer, and indirect taxes disproportionately affect the poor.




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Similarly, at a local level, “ratepayer” has become synonymous with the propertied voice to which councils should pay heed, even though renters (rather than the registered ratepayer for a leased property) bear the effective burden of local rates.

If the government is the legal owner of its funds, then, does it hold tax revenue in trust for taxpayers? Not at all. Subject to the rule of law, governments can do what they choose with their money.

Elections decide how taxes are spent

Self-appointed watchdogs such as the Taxpayers’ Union claim to bring government waste to public notice. Rightly so — as citizens, we should demand proper stewardship of government funds.

But our actionable right as electors is to vote a wasteful government out of office. The electorate as a whole, rather than an ideological interest group, determines the size of government we should have.

Unlike trust beneficiaries, we do not have an equitable interest in the government’s money. If it were otherwise, groups of taxpayers might have some claim on the government to spend or not spend its money in particular ways.




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For example, paying taxes to fund belligerent activities is problematic for pacifists, notably certain religious groups. A Religious Freedom Peace Tax Fund Act, which has been regularly introduced to the United States Congress, would permit dissenting taxpayers to assign the defence portion of their taxes to supporting peace work and social services.

Proponents of the legislation have not sought to pay less tax than their fellow citizens but to direct how their tax contribution is spent. These attempts have failed, as they must do. Democratic political communities permit dissent, but nonconformism does not extend to directing how taxes should be spent.

Tax is part of the social contract

In The Variorum Civil Disobedience (1849), a reflection on his imprisonment for failing to pay a highway tax, Henry David Thoreau recognised that an individual citizen can protest against government by refusing to pay tax (and accept the consequences), but they cannot treat the government’s choices in its expenditure as if it were a cafeteria. He wrote:

It is for no particular item in the tax-bill that I refuse to pay it. I simply wish to refuse allegiance to the State, to withdraw and stand aloof from it effectually. I do not care to trace the course of my dollar, if I could, till it buys a man or a musket to shoot one with — the dollar is innocent — but I am concerned to trace the effects of my allegiance.

Liberal democracies are based on some form of metaphorical social contract, most obviously manifest in the constitution. Under this arrangement, parliamentarians are elected representatives, not agents for particular groups.

Henry David Thoreau
Henry David Thoreau: ‘the dollar is innocent’.
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Like any government that fails to comply with the basic values of society, groups that seek to control government expenditure outside the electoral process can be seen as bending, if not breaching, the social contract.

A handbrake on decisive action

A progressive government should reject the suggestion that its funds are not its own to use as it sees fit for the betterment of society — as always, in accordance with New Zealand’s two fundamental constitutional principles of parliamentary sovereignty and the rule of law.

Kowtowing to a myth of “taxpayer money” may act as a handbrake on decisive action. We are taxed in accordance with statutory law. If Inland Revenue seeks to collect more from us than is due, we have access to various tribunals and courts.

These legal rules and processes determine what is mine and what belongs to the government. Broadly, we are free to deal with our own property as we see fit — and the government is too.

Media and progressive politicians should stop perpetuating the untruth that taxpayers retain some residual property interest in the taxes they pay. Taxpayer money is nothing more than their after-tax property and the government’s money is its own.The Conversation

Jonathan Barrett, Senior Lecturer in Taxation, Te Herenga Waka — Victoria University of Wellington

This article is republished from The Conversation under a Creative Commons license. Read the original article.

Australia needs a six-month GST holiday



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Isaac Gross, Monash University

Treasurer Josh Frydenberg has spent billions trying to save us from recession. The winding down of JobKeeper scheduled for September means he’ll have to spend billions more.

Many of the stimulus measures talked about are focused on the traditional targets of infrastructure and residential construction.

But this recession is different to previous ones. It has wrought most of its damage to restaurants, retail, entertainment and the holiday industry.

These service sector industries employ the lions share of the Australians at risk.

No matter how much traditional stimulus we offer, very few baristas or chefs are going to be able to find work building high-speed rail lines.

The COVID recession requires a different response.

A GST holiday would fight the recession we’ve got

One that would work would be a GST holiday.

Instantly, and for the next six months, all goods and services covered by the 10% tax would become more affordable.

The concession would be timely, targeted and would generate the maximum economic bang for the government’s buck.




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It would be targeted because the GST doesn’t cover many of the goods people are already buying such as fresh food and medicines.

What it does cover is extra, less essential, spending on things such as clothes, tourism and restaurants – the exact kind of spending we need to stimulate.

Cutting income tax or cash splashes wouldn’t deliver as big a bang for the buck – much of the bonus would be saved, or spent in sectors that don’t require stimulus.

However the only way to get the GST discount would be to buy goods and services, many of them produced by workers who will need support.

It’d be direct money where it is needed

The benefit would also be progressive. Calculations by Peter Varela, an economist at the Australian National University, suggest that the poorest households pay the highest share of their income in GST.

Removing it would eliminate this burden, if temporarily, helping the poorest households the most.

Making it temporary would encourage Australians to spend right now.

A GST holiday that only lasted only six months would force households to consider bringing forward planned future purchases to the present, when they are needed, in the same way as the government’s six month extension of the instant asset write-off is meant to for businesses.

It’s been done elsewhere

The idea was considered by Australia’s treasury during the global financial crisis. Britain’s treasury did it, cutting its GST (called value added tax) from 17.5% to 15% for a year in a measure judged a success.

Britain is reported to be planning to do it again.

Germany has already done it. It has cut its value added tax from m 19% to 16% until the end of the year.

Australia baulked at the idea during the global financial crisis because it was considered too difficult to get the premiers to agree to it.

But it mightn’t be as difficult now. The COVID-19 response has generated a new surge in cooperation between state and federal leaders for the good of the nation.




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A fly in the ointment would be who paid for it. The six month holiday might cost A$35 billion. While the states traditionally receive the GST revenue, in this instance the bill for the cut should be paid by the federal government.

It’s the federal government that is responsible for managing the national economy. State budgets, already hard hit, shouldn’t be further damaged.

Over to you Treasurer Frydenberg. Your economic statement is due on July 23. The budget is due on October 6. You could do worse than emulate Germany and the United Kingdom.The Conversation

Isaac Gross, Lecturer in Economics, Monash University

This article is republished from The Conversation under a Creative Commons license. Read the original article.

Post-coronavirus, we’ll need a working tax system, not more taxes and not higher rates



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Neil Warren, UNSW and Richard Highfield, UNSW

Oliver Wendell Holmes Jr famously observed in 1927 that “taxes are what we pay for civilised society, including the chance to insure”.

Whilst tax as a price for civilised society is well understood, less appreciated is the second part of his observation – that tax provides a chance to insure against a crisis.

As nations emerge from the COVID-19 crisis with policies unthinkable just six months ago, and associated debts previously unimaginable, it is becoming clear that while some were well insured and able to respond rapidly, most were underinsured, exposing their civilisations to previously unthinkable risks.

In many ways Australia is an exemplar in its use of taxation to provide the “chance to insure”. It funds Medicare; the Pharmaceuticals Benefit Scheme; the Higher Education Loan Program; the Superannuation Guarantee Charge and contingency-based welfare payments.

COVID has exposed the weakness in our system

COVID-19 has exposed how underinsured Australia is in other ways. It will have to borrow heavily to protect the economy, but for many years won’t be able to impose the extra taxes that will be needed to pay down the debt.

Introducing new taxes or increasing existing tax rates would threaten what will be a fragile recovery.

The only realistic option is to review what Australia gives away, such as tax concessions, and what it fails to collect, as measured by the so-called tax gap.




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The tax gap is the difference between the amount the Tax Office collects and what we would have collected if every taxpayer was fully compliant with tax law.

In 2016-17, the Commonwealth raised A$389 billion in taxes, intentionally gave away an estimated $166 billion and unintentionally failed to collect a further $30-35 billion that the Tax Office knows of.

Mapping out a pathway to winding back government debt and funding programs to better insure our civilised society has to begin with ensuring those who are not currently carrying their fair share of the legislated tax burden do so through reforms to reduce non-compliance.

Many of us aren’t paying the tax we should

The Tax Office conservatively estimates that non-compliance for the taxes it has so far examined is equivalent to more than 8% of the tax revenue it collected in 2015-16.

The Treasury also estimates that tax concessions in 2017-18 were equivalent to 41% of Commonwealth government revenue, or more than 9% of GDP (although it cautions against adding estimates together as reducing one concession can affect the use of others).

Given the scale of the Commonwealth response to COVID-19, the government will need additional tax revenues of around 2.5% of GDP (about $50 billion) for some years.

This should not prove insurmountable. In comparison with other advanced economies, Australia is a relative low taxer with a total tax burden of 28.6% of GDP in 2017-18, well below the OECD average of about 34.5%.

There’s revenue going begging

The tax gap estimates show billions can be raised from integrity measures such as addressing overclaimed work-related expenses ($3 billion), unreported cash wages ($1 billion) unreported rental property net income ($2 billion) and unreported business income ($2-3 billion).

There’s much more available from reducing tax concessions, removing the personal tax-free threshold, winding back retirement savings concessions, and broadening the goods and service tax (especially from fully taxing the food that is already partially taxed).

Lower income groups affected by the changes should be compensated by improved targeting of expenditure programs.




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Right now we’ve a near-universal welfare system and a targeted tax system.

The way out of our present problems is to make the tax system more universal and the welfare system more targeted.

New taxes and higher rates should be resisted, especially if made more palatable by more concessions.

What we are proposing would not only result in a tax system that was simpler and harder to escape – but one that was capable of funding the insurance we will need to preserve our society into the future

There’s no reason to think there won’t be another pandemic exposing the weaknesses in our tax system that remain.The Conversation

Neil Warren, Emeritus Professor of Taxation, UNSW and Richard Highfield, , UNSW

This article is republished from The Conversation under a Creative Commons license. Read the original article.

A temporary income tax hike is the bitter but equitable pill Australia should swallow



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Jonathan Karnon, Flinders University

We’re all in this pandemic together. But we’re currently leaving it to a small proportion of the community to shoulder most of the economic pain.

It’s an approach that’s compounding social and intergenerational inequity.

To date the Australian government has committed A$320 billion to support households and businesses during the COVID-19 pandemic. The Commonwealth’s net debt had been projected to peak this year at $392 billion and then decline. Now that debt is set to almost double.




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Paying the debt will likely take decades. The burden will fall mostly on younger generations, through higher taxes or reduced public services such as health care and education.

Younger workers are also bearing the brunt of the immediate economic effects. Industries with the biggest proportion of young workers have been hit hard. In arts and recreation services, a quarter of workers are under the age of 25. In retail it’s about a third. In accommodation and food services it’s almost half.

In the past, governments have imposed temporary levies after natural disasters to pay for recovery efforts.

But the peculiar dynamics of this crisis open the opportunity to introduce a temporary levy now. This would enable those with secure incomes to share the pain and reduce the double impost on the younger generation.

Levy time

A temporary income tax levy is not unprecedented.

In 2014 the federal government implemented the “temporary budget repair levy” to reduce the budget deficit (then A$37 billion). Gross national debt was about $320 billion. The levy increased the marginal tax rate on the top income bracket (more than $180,000 a year) from 45% to 47%. It collected about A$3 billion over three years.

Given the magnitude of the deficit we now face, a similar levy makes sense.

An example levy is illustrated in the table below (based on income tax data from 2016). A 1% levy is applied to annual income between A$18,200 and A$37,000, a 2% levy to income between A$37,000 and A$90,000, a 3% levy up to A$180,000, and a 4% levy to income of more than A$180,000.



For someone on a median full-time income of A$1,463 a week, this would mean paying an extra A$17 a week in income tax.

Over a six-month period such a levy would raise about A$6.5 billion.

Consumption block

The main argument against raising income taxes is that it reduces incentives to work and lowers consumers’ disposable income, which dampens economic activity (and ultimately government revenue).

This, and the politics of tax, means governments usually wouldn’t dream of raising taxes during an economic crisis, because that would further reduce consumer spending and compound the downturn.

But the COVID-19 economic crisis is unique. It is suppressing spending by those with secure incomes because people are staying home.

Analysis published by The Sydney Morning Herald and The Age shows consumer spending fell to 13% below normal in late March. One-off government stimulus payments totalling A$5 billion reversed the downward trend in the first week of April. However, the effect of the one-off stimulus payments is likely to be temporary as higher-income earners, who didn’t receive a stimulus payment, continued to reduce their spending.

If people are spending less because there are fewer opportunities to spend, this novel aspect of the crisis reduces the likelihood a temporary increase in the income tax levy would have any negative economic effect.

Positive effects

Right now the costs of the COVID-19 crisis are being disproportionately borne by a small proportion of the population – the 700,000 Australians who have lost their jobs and about the same number relying on the JobKeeper wage subsidy.

Many of those who have lost their jobs were already in low-paid and insecure jobs.

As previous research on the longer-term effects of natural disasters has found, these types of economic shocks widen inequalities, with most people never making up the income they lose. A levy would reduce this inequity.




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An advantage of introducing a levy during the crisis is there is clear time-frame to end it. It could be tied to social distancing regulations, ending when spending patterns return to normal.

Alternatively, the government could set a specific date to review the levy. It has already done this for funding initiatives such as telehealth consults during the crisis.The Conversation

Jonathan Karnon, Professor of Health Economics, Flinders University

This article is republished from The Conversation under a Creative Commons license. Read the original article.

Three charts on: why congestion charging is fairer than you might think



Peak-time drivers to the CBDs of Sydney and Melbourne typically earn much more than the average worker.
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Marion Terrill, Grattan Institute and James Ha, Grattan Institute

Congestion charging should be introduced in Australia’s largest cities, as Grattan Institute’s latest report shows. Our analysis also finds that the people who commute to the Melbourne and Sydney CBDs by driving are two to three times as likely to earn six-figure salaries as other Australian workers.

One of the main concerns about charging drivers who use the busiest roads at the busiest times has been about fairness. But sensible congestion charges could be designed to avoid burdening financially vulnerable people who lack alternatives to using particular roads at busy times.

Congestion charging is gaining traction in cities around the world as a proven method to manage congestion. London, Singapore, Stockholm and Milan all have congestion charging schemes. New York City legislators have approved plans to introduce it in Manhattan.




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It’s better than building new infrastructure

Sydney and Melbourne are big, global cities, but with growth and prosperity comes congestion. The solution from the federal, New South Wales and Victorian governments has been to throw money at huge infrastructure projects. Politicians like promising infrastructure because large benefits can be targeted at key voters, while the costs are spread across all taxpayers.

But this means many people are paying to alleviate some people’s congestion. And the relief from new infrastructure tends to be short-lived. In Australia’s fast-growing cities, extra public transport capacity at peak times gets chewed up quickly, while new freeways tend to fill with new traffic soon after opening.




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This doesn’t mean governments should stop investing in infrastructure. But it does raise the question of whether spending billions of taxpayer dollars is the best or fairest way to tackle congestion.

We usually think of congestion as a force that slows us down, without thinking about how we slow everyone else around us. Congestion charging fixes this by charging a modest fee to use the busiest roads. Drivers then have to decide whether it’s worth making their trip at that time on that road.

Drivers who need to travel at peak times are always able to do so – they just need to pay a fee. Heavy users will end up paying more for using an in-demand resource. The most flexible drivers will save money by travelling later, or elsewhere, or by another mode. And this means getting out of everybody else’s way.




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Charging is also fairer than the licence-plate approach of Mexico City or Beijing, where cars are banned from driving on certain days depending on their licence plate numbers. These heavy-handed restrictions ignore the fact that people’s travel needs vary from day to day. Why ban a driver on the day of a job interview?

But what about all the drivers on low incomes?

It’s fair to ask whether congestion charging will burden the most vulnerable people in society. And the answer depends on the design of the scheme.

First, the people who we should really worry about are those who: are struggling financially; frequently or urgently need to travel on charged roads or to a charged area; and lack good alternatives to driving at that time on those roads.

A sensible congestion charge would target only the busiest roads and areas – think central business districts (CBDs), major freeways and key arterial routes – and only at times of high demand such as peak hour.

So if Sydney or Melbourne were to introduce a peak-period congestion charge around their CBDs, how many vulnerable people would be affected? Hardly any.

Our research shows the drivers who would pay the charge tend to be doing just fine. It’s mostly commuters and people driving as part of their job – think tradespeople and couriers. Those travelling for work could pass the cost on to their customers – every tradie driving to the CBD would face the same charge, so no one would gain or lose a competitive advantage.




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Most CBD drivers are well-off

And the CBD commuters? They tend to earn much more than the typical Australian.

Grattan Institute analysis shows most people driving to the Sydney CBD for work each day earn six-figure salaries. Their median income is nearly A$2,500 a week – about A$1,000 a week more than the typical income for full-time workers in Sydney.

It’s a similar story in Melbourne. The median full-time worker driving to the CBD earns nearly A$2,000 a week – about A$650 more than the typical full-time worker in Melbourne.

And these CBD commuters are also generally well-served by public transport. The CBD is the most accessible location in Sydney and Melbourne, with multiple train lines and bus or tram routes running through it.

That’s why most people travel to the CBD by public transport. In Sydney, barely one in six full-time CBD workers actually commute by private vehicle. In Melbourne, it’s only a quarter. But these workers typically earn a lot more than the people on CBD-bound buses, trams and trains.


Grattan Institute, Author provided

Perhaps surprisingly, drivers to the CBD are more likely to come from inner, richer parts of the city – think Mosman and Double Bay, not Penrith or Parramatta. It’s the same in Melbourne: more people drive from Kew and Richmond than Broadmeadows or Dandenong. Even those driving in from lower-income areas typically earn more than most of their neighbours.

This means the number of genuinely disadvantaged people who would be burdened by a congestion charge is small. As for one-off trips to the CBD – maybe for a specialist appointment – these are by definition infrequent and can often be rescheduled to the middle of the day.

State governments should consider discounts for low-income people with impaired mobility. However, wide-ranging exemptions would badly undermine the effectiveness of the congestion charge – as happened in London.


Grattan Institute, Author provided

Congestion charging is a smarter way to improve Australia’s largest cities and fears that it would be unfair are overblown. It should be the centrepiece of a mixed strategy to tackle congestion. The NSW and Victorian governments should introduce cordon charging around the CBDs of their capitals within the next five years.




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The Conversation


Marion Terrill, Transport and Cities Program Director, Grattan Institute and James Ha, Associate, Grattan Institute

This article is republished from The Conversation under a Creative Commons license. Read the original article.

The dirty secret at the heart of the projected budget surplus: much higher tax bills



Bill shocks are the flipside of a surplus built on higher tax collections and tighter access to support payments.
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Peter Martin, Crawford School of Public Policy, Australian National University

The budget is bouncing out of deficit and is set to stay in surplus for the decade to come.

That’s what the April budget and the final budget outcome for 2018-19 tell us, and Thursday’s report from the Parliamentary
Budget Office doesn’t say any different.

It doesn’t have much choice. The Parliamentary Budget Office is required to take the government’s surplus and deficit projections for the next four years as given, and to take its economic forecasts and tax and spending announcments for the next ten years as given, whether realistic or not.

What it is allowed to do, and does once a year in a publication entitled medium-term fiscal projections, is to set out the implications of those projections.

Those implications, spelled out on Thursday, show the projected budget surplus to be so fragile as to be unrealistic, except the parts that rely on much higher personal income tax collections.

That’s right: much higher income tax collections per person, even after taking into account the coming decade of legislated tax cuts.

Middle earners hit hardest


Parliamentary Budget Office

But it won’t be higher for all of us.

The middle fifth of earners will pay far more of their income in tax in ten years’ time under the government’s projections, according to the PBO’s calculations. Instead of paying 14.9% of their income in tax, by 2028-29 they will pay 18.8%.

That’s after taking into account the long-term tax cuts the government pushed through parliament in May and went to the election on.

Without those legislated tax cuts, they would have been paying an extra 6.3% of their income in tax. With the legislated cuts (and others pencilled in by the PBO to keep the government’s tax take within its promised ceiling) they will be paying an extra 3.9%.

Put another way, the government’s tax cuts will undo some of the damage caused by bracket creep as more of each pay packet climbs into higher brackets, but not most of it.

It’s the same for pattern for the second-lowest fifth of earners. They will move from paying 5.3% of their income in tax to 9.9%, a near doubling, which is taken is taken into account in the surplus projections.




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The second-highest fifth will move from paying 22% of their income in tax to 23.4%, even after the tax cuts. The bottom fifth, who don’t pay much tax, will move from paying 0.6% to 1.2%.

Highest earners escape

But workers in the top fifth, which at the moment is workers earning above A$90,000, won’t pay a cent more, at least not on average.

The government’s projections, as spelled out by the PBO, have them paying less of their income ten years from today than they do today.

Put another way, they are the only fifth of the population that won’t be expected to wear pain to keep the budget surplus.



Parliamentary Budget Office

There are other contributors to the budget surplus. One is a pretty hefty assumed decline in growth in government spending over the next decade, amounting to 1% of GDP, taking government spending from around 24.9% of GDP to around 23.9%.

Much of it is projected to come from tighter eligibility criteria for payments, and measures to constrain their growth, something the PBO believes might be difficult to maintain:

The spending restraint seen over the past few years may be increasingly difficult to maintain over coming years given the length of time over which restraint has been applied, the pressures emerging in some spending areas, and the potential need for fiscal stimulus, noting that the projected improvement in the budget balance is mildly contractionary.

What it is saying, gently, is that it the longer the government attempts to restrain spending (for instance by imposing tough conditions on access to benefits and using debt collectors to recover alleged overpayments), the harder it will get.

And it is saying the government might need to spend in ways it hasn’t accounted for, including on measures to support the economy in the event of a downturn.

Budget conventions to the rescue

The projections assume the opposite of a downturn.

No blame should attach to this government for them, but our rather odd budget conventions dictate that the worse the economy is, the better the budget’s projections for economic growth. That’s right: the weaker our current economic growth, the stronger the budget’s projections for future economic growth.

The thinking is that over the long term, the economy should grow at roughly its long-term average growth rate. To get there when the economy is weak, as it is now, the budget assumes several years of stronger than normal economic growth to catch up.




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In this case it’s five years of stronger than normal economic growth.

The PBO contents itself with the observation that economic growth that was merely normal (or worse, remained weaker than normal) for some of those years would have a “significant and compounding effect on the budget position over time.”

The surplus is far from assured, and it shouldn’t be. The government might well find that it can’t and shouldn’t restrain spending on payments as much as is projected in the decade ahead, and it might find it needs to spend to support the economy.

It will almost certainly find that lifting the tax take on middle Australians from 14.9% of income to 18.8% is intolerable.The Conversation

Peter Martin, Visiting Fellow, Crawford School of Public Policy, Australian National University

This article is republished from The Conversation under a Creative Commons license. Read the original article.

Build to rent could shake up real estate but won’t take off without major tax changes


Hal Pawson, UNSW

In the wake of slumping demand for apartment building, it’s little wonder the multi-unit housing industry has been eagerly eyeing a possible new residential product: “build-to-rent”.

In fact, the latest figures show that apartment-building construction starts were down 36% in 2018 from 2016. But how much will this little-known type of housing solve our housing problems?




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Build-to-rent won’t be a silver bullet solution for Australia’s housing affordability stress, but it does have potential to tick the box on several important public policy objectives. These include widened housing diversity, enhanced build standards, and a better-managed, more secure form of private rental housing.

But for this to happen, Australia’s tax settings need adjustment.

What is ‘build-to-rent’?

This refers to apartment blocks built specifically to be rented, usually at market rates, and held in single ownership as long-term income-generating assets.

The enduring owner might be, for instance, an insurance company, an Australian super fund, a foreign sovereign wealth fund, a private equity firm, or the building’s developer.

Although new in Australia, build-to-rent is quite common in many other countries. Under its North American name, “multi-family housing”, the format has generated more than 6.3 million new apartments since 1992 in the US alone. And in the UK, a build-to-rent sector has led to 68,000 units built or under construction since 2012.




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A scattering of build-to-rent schemes are already underway or completed, mainly in inner Sydney and Melbourne. And they may prove to be the forerunners of a new Australian residential property sector – but that is far from guaranteed.

In Australia, our private rental market is almost entirely owned by small-scale mum-and-dad investors, so this kind of housing would be a largely new departure from typical Australian real estate.

Potential benefits

The build-to-rent development model, involving a long-term owner commissioning an entire building, creates an incentive for higher, more enduring quality than the standard “build-to-sell” apartment development approach.

Importantly, build-to-rent is a long-run investment that caters for rental demand, which tends to grow steadily.

This means the model is largely immune to the fickle changes in housing demand resulting from typically short time horizons and primarily speculative instincts of individual buyers traditionally dominant in our market.




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So at its full potential, this new housing product could introduce a valuable counter-cyclical component into the notoriously volatile residential construction industry, helping to offset damaging booms and busts. In other words, build-to-rent can create stability in the Australian property market.

How build-to-rent can incorporate affordable housing

Optimistically, some have claimed build-to-rent could also provide an “affordable housing” fix for many earners who are doing it tough in our existing private rental market.

But this could be possible only with the aid of major government funding or planning concessions.

Ideally, housing at rents affordable to low or moderate income earners would be included in predominantly market-rate build-to-rent schemes. Indeed, one major construction industry player recently advocated this as a standard expectation.

So how should affordable housing be provided in this case?

To find out, our analysis compares the cost of developing affordable housing by a for-profit company with development under a not-for-profit community housing provider.

Thanks to that non-profit format, and the tax advantages that go along with it, community housing providers can, in fact, construct affordable rental housing at significantly lower cost than their for-profit counterparts. Less subsidy is therefore needed.

Nonetheless, government help in some form will be essential to enable an affordable housing element. The most painless way for this to happen, from the government perspective, is through allocating sections of federal or state-owned redevelopment sites to community housing providers at discounted rates.




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‘Build to rent’ could be the missing piece of the affordable housing puzzle


Encouragingly, this strategy was recently advocated by newly designated federal housing minister Michael Sukkar.

Such designation of government-owned sites could, for instance, be factored into large-scale urban renewal projects like Sydney’s Central-to-Eveleigh and Rozelle Bays. When complete, it could fulfil the widely voiced demand that 30% of these developments should be affordable housing.

Levelling the playing field

Our modelling shows that under current conditions, even market-rate build-to-rent projects are barely viable – at least in Sydney.

The inflated price of developable land in Australia’s urban housing markets is an important contributing constraint. But our research also identifies a range of government tax settings that disadvantage build-to-rent, compared with both mum-and-dad-investors and traditional build to sell developers.

Removing less favourable land tax and GST treatment could markedly improve build-to-rent feasibility.




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From a housing policy perspective, there’s also a case for the federal government to reconsider its recent “withholding tax” decision that treats overseas-based institutional investment in rental property less favourably than investment in commercial property.

Since such global funds would likely lead the establishment of a new Australian build-to-rent asset class, revisiting the withholding tax changes could be a significant step in making build-to-rent a reality in Australia.

In any case, build-to-rent is no simple solution for Australia’s affordable housing shortage.

But even as a market-rate product, it could fulfil several important public policy objectives. How far it might do so in practice is something that governments rightly need to weigh up when considering industry-proposed tax and regulatory reforms.The Conversation

Hal Pawson, Associate Director – City Futures – Urban Policy and Strategy, City Futures Research Centre, Housing Policy and Practice, UNSW

This article is republished from The Conversation under a Creative Commons license. Read the original article.

Morrison’s $158 billion tax plan set to sail through Senate after deals with crossbenchers


Michelle Grattan, University of Canberra

The Morrison government will finish the first week of the new parliament with its election centrepiece – the $158 billion, three-stage tax package – passed into law.

The first stage of the tax relief – in the form of an offset for low- and middle-income earners when people submit their returns – will be available as soon as the Tax Office makes the necessary arrangements over the next few days. Getting the legislation through this week means there is only minimal slippage from the July 1 start date that was promised in the budget.

The numbers fell into place with Tasmanian crossbench senator Jacqui Lambie declaring she would vote for the package. She had negotiated with the government on her demand that it forgive the $157 million social housing debt her state owes the Commonwealth. This would save Tasmania $15 million a year, which Lambie wants used to deal with issues of homelessness and social housing.

Lambie said: “The good will is there and they know that we’ve got housing problems down there.”




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While Finance Minister Mathias Cormann, who had said there would be no horse-trading over the package, was publicly coy about the deal, Lambie is confident it will be delivered.

She said some details still had to be sorted out.

What I don’t want to be doing is rushing out saying here’s the money and that’s it. We want to make sure that that money is targeted […] we’re still dealing on good faith. And I look very forward to that over the next four to six weeks.

Cormann told Sky News: “Senator Lambie has been a very forceful advocate.

She has raised issues with us. We are very happy to work through these issues with her. When we are in a position to make further announcements down the track we will.




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The other crossbench votes needed for the package come from independent Cory Bernardi and the two Centre Alliance senators.

Centre Alliance extracted a deal over action on gas prices.

It said in a Thursday statement that it had “worked with the government on both short- and long-term reforms to deal with gas market concerns.”

The government would announce the full package in coming weeks, it said.

It would include

changes to the Australian Domestic Gas Security Mechanism (ADGSM) to deal with current pricing, market transparency measures, measures to deal with the monopoly nature of East Coast gas pipelines and longer term measures to ensure future gas projects deliver surplus supply to the Australian market.

The gas agreement, canvassed publicly in recent days, has caused some blow-back from the industry.

Faced with the inevitability of the tax package passing, Labor said it would continue to pursue its attempt to split the package and then consider its options.

It is likely not to oppose in the final vote.




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Lambie’s vote key if government wants to have medevac repealed


Eyes are now on Lambie’s position on the government’s bid to repeal the medevac act. Home Affairs minister Peter Dutton on Thursday introduced legislation for the repeal. Lambie said she was still making up her mind on how she will vote when the legislation arrives in the Senate. She is set to be the crucial vote.The Conversation

Michelle Grattan, Professorial Fellow, University of Canberra

This article is republished from The Conversation under a Creative Commons license. Read the original article.

Grattan on Friday: Those tax cuts test Albanese and provoke Hanson


The proposed 3 stage tax plan will cost $158 billion.
Shutterstock

Michelle Grattan, University of Canberra

As hissy fits go, it was a beauty. Pauline Hanson was very cross indeed. Senate leader Mathias Cormann hadn’t called her, even though he was reportedly negotiating on the government’s $158 billion package of income tax cuts.

Venting on Sky on Wednesday night, Hanson said: “I don’t think he’s got the guts to pick up the phone and actually talk to me. And to turn around and say that he’s negotiating with crossbenchers is not the truth, because he’s not negotiating with me”.

She went on to rail about the Liberals preferencing One Nation below Labor, doing “grubby deals” with Clive Palmer and trying to destroy her.

The three-stage 10-year package, which promises an extra tax offset for low and middle income earners, is the big game in town for the first days of the new parliament, which opens the week after next, and it’s causing some grief.




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Frydenberg declares tax package must be passed ‘in its entirety’


Despite the government’s confident words during the election campaign, the Tax Office has declined to pay the offset of up to $540 until the legislation is passed. This means the July 1 deadline from when the offset was supposed to be available will be missed. (Although people will get from July 1 the tax cut in the pipeline from last year’s budget.)

If the tax legislation is passed quickly, a few weeks’ delay for the offset is no big deal, especially as many people won’t be putting in their tax returns for a while. But the pressure on the government to deliver the first stage of its plan ASAP – not least because the economy needs the stimulus – reduces its ability to hold out indefinitely on its insistence it won’t split the package to accommodate objections to the later cuts.

Labor is in even more of a bind. It is happy to tick off the first stage – worth $15 billion – but has yet to decide its position on stages two (costing $48 billion and starting 2022-23) and three (costing $95 billion and commencing 2024-25).

Its objections are particularly to the last stage, which delivers cuts for higher income earners. Both the later stages come after the next election, due early 2022.

Those urging Labor should try to block at least stage three argue, apart from the equity issue, that mounting economic uncertainty makes it irresponsible to lock in such big tax cuts out in the “never never”.

On the other hand, a strong case can be made on grounds of principle and practicality for Labor to wave the whole package through.

The question of when a party or politician has a “mandate” is vexed.

On one view an opposition can claim it possesses a mandate to stay faithful to positions it advanced before an election even after it has lost that election.

But when the Morrison government went to the polls with the tax package as its prime policy, it does seem to have a strong case to say the parliament should pass it.

The same point would have applied if Bill Shorten had won. He would have had a mandate for his proposed changes to franking credits and negative gearing – both opposed by the Coalition.




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It doesn’t help maintain faith in the political system, or in election promises, for parties to try to govern from opposition, despite the Senate’s voting system sometimes facilitating this. Voters should be able to expect that major election policies of the winning side are implemented (perhaps with some alterations at the edges by parliament).

It is another matter when, as happened with the Abbott government’s 2014 budget, big new controversial initiatives are brought in soon after the election campaign, during which they were not flagged.

The practical reason against Labor going to the barricades on the tax package is that as it regroups, there is little to be gained by taking on this particular battle, especially when it is trying to reposition itself as appealing better to “aspirational” voters and leaving behind language attacking the “top end of town”.

Labor might be right that the proposed long term tax cuts could look irresponsible later, but if so, that is a fight to be had at the next election, when the ALP could highlight doubts it had previously registered.

There are divisions in Labor about what to do. Victorian MP Peter Khalil this week said if the government won’t split the package, Labor should vote for it all. Anne Aly, a backbencher from Western Australia, expressed concern about the package’s implications against a darkening economic outlook. The ALP has asked the government for more information. Anthony Albanese is consulting within the party before shadow cabinet decides the position it takes to caucus.

While the government is focusing the rhetorical pressure on Labor, it has an eye to the alternative route – to get the package through via the crossbench.




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For Cormann, the new Senate is easier than the last, partly because the non-Green crossbench has been slashed at the election.

To pass legislation opposed by Labor and the Greens the government needs four of the six non-Green crossbenchers. These include two from Pauline Hanson’s One Nation, two from Centre Alliance, South Australia’s Cory Bernardi, and Tasmania’s Jacqui Lambie.

Bernardi will vote with the Coalition. He has said he wants to help the Morrison government as much as possible, and on Thursday he announced he is winding up his Australian Conservatives party. It’s not clear whether he’ll seek to rejoin the Liberals, from whom he defected in 2017, or even stay in the parliament.

Cormann has been in discussion with Centre Alliance about their push for lower gas prices, and an agreement on some action appears likely. While this deal is formally separate from the tax package, he and they both have that front of mind.

This would leave one vote to be collected.

Lambie refuses to comment on her position. Hanson said earlier this month she was “not sold” on the current package and “therefore not likely to support the measures” – and proposed some of the funds be used for a coal-fired power station and a water security scheme.

After Wednesday’s outburst, Cormann was (of course) on the phone to her at crack of dawn Thursday. On her account, he said: “I’m not negotiating with crossbenchers with this at all. We have our three stages. We’re going to pass that no matter what”.

The government aims to keep the heat on Albanese. By the same token, if the crossbench has to come into play, Cormann won’t want a repeat of last term, when he couldn’t muster the numbers to deliver tax relief to big companies.The Conversation

Michelle Grattan, Professorial Fellow, University of Canberra

This article is republished from The Conversation under a Creative Commons license. Read the original article.

Frydenberg declares tax package must be passed ‘in its entirety’


Michelle Grattan, University of Canberra

The government’s tax relief package is shaping up as the first test of incoming opposition leader Anthony Albanese, with Treasurer Josh Frydenberg declaring on Friday it must be supported “in its entirety” when put to the new parliament.

But Albanese has only guaranteed support for the first tranche. As for the later cuts for higher income earners, “we will consider that,” he said on Friday.

But let me tell you, it is a triumph of hope over experience and reality that the government knows […] what the economic circumstances are in 2025 or 2023, in the middle of the next decade.

Appearing with Albanese on the Nine Network, Trade Minister Simon Birmingham said:

Albo, it would be remarkable if your first act as leader of the opposition was […] to oppose a long term package of tax relief – that would show a real tin ear for the Australian people”.

In an interview with The Conversation, Frydenberg refused to be drawn on what the government would do if unable to get the whole bill through.

It would, however, be hard for it to avoid splitting the bill – to hold out would deny the immediate relief pledged in the April budget.

All or nothing

Nor could Frydenberg say when parliament will meet to consider the legislation, although the government has effectively conceded it will not be in time for the promised July 1 start of the additional tax offset promised in the budget. (A smaller offset from last year’s budget will be paid from then.)

But Albanese said the tax cuts could be passed in time for July 1, because it would only need a couple of hours of sitting. “We’ll do a deal. I can do that. One speaker a side, and Bob’s your uncle.”

Frydenberg said Reserve Bank Governor Philip Lowe had highlighted the positive impact the tax cuts would have on household incomes.

“Let’s too not forget that $7.5 billion will flow to households in the coming financial year, as a result of these tax cuts,” Frydenberg said.

Tax cuts as good as rate cuts

“This benefit to households and the economy is equivalent to two 25 basis point interest rate cuts and is one reason why growth and household consumption is projected to pick up,” he said.

“The tax reforms we are putting to parliament are not just providing immediate relief, but leading to long term structural change. This will tackle bracket creep and reward aspiration.

“Earning more is nothing to be ashamed of and should be encouraged not punished. Rewarding aspiration is in the Coalition’s DNA and will be a fundamental driver of our policies in government.”

In his assessment of the economic outlook, Frydenberg had two messages.

He said in his discussions with some of Australia’s biggest employers, “I’ve been buoyed by their confidence and their desire to work with the government, to support continued economic growth and job creation”.

Headwinds worsening

But the economy “faces significant headwinds. Trade tensions between the United States and China have increased, with the potential to negatively impact global growth.

“Were there to be another round of US tariff increases, the potential for which has been flagged publicly, the proportion of global trade covered by recent trade actions would double from 2% to 4%.”

Also, flood, drought and fires had taken a toll and the housing market slowdown was hitting dwelling investment and having an impact on consumption.

The challenges made the government’s agenda for growth, including tax relief, so important and time critical.

Asked whether the “headwinds” faced by the Australian economy were stronger than at budget time, when he also spoke of headwinds, Frydenberg said: “I think the tensions between China and the US have increased”.




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Frydenberg spoke with the US Treasury Secretary Steve Mnuchin this week and the two will meet in Japan at the G20 finance ministers meeting in a few weeks. Frydenberg stressed in the conversation the importance of free trade to Australia and its wish to see disputes resolved as amicably as possible.

Asked whether, if the economy deteriorated further, the government would be willing to live with a smaller surplus next financial year than the $7.1 billion projected in the budget, Frydenberg said, “that’s the amount that we’re committed to”.

He would not be drawn on the signal this week from Lowe that an interest rate cut was coming.

The Treasurer said the current unemployment rate of 5.2% reflected “strong labour market performance”.

While there are no plans for an overhaul of federal-state relations by the re-elected government, Frydenberg said he would work closely with the states on infrastructure and managing population.




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He said he would respond fully to the Productivity Commission report on superannuation, although he had not set a date for this.

“The issues that were raised through the Productivity Commission report which we need to have a good look at are about the unintended multiple accounts and the under-performing funds,” he said.

“The royal commission [on banking] recommended having a single default [account], which we accepted and Labor accepted, so we’ll go ahead and do that”.




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Grattan on Friday: Shocked Labor moves on – but to what policy destination?


The Conversation


Michelle Grattan, Professorial Fellow, University of Canberra

This article is republished from The Conversation under a Creative Commons license. Read the original article.