Thursday, August 20, 2009

Tax Review By Tax Officials Equals More Taxes

When the federal treasurer Wayne Swan announced his plans to review taxation he promised a “root and branch” review, leaving no stone unturned, no cranny unexplored. Now, as Treasury Secretary Ken Henry prepares his final report, there has been increasing speculation around its contents. It is clear that a wide range of ideas and suggestions have been put forward for consideration, and that is the whole point of having the review. However, some of the ideas which have been canvassed in the media could be seen as potentially alarming.

The International Monetary Fund has recommended that Australia extend its capital gains tax to the family home, something which is tantamount to being sacrilegious in this country, while at the same time making interest payments on mortgages tax deductable. It is unlikely in the extreme that such a proposal would be adopted by any government in this country, but the fact that it has been suggested is enough to send shivers down the spine.

First of all, home ownership is primarily about accommodation, not investment and income, and should not be treated in purely financial terms. Home ownership, as well as being an Australian tradition and ideal, provides family and community stability and cohesion. The purpose of tax is not just to raise revenue for the government, but to provide a policy tool for the government by which it can encourage certain activities by reducing tax, and discourage others by increasing tax. In that context it is appropriate to encourage home ownership, for the benefit of the community, by not subjecting it to punitive taxes. In fact there are already too many taxes which affect housing, and which should be reduced.

It has been suggested that failing to collect Capital Gains Tax on homes costs the government $25 billion a year. That in itself is a shameful and deceptive statement to make, based on the implied assumption that there is some sort of entitlement for the government to collect that money. Failure to collect a tax does not cost the government a single cent. It is our money, not theirs, and they have no right to consider it as lost revenue. Until our elected representatives choose to impose such a tax they have no right to consider it a cost to allow us to keep our own money in our pockets.

The other idea of allowing interest payments to be claimed as tax deductions sounds appealing, but comes with a hidden downside. Logically, since we are forced to pay interest on any interest we are fortunate enough to earn, you should thing it would be only fair to allow us to claim interest paid as an expense. Unfortunately, this would be likely to have the undesirable effect of encouraging people to increase their debt, and in the case of mortgages, it would then in turn drive the price of houses up even further. In either case, those are undesirable outcomes which are contrary to the community interest.

The important thing for the Henry Review, and indeed for any reform of taxation, is that the entire exercise should be aimed at reducing complexity, and improving efficiency. To that end, it should also be about simplifying compliance, for both business and individuals. That should mean reducing taxes, not introducing new ones. It should also mean taking low income people out of the income tax system altogether. It should mean making everything easier. Unfortunately, there is no guarantee that’s what we’ll get. In fact, there is a real danger that when you ask tax officials to improve the tax system, what you could end up with is more ways to collect more tax, and that’s the last thing we need.

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