4 February 2017
The embarrassing mush that Federal Treasury produced in its annual Tax Expenditures Statement was bad enough in its own terms. What’s worse was how it pointed to the total decline into utter irrelevance of an institution that used to be the very foundation of rigorously rational policy analysis and advice.
In very simple terms, the central department in commonwealth governance is useless. This should be, this is, a deeply disturbing development. Federal political governance is broken. So too is the bureaucratic. Almost literally, nothing Federal Treasury says is of the slightest value.
Now, Treasury’s budget forecasts, MIS-forecasts, have already long placed an embarrassing question mark over its analytical credibility. Year after year Treasury not only got its forecasts wildly wrong, but in doing so demonstrated a disturbing disconnect from reality.
Sure, you can excuse, up to a point, a margin of error in getting specific forecasts not quite right; but it is an altogether different matter if that error — correction, errors, plural — flows from a more basic, more pervasive failure to actually understand what is going on in the world.
Former treasurer Wayne Swan owns the “four years of surpluses” line that he infamously trumpeted in his 2012 budget speech — we “own” the $135 billion of deficits that actually happened.
But Treasury was a co-owner of the incompetence in its analytical framework and application. Now we have its claim in the Tax Expenditures Statement that the family home’s exemption from capital gains tax cost the federal budget a staggering
$61.5bn a year, every year, and rising inexorably with increasing property values. A claim that was seized on and breathlessly projected — how surprising — by the Fairfax press.
Once upon a time, so-called tax expenditures had a very legitimate, indeed necessary, place in the Treasury analytical firmament and policy advice: to keep both budgets functionally and governments politically honest.
A government can provide a handout either by a specific spending allocation or by a tax deduction or rebate for that expenditure made directly by the citizen. Even though the two are not mirror opposites it is an important contribution to the public policy debate, and to fiscal clarity, to broadly identify such “spending” on the revenue side of the budget.
But what was intelligent and specific has developed into a sort of Marxist Keynesian all-pervasive orthodoxy, to ruthlessly identify all variations from a tax norm as a tax expenditure, and running now to 160 pages of detailed mush.
Treasury’s tax norm in the family home case is the marginal personal income tax rates. So the $60.5bn “tax expenditure” flows from not applying the capital gains tax at all ($27.5bn) and then also adding the cost of the 50 per cent CGT “discount” ($34bn).
This shows an analytical approach of mind-bogglingly blinkered ideological stupidity. Taking it to its “logical” conclusion, the Treasury should estimate the “tax expenditure” of not taxing all income at the 49 per cent top marginal tax rate (for this year, including Joe Hockey’s “budget repair” levy). Including by the bye, company tax as well: why should the income of a company deviate from the personal income tax norm?
Indeed, in ideological purity, it should estimate the tax expenditure of not taxing all income at 100 per cent. Anything that the government leaves you with is just as much a “gift” as a direct spending item.
Now Treasury thinks it cleverly escapes from the ultimate lunacy of its ideological
— it is not analytical — approach, by defining the tax norm for estimating tax expenditure deviations as the progressive personal income tax scale, including the low-income tax-offset.
It acts as if these scales have been mandated from heaven. It doesn’t seem to understand that such a progressive tax scale is just as much a deliberate policy design choice as choosing to only tax 50 per cent of a capital gain.
So in denying that, stating that capital gains “should” be taxed at the full personal tax rate; in logic it should also be stating that all personal income “should” be taxed at the top marginal rate. Or alternatively — why not? — at the lowest marginal tax rate.
This brings us to the really disturbing heart of the Treasury ideological inanity: the inability to understand the qualitative difference between revenue and spending. The one is not the negative of the other spending.
A decision not to tax is not the same thing as a decision to spend. To state that it is, was of course exactly captured in the unified — ideological Treasury bonding with political government — assertions of the Rudd-Swan-Gillard years that tax increases were budget “saves”.
Yes, the very specific decision to provide a form of spending by a tax deduction/rebate, can be so identified. That for example a government payment for childcare is qualitatively the same as providing the tax offset.
But would Treasury care to identify what form of government spending could replace the non-taxation of a capital gain on the sale of a family home? What is the “spending spending” that could mirror the “tax spending”?
We could do much the same with most of the other so-called “tax expenditures” in the 160 pages: emanations all of, as I note, a Marxist-Keynesian mindset. But I want to finish on a related example which demonstrated an even greater harm to the national interest: Treasury’s “climate action modelling”.
The Treasury of then secretary Ken Henry and his right-hand man David Gruen — Henry’s gone to lusher fields in the National Australia Bank, but Gruen now resides in the warm embrace of the prime minister’s office — purported to show we could dramatically increase the cost of energy and it would make all-but no difference to economic growth. This announced a Treasury not simply divorced from reality but from the entire history of the human race; with its advance based entirely — entirely — on energy becoming increasingly cheap, plentiful and secure. Time to drain the Treasury swamp.