Jim Chalmers juggles expectations and ambition in pursuing tax reform

Next week will be the 40th anniversary of the Hawke government’s tax summit. Dominated by then treasurer Paul Keating’s unsuccessful bid to win support for a consumption tax, it was the public centrepiece of an extraordinary political and policy story.

That story was about the possibilities for, but constraints on, bold reform; how a determined treasurer can muster a formidable department to push for change, and the way the ambitions of a minister can clash with the pragmatism of a prime minister.

Ken Henry, later secretary of the treasury, was then part of what they dubbed the “treasury tax reform bunker”. He kept a timesheet, averaging 100 hours work a week for a three-month period. Officials brought sleeping bags and their small children (Henry’s were aged three and five) into the office.

Before the summit, the government produced a comprehensive draft white paper. Keating battled to keep the conflicting interests “in the cart” for his blueprint. But the four-day summit, attended by business, unions, premiers and community groups, was inevitably divided by stakeholders’ self-interests. In particular, the unions couldn’t wear Keating’s consumption tax, and Bob Hawke kyboshed it unceremoniously. Keating, who had to settle for a more limited but still very significant set of reforms, was furious with Hawke, and it left a fracture in their relationship.

Jim Chalmers was aged seven in 1985. But he’s a student of Keating (he did his PhD on his prime ministership) and you can be sure he’s boned up on what went right and wrong in that tax reform exercise. Now he is preparing for the government’s August 19-21 “roundtable” and his own bid at major tax reform.

The roundtable, as first announced, focused on “productivity”, and that will be central. But Chalmers has taken to calling it an “economic reform” roundtable – its brief also includes budget sustainability and resilience – and he is effectively putting tax reform close to its heart, or at least letting others do so. After all, a fit-for-purpose tax system is one key to improving productivity.

The roundtable (for which invitations to business and the union movement are now going out, with more to follow) is nothing like on the scale, in size (the summit had about 160 attendees, the roundtable will have about 25) or preparation, of the elaborate 1985 conference.

And crucially, while that summit was the culmination of a process, Chalmers is using the roundtable to kick off a process.

Chalmers is lowering expectations in regard to specific outcomes on tax from the roundtable. While those might be obtainable on some productivity issues, on tax he is likely to look for broad support for a direction of reform. For instance, is there a general appetite for reshaping the tax system towards lower personal and company tax, offset by higher taxes on certain investments and savings? `

Most tax experts argue Australia’s system is too skewed towards taxing income rather than spending. This leads to calls to increase or broaden the GST, financing cuts to personal income tax.

Chalmers has been a long-term opponent of changing the GST, but he says he is not ruling the GST out for discussion at the roundtable. (That’s a contrast to when Prime Minister Kevin Rudd, commissioning Henry to lead a major tax review, excluded the GST from its terms of reference.)

Almost certainly, however, it would not be possible to get “consensus” from business and unions for GST changes. Not least of the constraints is that compensating the losers in such a change is very expensive and there is not the money to do so these days.

That immediately limits the extent of reform.

Henry tells The Conversation’s podcast^[1] that if he were designing a tax reform package “I’d be looking at opportunities to broaden the GST and maybe to increase the rate as well”.

But “I do think it is possible to achieve major tax reform […] without necessarily increasing the [GST] rate or extending the base”.

Henry’s (non-GST) wish list includes getting rid of the remaining state transaction taxes, such as stamp duty on property conveyancing.

Notably, he argues for extracting more revenue from taxing natural resources and land, and also from taxing pollution from various sources. “We’re going to need to tax those things more heavily if we’re going to relieve the tax burden on young workers through lower personal income tax and introducing tax indexation.”

Henry is particularly focused on the unfair burden at present put on these younger taxpayers. He has come around to the idea of income tax indexation as one means of assisting them.

A system more geared to younger workers raises immediate questions about the present generous treatment of superannuants. Chalmers is already caught in that hornets’ nest with his proposed changes for those with balances more than $3 million.

To what extent will the roundtable tax debate revive the issues of negative gearing and the capital gains tax discount? The government hosed down before the election the prospect of any changes to negative gearing this term. Chalmers, however, had work done on this last term and he would likely favour reining it in. But would this be a bridge too far for the prime minister?

Indeed, where will Anthony Albanese’s limits be when it comes to reform? Would he only support changes that had strong consensus? And how far would he feel constrained in going beyond what he considers he has a mandate for?

If Chalmers stays serious about the tax push, it is going to take many months of intense work. It can’t be rushed, but nor can it be delayed. If it ran for much over a year it would likely find the government’s political capital had been eroded. The size of its capital store can appear deceptive because so much of it is thanks to Peter Dutton and Donald Trump.

In 2022, the Liberals boycotted Labor’s jobs and skills summit (although Nationals leader David Littlepround attended). This time, shadow treasurer Ted O'Brien has accepted Chalmers’ invitation and will participate in the roundtable.

It will be a tricky gig for O'Brien, new to this shadow portfolio. He has to avoid being too negative, but nor can he endorse things the opposition might later reject. The Coalition will not have a tax policy against which to judge what’s said.

The occasion will be a chance for O'Brien to make contacts and get more insight into stakeholders’ views on the key economic debates, much wider than just tax.

Importantly, however, O'Brien will need to remember judgements will be being made about him by other participants in the room. Business in particular will be seeking to get a fix on whether opposition leader Sussan Ley’s declarations about wanting to be constructive where possible are fair dinkum.

References

1. ^{^} podcast (theconversation.com)