Tax reform: playing the long game

Premier Colin Barnett and Treasurer Troy Buswell have embarked on a hazardous journey; they have

suggested changes to the Australian tax system. Perhaps they are being courageous, for they should know the tax reform road in Australia is full of potholes and tricky bends.

A quick update. Mr Barnett proposed a change in the goods and services tax, possibly increasing the rate from the present 10 per cent to 12.5 per cent, or broadening the base. Mr Buswell suggested that income-taxing powers be returned to the states.

The reaction was enlightening. Precious little attention was devoted to the substance of the proposals; rather it was their motives that came under scrutiny. And the general conclusion was that they were engaging in a diversionary tactic, to shift the debate away from the state's current financial woes.

What is undeniable is that the Western Australian government has significant financial problems; but they are problems that have less to do with the level of economic activity than they do the way taxes are spent and distributed.

That leads us back to distribution of the GST, about which much has been written.

It's not going to change any time soon – at present the GST debate is a zero sum game. If one state improves

its position, another state suffers. That's why Prime Minister Tony Abbott has kept saying there is no plan to change the arrangement in this term in government.

So what about the next term? A short trip down memory lane might be worthwhile. Remember the tax summit in 1985 and how then treasurer Paul Keating's 'tax cart' was almost tipped over? He just happened to be promoting a consumption tax – Option C, which was contentious.

The prime minister of the time, Bob Hawke, sensed there was strong opposition – especially from the union movement – and pulled the rug out from under his treasurer. This undoubtedly led a stranded Mr Keating to think 'don't get angry, just get even', which he did in 1991, when he dethroned Mr Hawke.

And there were also John Hewson and Ken Henry – both casualties of the tax reform road. Mr Hewson proved to be more an economics expert that a politician. It's history now how Mr Keating, with no formal economic training, outfoxed Mr Hewson in 1993, even though the Liberals were also promoting a consumption tax. The tax, or a scaled-down version of the original proposal, arrived in the second term of a John Howard government.

Next it was Kevin Rudd who promised a tax review in 2007 and appointed the Treasury head, Ken Henry, as chairman. That was the first mistake. Mr Henry should have stepped back and overseen the report of an independent review committee, and then made recommendations to government.

The government sat on the Henry committee's report, and in 2010 cherry picked the disastrous super profits tax plan for the resources sector. This was hastily modified, and then approved by the three big iron ore miners – BHP Billiton, Rio Tinto, and Xstrata – which have paid virtually no extra tax under the new regime, which became the MRRT in July last year.

Much has been written about the 24-hour news cycle. Mr Abbott has flagged he doesn't want to be drawn into that style of news coverage. And if Mr Barnett and Mr Buswell are also prepared to play the long game, they might just be on the right track.

The idea of returning income-taxing powers to the states is not new. It has been raised on occasions ever since the powers were effectively ceded to the Commonwealth in 1942 as a wartime measure. Not surprisingly, Canberra has guarded those powers jealously ever since.

When prime minister after 1975, Malcolm Fraser raised the issue of giving the states the relevant revenue raising powers under his 'new federalism' policy. Mr Fraser intended to provide the states with a set level of payments, as a way of decentralising power. If they wanted the payments topped up, they could raise the money themselves. Or so the theory went. Then they would not be able to blame Canberra for failing to keep their election promises. Sound familiar?

The Commonwealth passed the relevant legislation, but Sir Charles Court in WA was about the only premier to show any interest. The initiative was eventually killed off by the Labor Party in NSW, which claimed that any state party that supported it was effectively backing double taxation; and no-one wanted to be seen to be doing that.

Mr Barnett and Mr Buswell have fired the opening shots in the tax reform campaign. What is relevant is that the tax inquiry mooted by Mr Abbott will be linked with a review of federal and state relations. That might just improve the opportunity for WA and some of the bigger states to press for more significant change.

It could happen. But it won't happen overnight.