'Why do politicians find tax justice so hard?' by Daniel Halliday

Daniel Halliday Graphic

As part of his budget speech to the House of Representatives in April, Josh Frydenberg, the federal treasurer, announced that his suite of policy changes would ‘deliver better outcomes for all Australians’. Such talk is par for the course in parliamentary democracies. Everyone knows that a large portion of the electorate voted against the policy positions of any incumbent government. Yet no politician can expect to get away with publicly conceding that their policies might be aimed at keeping their base happy while also pursuing some swing voters.

This may sound unduly cynical: Whatever the realities of gaining and holding elected office, why shouldn’t politicians hope to serve everyone? Shouldn’t this be their moral duty? Held in abstraction, this is an attractive and plausible view. But a more practical position needs to recognise the ways in which governing for everyone faces special difficulties in specific policy areas. The problem for tax policy is that benefiting everyone is, much of the time, basically impossible.

The short explanation for this is that tax policy can never really start from scratch. The new tax policies in any budget are not like new football seasons, where what happened last time is irrelevant to the benefits and burdens that participants might incur as the next year unfolds. This is because the prevailing regime of tax rules is one around which taxpayers have formed expectations and have planned their affairs in ways that unavoidably look far beyond the next twelve months. Here, citizens really have no choice given what sort of plans they have to make. Almost no mortgage, or pension scheme, or course of higher education, or training can run its course quickly enough to be completed before the next budget. Whether the prevailing rules are fair or unfair, what they already are imposes substantial limits on what they can be turned into by way of the reforms in a single budget. Because so many of our economic activities have a long-term aspect, there needs to be a corresponding long-term stability in the tax system. Otherwise, the uncertainty will be too much for many of these activities to be even feasible.

This means that while there is flexibility in spending following a surplus, budgets are forced to be incremental and conservative with the tax rules. The larger the tax reforms any treasurer ventures to announce, the more the established plans and expectations of taxpayers stand to be upended. In an ideal world, past budgets would have been designed in ways that appreciated this. Treasurers over the years would, ideally, have done more to avoid entrenching tax rules that would narrow the options available to their successors in decades ahead. But once the horse has bolted, new policymakers have to start from where they have been left.

This explains, whenever a big reform does get proposed, the changes are usually subject to a ‘grandfathering’ clause where the old rules stay largely intact for those already invested in them. It bears emphasising that this makes taxation different from other policy domains. The question of whether or not to include grandfathering simply wouldn’t come up in any new legislation about, for example, immigration or marriage equality. Policies on these matters do not need to stay the same simply for the sake of what stability brings. Radical reform can more easily have its day, and the road to greater fairness is more open, even if our politicians don’t always take us down it.

Going back to the specifics of tax, the prospect of grandfathered privileges is especially familiar and especially stark in the case of housing. Longstanding Labor proposals to end the right to negatively gear a loss-making property only apply to future purchases of homes: citizens who already have negatively geared properties can simply keep them that way. This can look like a form of fairness. Those who have a sunk investment (so to speak) into the old way of doing things don’t have to absorb the cost of having it pulled out from under them. Stability is preserved for everyone – what’s fair is that nobody gets their established financial situation disrupted, even though the consequence is that those planning after the change need to do so under different conditions.

But fairness here is not clear-cut. Grandfathering is essentially a way of pulling up the ladder so that those who were around early enough to gain a privilege get to keep it, while those late to the tax party don’t get to join them. And the need for tax stability means that politicians aren’t in a position to simply do away with grandfathering. Apart from the aforementioned moral concern that it goes back on a promise (however short-sighted) made to those who invested accordingly, there remains a more economic concern about triggering a recession or downturn that wouldn’t help young people either.

What I want to suggest is that these difficulties about tax could be better appreciated. Another line from Frydenberg’s speech was that ‘our commitment to fairness means the next generation not having to pick up the tab for the last’. Granted, the treasurer’s party is not the one seeking to change negative gearing. But regardless of policy differences across party divides, all legislators are in the same boat when it comes to the impossibility of starting fresh where tax policy is concerned. It is the very general tendency for tax decisions to separate different generations into winners and losers that makes it so hard to construct tax rules that really do advance the interests of all Australians. And things will tend to get resolved by the fact that the Treasury still has to get its revenue from somewhere. The need to preserve old privileges for those who already have them means it is the young who remain exposed to whatever tax burdens the Treasury must impose to offset the generosity of perks offered to older generations. This really is a case of the young picking up the tab.

Daniel Halliday (photograph supplied)Daniel Halliday (photograph supplied)

None of this has to mean that Frydenberg’s endorsement of fairness between the generations is an impossible or utopian goal. But for a goal of intergenerational fairness to be realised, there will need to be some recognition that other elements of fiscal policy need to pick up the fairness tab for the tax rules. Budgets are not, after all, just about taxes. Insofar as young people stand to lose out when stability is preserved, Australia could move closer to a fair fiscal system overall if young people got their perks elsewhere.

What form might this take? Policy action on such things as student debt and childcare offers opportunities for the Treasury to spend in ways that will likely make things easier for young people. A better solution would be to address more directly the common feeling that the young, when trying to buy a house, have been dealt a bad hand. But homeownership is desirable in part because renting a home has so many downsides. More favourable legislation for tenants, perhaps in ways that mimic countries where homeownership is considered overrated (like Germany), might promote intergenerational fairness in spite of grandfathering.

This is not to say that there are literally no options for making the tax system fairer. Some tax reforms, though controversial, may not affect stability with respect to citizens’ ongoing financial affairs. The inheritance tax (still common in other Western countries) became extinct in Australia in the 1970s. But one of its advantages is that the dead don’t have any more planning to do. The idea of taxing estates is considered toxic enough that treasurers never mention it (let alone in a budget). But a tax might become more popular when government promises to dedicate its revenue to some cause that citizens can get behind. It would be interesting, for example, to gauge public opinion on an inheritance tax that redistributes all of its revenues as equal cash grants to people between the ages of twenty and thirty-five, or funds a scheme for people seeking to buy their own home and who aren’t lucky enough to have older family members buy it for them.  

Until the conversation can be advanced in ways that recognise the poor prospects for tax justice in isolation, our politicians will remain hamstrung. If they were granted leave to depart from the myth about magically benefiting all citizens all of the time, they could make progress towards policies mitigating the impossibility of designing tax rules that are fair over the short or medium term. Just as importantly, those outside politics would be in a better position to pressure them to do so. And if tax rules continue to benefit the old, as may be unavoidable for some time, then it is the young who should have first dibs on a surplus.

Published in May 2019, no. 411
Daniel Halliday

Daniel Halliday

Daniel Halliday works mainly on topics at the intersection of political philosophy and economics, with a special focus on markets, taxation, and inequality. He is the author of The Inheritance of Wealth: Justice, equality, and the right to bequeath, published by Oxford University Press in 2018. Daniel is also working on a co-authored textbook about the moral foundations of capitalism. He has a PhD in philosophy from Stanford University, and has been teaching at Melbourne University since 2011.