Not the leaked 2021 Budget Speech

Mr Speaker, when the next financial year begins on 1 July 2021, a substantial fraction of the population will still not be vaccinated against CoViD-19. And while it appears that the available vaccines will adequately protect the vaccinated population against the disease, it is not clear that they will effectively protect the unvaccinated population from being infected through the vaccinated population. In those circumstances, we can’t just wait for the end of the pandemic to give us tolerably full employment. We must reform the tax system so that we can have tolerably full employment in spite of any lingering pandemic, in spite of the restrictions that governments impose because of any lingering pandemic, in spite of the restrictions that individual consumers will inevitably impose if governments again let the pandemic get out of hand, and in spite of the associated uncertainty in global demand for Australian products.

Moreover, Mr Speaker, even if the pandemic ends tomorrow, the economy will not go back to the old normal. Businesses that have gone broke will not suddenly rise from the ashes. Accumulated deferred bills will not suddenly pay themselves off. Skills that have gone rusty will not suddenly be re-honed. Entrepreneurs, deciding what businesses to start up, won’t make their decisions the old way, for fear of the next pandemic, whenever it might be. They have been taught a brutal lesson that certain types of businesses are subject to sovereign risk, and they won’t forget it. They won’t even let their children or grandchildren forget it. Hence there won’t be any return to the status quo ante. The jobs that have disappeared won’t all come back. The jobs that don’t come back won’t all be replaced by similar kinds of jobs. And even if all of those things were going to happen, we couldn’t afford to wait for them. Therefore we must create new jobs, including new kinds of jobs. And we must create them sooner rather than later.

But let me be clear: the answer to these challenges is not higher taxes. As I shall outline tonight, we must get rid of all the taxes and charges that cause the cost of hiring a worker to exceed what the worker can take home and spend; we must raise revenue in other ways that don’t discourage employment; and we need some sort of tax that is designed not to raise revenue, but to deter bottlenecks to employment.

And let me be clear about something else, Mr Speaker: in this program, the role of the federal government is not to pick winners. Rather, the role of the federal government is to refrain from putting obstacles in the way of the winners, and to refrain from backing obvious losers. The current tax system is failing on both counts, and the reforms that I announce tonight will put it right.

I begin by announcing an emergency measure that will apply between tonight and 1 July.

At present, JobSeeker Payment is paid to jobseekers on the condition that they look for full-time work but don’t find it. As soon as they find full-time work, or a sufficient amount of part-time work, they lose the payment. Obviously it makes more sense to pay employers to hire jobseekers than to pay jobseekers not to get hired! The government pays in either case; but at least the former case generates some productive activity that raises national income and, eventually, tax receipts. Paying employers to hire people is not an example of picking winners, because it doesn’t prescribe the type of employment. But paying out benefits only if people don’t get hired is an obvious example of backing a loser.

Therefore, between tonight and 1 July 2021, JobSeeker Payment will be automatically converted into a wage subsidy of the same amount, in the event that the jobseeker is hired. If the jobseeker is not hired, then of course the JobSeeker Payment will continue as usual. But the availability of the wage subsidy will make the latter outcome far less likely.

From 1 July, when the new tax arrangements commence, the said wage subsidies in place on that date will be cut by 10 percent in the first full fortnight, and by the same dollar amount in the second fortnight, and so on, being phased out over 9 fortnights. So the elimination of the distortion caused by subsidizing unemployment will be only temporary. Obviously it would be better to effect a permanent solution; but that’s a debate for another day and another Budget.

That brings me to the tax reforms that will take effect from 1 July.

I remember it being said many years ago — and I wish I could find the original quote — that it’s almost illegal to give someone a job in Australia. Part of the reason is the bewildering array of taxes for which an enterprise becomes responsible as soon as it’s silly enough to hire a worker. The worker’s personal income tax, although nominally paid by the worker, never actually passes through the worker’s hands. The employer pays the after-tax wage to the worker, and pays the tax directly to the ATO. The employer also pays the worker’s federally-mandated superannuation contribution. Officially, this isn’t supposed to be a tax. To the employer, however, it looks like a federal payroll tax except that it’s harder to comply with. Then there’s state payroll tax, which technically is a tax, although it doesn’t cost as much as the super guarantee, which technically isn’t! Then there’s FBT, whose compliance costs are out of all proportion to the revenue raised. And even before a business grows big enough to hire its first worker, it incurs the compliance costs of GST and business income tax. Although these imposts are classified in different ways, they all look pretty much alike in employers’ accounts: they are all variable costs that have to be covered by prices. For completeness, I should also mention the Petroleum Resource Rent Tax (or PRRT) — although it’s not such a serious problem, because it affects only a limited class of highly profitable businesses and doesn’t feed into prices.

That’s seven taxes or tax-like imposts that employers have to deal with. Tonight, Mr Speaker, I announce that the seven are to be reduced to two. I shall also announce two property taxes, namely a vacant-property tax and a capital-gains tax; but these will be fully rebatable against state taxes on the same bases, on the condition that the states abolish not only their payroll taxes (already mentioned), but also their conveyancing stamp duties and insurance taxes. And of course these property taxes, by their nature, will not be an issue for employers per se.

The two remaining taxes that employers will have to deal with are as follows.

First, Mr Speaker, the mechanism of the PRRT is to be extended to all other businesses, except that the 40 percent rate is to be applied to that part of the assessed economic rent which exceeds a threshold of $50 million per annum. The extended PRRT is to be renamed the Business Economic Rent Tax, which makes the convenient acronym BERT. Mr Speaker, ladies and gentlemen, meet BERT. The entire revenue from BERT will be earmarked for superannuation contributions, which will be brought on-budget. This arrangement is prudent because the revenue from BERT, as from all taxes of this sort, is likely to be volatile — and because saving for retirement, being spread over a period of decades, is tolerant of volatility, whereas other categories of government expenditure are not so tolerant. Superannuation contributions will be distributed on a simple per-capita basis, regardless of earned income. This will instantly eliminate the current gender bias of superannuation contributions and their skewing towards high-income individuals. Big super-profitable businesses that attack BERT will be attacking the people’s retirement savings — unless they can propose some alternative method of funding contributions that is at least as popular as BERT. Good luck to them. The $50 million threshold for new BERT payers has been chosen for ease of transition. The Government understands that companies now paying PRRT will consider it anomalous that they do not get the benefit of any threshold, just as they now consider it anomalous that they pay PRRT at all; but that’s another debate for another day and another Budget.

Second, Mr Speaker, income tax for incorporated and unincorporated businesses will morph into a cash-flow tax (or CFT) at the same rate that each business was paying under the old company tax, except that unincorporated businesses will be taxed at the lower company-tax rate instead of the personal rate.

All the other business imposts that I mentioned — PAYG personal income tax, GST, FBT, state payroll tax, and the old regressive job-killing super guarantee levied on wages — will disappear. Most employers, including all smaller ones, won’t have to deal with BERT and don’t have to deal with the current PRRT. Consequently, most employers will see six taxes reduced to one.

It remains to explain how business income tax is to be morphed into a CFT while eliminating five other imposts. I must emphasize at the outset, Mr Speaker, that in consequence of all the following changes, businesses in the aggregate will pay out the same amount in after-tax wages, and the same amount in taxes and tax-like imposts, as before. Therefore, in the aggregate, they will not need to generate any more income. Therefore, in the aggregate, they will not need to raise prices, and competition between them will ensure that they don’t. Therefore we don’t need to discuss how to compensate vulnerable people for any one-off increase in the CPI, because there won’t be any such increase. On the contrary, the old super guarantee, which feeds into prices, will be replaced by the BERT, which won’t feed into prices. In other words, Mr Speaker, the transition to a CFT is not GST Mark II. It’s a new concept.

The reduction of six business taxes to one will involve six steps. The first two have already been implied: employers will simply stop paying payroll tax and super contributions.

Step 3 is that the GST simply disappears.

Step 4 is the abolition of PAYG personal income tax, with a twist: employees continue to receive the same after-tax wages as before, but employers no longer remit tax on them, and no longer claim wages as deductions. The innovation of preserving after-tax wages, rather than before-tax wages, avoids any regressive redistributive effect. In particular, it maintains the fact that the net pay of a half-time worker is more than half the net pay of a full-time worker in the same position. I note that another way to achieve that outcome is to specify workers’ remuneration as a payment per hour plus a payment per shift, or a payment per piece plus a payment per shift. But this too is a debate for another day, and not necessarily in a budgetary context.

The remaining two steps are most easily explained as changes to the business income-tax base — either changes to what is taxable, or changes to what is deductible.

Step 5 is the elimination of FBT. Instead of paying tax on fringe benefits, employers simply cease to claim deductions on expenses incurred for fringe benefits.

Steps 4 and 5 have reduced the business income tax to a value-added tax implemented by the subtraction method, which doesn’t require tax invoices. So obviously Step 6 is to border-adjust that tax by excluding direct export income from the base, and disallowing deductions for direct imports. Border-adjustment changes the tax base to consumption.

Financial institutions, because of their thin capitalization, will tend to incur BERT on their interest margins. But the CFT will treat them as the old GST did; in other words, most financial transactions will be input-taxed. Similarly, residential rents will be input-taxed under the CFT, as they were under the GST, and indeed as they were under payroll tax and conveyancing stamp duty, although that was not so often pointed out.

Mr Speaker, by steps 4 to 6, Australia will become the first country to shift its tax base from income to consumption without a one-off increase in the CPI, and only the second country (the first being Japan) to implement a value-added tax by the subtraction method.

Through these six steps, we will boost employment in four ways. First, we will reduce the cost of labour to employers without reducing workers’ spending power, by eliminating the tax wedge between the two. Second, by getting rid of taxes that specifically target the value added by labour, we will incidentally capture more of the so-called value-added which actually represents extraction of economic rent, and which therefore can be taxed without deterring production. Third, Australia’s tax system will no longer operate as a giant reverse tariff, taxing the value added to Australian exports up to the point of exportation, while sparing the value added to imports up to the point of importation. By casting off the shackles of the old production-based, origin-based tax system, Australia will grab a bigger share of the global market for all categories of products. And fourth, by eliminating company tax, we tell prospective foreign investors that they won’t be taxed for simply creating jobs and wealth in Australia — although of course they will pay BERT if they are more than usually profitable.

I should also note that all enterprises that pay BERT will have an effective 40 percent reduction in the marginal cost of labour, because labour will be part of the recognized cost base. That will make it hard for them to portray BERT as a job-destroyer, as they undoubtedly would if they could.

Mr Speaker, I mentioned a vacant-property tax. This is what I meant by some sort of tax that is designed not to raise revenue, but to deter bottlenecks to employment. Allowing land owners to minimize their tax by failing to create jobs on their land, while waiting for an unearned “capital gain”, is another example of backing an obvious loser. Accordingly, the vacant-property tax, hereafter called the dereliction tax, will be levied on all unoccupied properties, including vacant land and abandoned buildings, at a rate of 5 percent of the assessed site value per annum, wherever the vacancy is not caused by government action or delay. But it will be fully rebatable against any state tax on the same base. (And tonight when I speak of the States, I include the Territories.) In practice this means that the States will impose their own dereliction taxes on the same base at no less than the same rate, in order not to forfeit the revenue to Canberra; so the federal tax will be inoperative.

I also mentioned a capital-gains tax on property. This will be levied at a rate of 40 percent on the inflation-adjusted capital gain on all property sales after 1 July, regardless of whether the seller is an individual or a body corporate, regardless of whether the property has changed hands by gift or inheritance between purchase and resale, and regardless of the date of purchase. Thus there will be no grandfathering. This is equitable at a time of crisis, because it means that sellers who purchased long ago and make handsome capital gains will give something back, while those who purchased more recently and make no real capital gains, or make capital losses, will be spared taxation. Grandfathering is the doctrine that the beneficiaries of past vice should be exempt from the new virtue. We say they should pay some of the bill for it. Even so, selling before 1 July in order to beat the tax may turn out be unwise, because other tax changes can be expected to increase purchasing power after that date. The capital-gains tax, like the dereliction tax, will be fully refundable against any state tax on the same base. In practice this means that the States will impose their own property capital-gains taxes on the same base at no less than the same rate; so the federal tax will be inoperative.

But I repeat: the rebatability of the dereliction tax and capital-gains tax will be contingent on the States abolishing payroll tax, conveyancing stamp duty, and insurance taxes. Thus the three biggest irritants in the state tax system, whose inefficiencies have been decried in review after review, will at last be taken out the back and shot.

Mr Speaker, in consequence of the comprehensive capital-gains tax on property, the States will find that a vast array of long-desired infrastructure projects have suddenly become self-funding through the uplifts in property values that they will cause. Accordingly, I have no new infrastructure grants to announce tonight, or at any later time.

In consequence of the dereliction tax, holders of greenfield and brownfield land-banks will need to get them developed and built upon, in order to avoid the tax. This will give a greater stimulus to construction than any so-called home buyers’ grants, not least because those grants tend to be self-defeating by driving up the prices of the affected land for the benefit of the vendors. And the need for all vendors to pay capital-gains tax will do more to level the playing field between repeat buyers and first-time buyers than any so-called first home owners’ grants. Accordingly, from 1 July, all federal funding for such grants will cease.

Mr Speaker, the estimated deficit for 2021–22 is $50 billion. This figure is round because it is rough. It is not optimistic or pessimistic, but merely rough. Our situation is unprecedented. We are doing an unprecedented experiment this financial year by making the unemployment benefit convertible into a wage subsidy, and we are adding another unprecedented experiment next financial year by removing the tax wedges between employers and employees and between exporters and their customers. While the growth dividends from these changes will undoubtedly be positive, their magnitudes are extremely uncertain, and I make no bones about the uncertainty: if ever there was a Rubbery-Figures Budget, it’s this one.

But there is something I can say with greater confidence. By the time we deliver the Budget for 2022–23, which of course will be a pre-election Budget, we will have enough experience of the new arrangements to tell us what rate of CFT will give us a small but reliable surplus in the following financial year. We will submit that rate to the judgment of the Australian people.

Mr Speaker, given that a growing economy requires a growing money supply in order to maintain zero inflation, the doctrine that the Budget should be balanced through the economic cycle is an implicit assertion that, in the long run, seigniorage should be privately appropriated. By committing to a surplus in 2022–23, I do not necessarily intend to endorse that doctrine. But I do intend to demonstrate a capability to achieve and maintain whatever fiscal balance is deemed to be appropriate, while restoring and maintaining full employment in hostile circumstances.

Consequently, Mr Speaker, it is not only with much sadness, but also with much hope, that I commend this Budget to the House.

[Originally posted on LinkedIn, March 2021.]