Grattan on Friday: Albanese’s Stage 3 rework invites a wider tax debate the government doesn’t want to have

Anthony Albanese might not be Labor’s strongest policy innovator but as a tactician, he’s as shrewd as they come.

Hence his small target strategy in 2022, a contrast with Bill Shorten’s policy overreach in 2019. Ahead of the Dunkley byelection, Albanese’s rework of the Stage 3 tax cuts is calculated boldness.

Peter Dutton isn’t too bad at tactics either, and the two are presently in the cat-and-mouse phase of their battle over the changes. Dutton won’t yet declare the opposition’s stand on the government’s package, trying to keep attention on Albanese’s broken promise. “Liar in the Lodge”, Coalition MPs shout, rewarming yesteryear’s “Juliar” sledge.

The Coalition can’t afford to delay a response too long, making itself the target. Anyway, legislation for the new package will be introduced next week, and voted on in the lower house by the following week. The government hopes it will be through parliament in the last week of February, just in time for the March 2 byelection.

An immediate problem for the “liar” campaign is that people are more forgiving when a broken promise benefits them. This one advantages the majority of taxpayers. Even those disadvantaged are still getting a tax cut, just a smaller one than they anticipated. If the broken promise had removed an established benefit it would be a different story.

The expectation is the Coalition will reluctantly wave the package through. Apart from the byelection, the message from some of its backbenchers in poorer electorates is people want the money.

The Greens are playing the Oliver Twist game, demanding more, including on welfare. If the opposition were rash enough to vote against the package in the Senate, the government would need the Greens’ support (the package has the backing of all or most other Senate crossbenchers, even Pauline Hanson).

On occasion, notably over the government’s housing fund, the Greens played hardball and extracted concessions in return for their votes. This time, they are not in a great bargaining position. Would they really, with a byelection imminent, want to hamper tax relief for families facing painful living costs?

For the longer term, the Stage 3 decision has burst a dam, unleashing a much wider tax debate.

The pressure is coming from two directions – from those whipping up scares of what the government might do and those who want the government to undertake a range of ambitious reforms.

The scare campaign, fuelled by the opposition, focuses on areas such as negative gearing. Treasury’s tax expenditures statement, released this week, showed the cost to the budget of negative gearing was $2.7 billion in 2020-21, with higher income earners the main beneficiaries. The government says it is not considering changes to negative gearing. The critics retort it said that about Stage 3.

Those wanting comprehensive tax reform aren’t saying trust should be breached – they’re arguing now’s the time to put the tax system on the table for review.

Former union leader Bill Kelty, who collaborated with the Hawke-Keating government on landmark economic reforms, told Nine media the system should be shifted towards taxing assets and away from income, with the burden of income tax reduced. Kelty argues the current system is grossly unfair to younger people, many of whom are loaded with debt, while many older people are asset-rich.

Calls for a comprehensive look at the system are also coming from the “teal” corner of parliament. The teals’ votes on the present package don’t matter because Labor has a majority in the lower house, where the teals sit. But their response, unconstrained by party straitjackets, has been interesting for what it shows about the way “community candidates” operate.

The teals have been open about the tension between political integrity (governments keeping promises) and what’s seen as a fairer package giving cost-of-living help. In line with their commitments to local consultation, they are taking formal steps (such as surveys) to get their constituents’ views.

Zali Steggall (a forerunner of the teals, elected 2019), who represents the wealthy Sydney seat of Warringah, admits being conflicted.

“Whilst I support more assistance for those who are doing it tough, the lack of transparency in proposing amendments raises concerns about the government’s credibility and commitment to honesty with the Australian public. The recent government backtrack on the Stage 3 tax cuts undermines trust,” Steggall says.

“I support streamlined tax brackets to encourage hard work and income retention.

“The community is providing me with their feedback, and we can so far see that there is support for helping those who are facing economic challenges – however, it is also being made clear that there is concern around the proposed thresholds. I will thoroughly review the Treasury’s analysis and continue to welcome further feedback from Warringah.”

In the end, all or most of the teals are expected to vote for the package.

Teal member for Wentworth Allegra Spender, who has been an advocate for comprehensive tax reform since entering parliament, is using the opportunity to ramp up her campaign.

We are seeing an “intergenerational tragedy,” she told the National Press Club this week. “While our younger generation is the most highly educated yet, in the last 15 years or so households over 65 grew their wealth by around 50% while those under 35 barely moved. Tax is a significant factor in this.

“A retired household pays half the tax of a working household on the same income – even though they are on average likely to be
wealthier. The number of retirees paying tax is falling even as their wealth grows. 17% of retirees pay income tax today, compared with 27% a generation ago.”

The government does not want a full-blown tax debate. Treasurer Chalmers shows no appetite for launching into comprehensive tax reform, involving, as it does, losers as well as winners. He prefers incremental changes when opportunities come.

But if the government tries to go the 2025 election with a minimalist tax agenda, it will face awkward questions on two fronts. Some will claim it is hiding ambitions for changes it will roll out after the votes roll in. Others will condemn its unwillingness to commit to using a second term to deal with the glaring inadequacies of our present tax system.