The elephant in the Audit Commission’s room

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By Leith van Onselen

In many ways, the Commission of Audit (COA) was half-baked, and destined to produce recommendations that missed gaping holes in Australia’s taxation system.

The problem arose because the COA’s terms of reference explicitly mentioned direct government expenditure, such as grants and transfer payments, but excluded Australia’s world-beating tax expenditures – effectively “expenditure programs” of the Commonwealth that are delivered through the tax system, rather than the direct expenditure side of the budget (i.e. deductions, rebates, exemptions and concessional valuation rules).

Fairfax’s Peter Martin has today picked-up on this theme, questioning the exclusion of superannuation concessions and business tax breaks from the COA’s recommendations, while it clamps down hard on direct welfare recipients:

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The government supports well-off retirees via superannuation tax concessions… It supports less well-off retirees by the pension…The commission of audit comes down hard on the pensioners and lets off the superannuants scot-free.

Memo to anyone seeking government support: get it delivered as a concession rather than as a payment. The commission of audit won’t notice.

It’s the same for business. The commission of audit wants grants to business axed but it lets tax breaks for business go through to the keeper…

Whether by design or not, the people most likely to be hurt by the commission of audit’s recommendations are Australia’s most vulnerable. It wouldn’t have been so if it had devoted equal or any attention to tax breaks.

It is a heavy irony that the 1996 National Commission of Audit found Australia’s treatment of tax expenditures “clearly inadequate“.

“Tax expenditures should be treated as much as possible like program expenditures in all published fiscal reports and statements,” it recommended.

Martin is spot on. If the Government was serious about bolstering its long-term revenue position it would close the myriad of tax concessions that are bleeding the Budget dry, but serve little social purpose. An obvious solution is to reduce superannuation concessions, which are already almost as large as the Aged Pension, are growing much faster, and overwhelmingly benefit higher income earners. The Government should also look at removing the tax-free status of superannuation earnings for people over 60, as well limiting negative gearing and tax concessions on company cars, among other things.

Of course, we cannot blame the COA for leaving these measures out, as it was explicitly directed to do so. To its credit, its report does at least urged the Government to address superannuation concessions in its White Paper on tax reform:

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The Age Pension and superannuation are interrelated elements of the retirement income system and should be considered in parallel when changes to one or the other are proposed.

In regard to reform of the broader retirement income system any longer term consideration of superannuation tax concessions would be best considered in the context of the Government’s White Paper on Tax Reform. The Commission notes that many superannuation tax concessions disproportionately benefit higher income earners, when compared to taxation at marginal tax rates under the progressive income tax system.

The Government has flagged that tax expenditures will be taken into account in its tax review. The problem is, its record on reform in this area is poor, leaving little hope of genuine progress. The Coalition’s staunch opposition to the former Labor Government’s attempted removal of the tax expenditure on the car fringe benefits tax in the lead-up to the 2013 election is a recent case in point. Another is the Coalition’s jettisoning the former Labor Government’s planned changes to superannuation, which would have seen tax concessions reduced on super funds earning over $100,000 per year, as well as cancelling Labor’s Low Income Super Contribution.

The Government’s “war on entitlements” will remain half-baked unless tax expenditures are subjected to the same standard of scrutiny and the same political accountability mechanisms as applies to direct Budget outlays.

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About the author
Leith van Onselen is Chief Economist at the MB Fund and MB Super. He is also a co-founder of MacroBusiness. Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.