Australia’s election shows difficulty of reforming tax

30 May 19

Taking tax reform to an election is always difficult but there are lessons from the recent Australian election, writes Institute for Government’s Sarah Nickson.

 

 

Against all expectations, the conservative Liberal government defeated the centre-left Labor Party in Australia’s national election on 18 May.

In Labor’s search for a culprit, many fingers have been pointed at their pledges on redistributive tax reform. But tax reform needn’t be an election loser. Instead, politicians must sell their reforms in terms the public can understand – and convince them reform is fair.

Tax reform has been blamed for Labor’s surprise loss

Pollsters and political commentators had predicted a Labor victory. Led by Bill Shorten, Labor hadn’t lost an opinion poll since mid-2016.

Labor entered the election with a comprehensive policy agenda, including controversial tax changes that would have withdrawn concessions from significant, and vocal, parts of the community. This included scrapping refundable ‘franking credits’ (a tax concession popular with share-owning retirees), increasing taxes paid on residential investment properties, and reducing pension tax breaks for wealthier Australians.

By contrast, the Liberals’ Scott Morrison, Australia’s third Prime Minister in the space of four years, took a policy-lite offering to the election. Beyond promises to legislate income tax cuts, the campaign focused on convincing voters of the dangers of switching to Labor. Their scare campaign, with pithy slogans like ‘retiree tax’ and ‘Labor’s taxes: the Bill Australia can’t afford’, helped convince voters to stick with the status quo.

The answer isn’t walking away from tax reform

Early analysis speculated that opposition parties will shy away from pledging difficult reform in future. Politicians may well conclude that tax hikes can’t be sold at elections – but this would be wrong. Institute for Government’s research shows difficult reform is possible – with the right groundwork. Instead of avoiding tax reform, politicians should reflect on two key lessons: the public need to understand tax reform and they need to accept it is necessary and fair.

We’ve previously argued it’s hard to have a sensible debate about tax reform if the public don’t understand the tax system and policy options, even if only at a high level. While far from an easy task, it seems Labor failed to adequately explain their proposals to the electorate. Soundbites like ‘retiree tax’ created confusion about who stood to lose from the policy. It was also impossible for Labor to be precise about the impact of changes to property taxes. This gave room to exaggerated claims about the likely effects on renters and home owners, who were already spooked by recent (though moderate) house price falls.

The public weren’t convinced it was necessary or fair to target retirees. This was a critical failing: our analysis shows the public salience of an issue is a key factor in creating an environment for policy change. The government itself had been burned by reform for which the public were unprepared and thought was unfair. Back in 2014, their budget included a series of cuts to payments and services to vulnerable groups – none of which had been foreshadowed in the previous year’s election campaign. Most of these cuts were eventually reversed, and the then-prime minister, Tony Abbott, never recovered. But if fairness can scuttle reform, in other cases, it can justify it – if politicians can build a case, as the British Labour Party did when introducing the minimum wage.

Asking part of the electorate to pay more tax was never going to be easy. But Labor had a crowded policy agenda. Our past research has shown the importance of clear priorities – in both government and opposition – and the risks in trying to do too much on too many fronts. Pursuing fewer intricate and controversial reforms might have given more space to explain and justify them to the public – a task as important as developing the reforms themselves.

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