Economists must climb down from ivory tower to win the tax debate

As the next federal election draws nearer, a sense of deja vu is enveloping the economics and public policy community. 

Elections used to be an opportunity for policy debate and the laying of bold plans for the future of the country. But aside from Labor’s notable, though ultimately unsuccessful, exception in 2019, elections have become an exercise in small target strategy. Indeed, both major parties in Australia have turned preserving the status quo into an art form. As a result, while calls for meaningful economic reform grow louder and more urgent, policy action remains decidedly unambitious. 

The urgency is warranted. The Australian economy lacks vigour and vitality, competitiveness, and dynamism. Economic and productivity growth are moribund; real incomes are declining; income, wealth and intergenerational inequality has morphed into a broader schism through Australian society; and the federal fiscal position is in deep, structural deficit. 

Any credible ordering of economic reform priorities for Australia would place tax reform near the top. Indeed, for people passionate about public policy and the prosperity of Australia, there are few topics like tax. It is an issue in Australia that seems to embody all four of the classical genres: epic, irony, tragedy, and a particularly dark form of comedy. 

Tax reform is not about economists, and it’s not about politicians. It is about the prosperity of Australia and Australians. 

Economists know that proper tax reform, done correctly, can be good for the economy, good for the prosperity of individual Australians, and good for the budget. Indeed, we know what needs to be done, and yet it doesn’t get done. 

It would be easy to simply lay blame at the feet of the political class. But many things are easy from the heights of the proverbial ivory tower where economists and public policy pontificators often safely reside. 

Tax reform is not easy. It is difficult. And any level of genuine introspection from economists and others promoting tax reform should conclude that the economic arguments for reform have not yet won the day. 

There are parallels with the recent re-election of Donald Trump as president of the United States. As a candidate, he advocated for, among other things, the implementation of an average tariff rate on imports that was last seen 100 years ago. Economists have been at pains to lay out the arguments against such economic self-destruction. And yet, Trump has been re-elected in a fashion so emphatic and emboldening that the power of his mandate is impossible to either ignore or deny. 

Equally, back in Australia, politicians know that there are very few votes for economic reform. If tax reform were electorally popular, for example, it would have happened by now. Like all reforms, refashioning and refining the tax system results in many small winners, and a few large losers. Governments eyeing re-election, therefore, shy away from spending their political capital on reform, only to be wedged by opposing politicians and attacked by rent seekers united by palpable self-interest. 

What should economists and advocates for tax reform make of this? Rather than being a source of bitterness and discontent, we believe it should be a source of motivation. A reminder that we need to keep chipping away, to keep making the case, and to not give up. 

There are libraries of reports, papers, articles, and modelling results dedicated to improving Australia’s tax system. Just as the aggregate economic gains from free trade are widely accepted by economists and politicians of almost all persuasions, so too are the tax reform shibboleths of “broadening the base” and “lowering the rate”. 

Ultimately, however, tax reform is not about economists, and it’s not about politicians. It is about the prosperity of Australia and Australians. 

In housing policy, debate has tipped in favour of YIMBYs at the expense of NIMBYs, while demand-side solutions such as generous first home-owner grants – once the favoured policy of politicians and the electorate alike – are now rightly seen as making a bad situation worse. But that evolution has required a national crisis in the form of a systemic lack of affordable, decent, well-located housing for people of average means. 

The time will come for changes to tax. It must. But if it requires a crisis of the scale which besets Australia’s housing sector to trigger that change, economists will have failed. 

Those libraries of reports, papers and articles explain the what and the how of tax reform. But achieving tax reform will require economists to better explain the why of tax reform. Indeed, it is not the politicians who require convincing, but the public. 

Ending the sense of deja vu and turning tax reform from a recurring dream into reality will require economists to climb down from the ivory tower and engage directly with the Australian community. Only once the electoral popularity of tax reform is improved can we expect politicians to stake their political capital for change.