Gee, that right-wing populism is bad, isn’t it? First we had Brexit, then we had Trump,  and now we  have  the Yellow Vests in France. And we seem to have always had Pauline Hanson.

In a linguistic sense, “right-wing populism” has come to have lost its adjective, and it’s just  “populism.”  The  “right-wing”  part  is taken for granted.

But   that   is   wrong,   because   “populism” simply means politicians trying to appeal to “ordinary” people, usually by portraying them as not doing as well as “the elites,” or “the rich.” Left-wing populism is alive and well – as we are about to see in the Australian election campaign.

Although the Labor Party is a heavy favourite to win the 2019 election, courtesy of a divided and dithering Coalition government, which repeated Labor’s proven election-losing strategy of replacing sitting Prime Ministers – and thus Labor could probably coast to an election win by staying silent – the Opposition has cast around for a compelling narrative.

Labor has found it in economic inequality. The  party  is  clearly  positioning  itself  to ride the wave of redressing rising inequality –  the  same  pitch  tried  by  Democratic

Senator Bernie Sanders in the US, and UK Labour leader Jeremy Corbyn.  Focusing  on inequality means the Opposition  can  say that the rich are getting richer, and the poor are getting poorer – and that Labor’s redistributive instinct is precisely what the times require.

Expect to hear a lot in the lead-up to the election about inequality. That inequality is rising is Labor’s mantra, and it will be at the heart of its election campaign.

The other phrase you will get sick of hearing by  election  day  is  “fiscal  buffer.”  Shadow treasurer Chris Bowen says the risks to Australia from the slowing world economy justify Labor implementing all its $200 billion-plus in pledged tax rises to arm the federal government with a bigger fiscal “buffer” to counteract any global downturn.

They are the two main hooks on which the Opposition has hung its plan to generate $200 billion in extra tax revenue over a decade.

Inequality

All around the world, goes the narrative, the rich get richer, and the poor get poorer. The first part of that certainly is true. Every year, charity group Oxfam produces a  statistic for the World Economic Forum in Davos saying that a certain number of billionaires has the same net worth as the poorest half of the world’s population – about 3.8 billion people. This year, that number was 26.

Oxfam said the wealth of more than 2,200 billionaires across the globe had increased by US$900 billion ($1.25 trillion) in 2018 – or US$2.5 billion ($3.5 billion) a day. The 12% increase in the wealth of the very richest contrasted with a fall of 11% in the wealth of the poorest half of the world’s population, the charity group said.

In a landmark 2017 speech, Bill Shorten claimed that rising inequality was the single  biggest  threat  to  Australia’s  social cohesion and the economy, and that the nation’s economic system was “accelerating inequality, rather than addressing it, entrenching unfairness, rather than alleviating  it.”  In  the  same  vein,  shadow Treasurer says Chris Bowen is fond of saying that income inequality in Australia “is   at   a   75-year   high.”   Bowen   cites   a number of statistics to demonstrate this: real net disposable income per capita, real wage increases, the minimum wage and its relativity to the average wage; and the gap between productivity and worker pay.

In reality, inequality is difficult  to  measure: if wealth is being measured, the potential exponentiality of wealth makes  a  mockery of measurement. The likes of Jeff Bezos, Bill Gates and Warren Buffett – or their Australian equivalents, Gina  Rinehart,  Frank  Lowy and Andrew Forrest – ensure that wealth inequality will continue to rise. (Oxfam calls for a global “wealth tax,” as advocated by the French economist Thomas Piketty, to arrest the rising trend in inequality.)

Like all statistics, if you torture data on inequality for long  enough,  it  will  tell  you what you want to know. But some inconvenient (for Shorten and Bowen) conclusions have recently been drawn about inequality in Australia.

An August 2018 report from the Productivity Commission,  the  Australian  government’s main review and advisory body on micro-economic policy and regulation, concluded that income inequality was not soaring, and that economic gains had been “shared widely”  across  all  income  groups.  While income inequality had increased modestly since the late 1980s, said the PC – and it noted that the extent of this increase was “contested” – and, since the global financial crisis, the trend indicated a slight decline.

Launching the report PC chairman Peter Harris said that 27 years of economic growth in Australia had led to “significantly improved   living   standards”   for   people at  every  income  level,  while  the  nation’s “highly targeted’ welfare system had reduced inequality – as typically defined – by 30%. The benefits of income growth since the last   recession   in   1990   had   been   “fairly evenly shared across every income decile in Australia … and the bottom decile, those with least income, have done as well, if not slightly better, than most,” said Harris. Incomes grew steadily during the 1990s, rose sharply during the mining boom of the mid-2000s and had flattened since the GFC, the study found: on average, real incomes increased by more than 2% a year between 1989 and 2016, to an average of $54,000 and a median of $46,000.

That  hardly  squares  with  Labor’s  view  of “accelerating inequality” and an economic system that is “entrenching unfairness.” In fairness, Harris pointed out that despite 27 years of uninterrupted economic growth, and unemployment stabilising and a notably lower level, significant investment in redistribution and a boost to the Age Pension, the share of households officially in poverty – those with incomes half or less than the median of $46,000 – had remained about 9%.

It is true that real wages growth has been poor in the 2000s, but more recently, according to the ABS Wage Price Index, real wages grew in the year to September 2018 by 2.3% – a three-and-a-half-year high. In fact, Despite the sharp rise and subsequent fall over the past decade in the  nation’s  terms  of  trade  (the  difference between what Australia is paid for its exports and what it pays for its imports), which is one of the main influences on real wage growth, Australian workers have not seen any fall in real wages.

Also, enterprise bargaining agreement (EBAs) wage growth has stagnated – although the number of employees covered by EBAs, in both the public and private sectors, has been falling since 2012. The government can point to –  actually,   it trumpets – seemingly wondrous jobs numbers. In December, the national unemployment rate fell from 5.1% to 5%, to a ten-year low in trend terms (not seasonally adjusted). In New South Wales the jobless rate was 4.3%, while in Victoria it was 4.2% – the best since reliable records began, in 1978. Wage growth is supposed to pick up if unemployment keeps falling.

Company profits, too, started to pick up in 2017 after three years of falls: the recovery continued in 2018, and that too should lead to a boost in real wage growth.

But this has not arrived quickly enough for Labor, which has decided it needs to kick things along, with, in Bowen’s words, “a very progressive tax policy: the most progressive policy from an opposition we have had in generations.”

House prices, too, can be used in the inequality debate: for the one-third of Australians who own a house, and even for the 34%–35% who are paying off a home loan, the rise in values in recent years generated significant wealth (although house prices have subsided since peaking in 2017). Renters did not experience this.

And in the broader debate on inequality, listed company profitability and executive remuneration have been dragged in as exhibits for the prosecution  (Labor  and  the Unions). The litany  of  behavioural and cultural horror stories from the 2017 Financial Services  Royal  Commission and the ongoing arms race in  executive  pay for stock exchange-listed companies – only occasionally dented by frustrated shareholders  with  a  “strike”  vote  against the remuneration report at annual general meetings – fit only too well into a Labor narrative of companies treating customers badly and paying themselves too much while they’re at it.

The Unions re-enter the limelight

And if you thought Bill Shorten and Chris Bowen were fired up about inequality, they sound insipid compared to Australian Council of Trade Unions (ACTU) boss Sally McManus. For McManus, rising inequality is not only an article of faith – it is the means by which the Unions can deal themselves back into the heart of the government of the country.

McManus says the union  movement  is  “here to fix the imbalance that has eroded people’s   rights   and   wrongly   empowers corporations, big business and the already wealthy.” The ACTU leader has identified “neo-liberalism” as the driving force behind inequality – ignoring the rule  of  thumb  that anything with the prefix “neo” is usually pretentious rubbish – and  accuses the government of being enthusiasts for “trickle-down”   economics,   a   straw-man argument that nobody actually advocates, apart from the obvious fact that the private sector in Australia employs about  85%  of the workforce, and it benefits the nation if companies are doing well, making profits, growing and employing people. Private- sector businesses, and the people that start them,  have  incentive  to   take   risks   and be rewarded by higher income. It is this acceptance of risk that generates higher investment and an expansion of growth and employment.

The ACTU has taken aim at the hundreds of our biggest corporations that it says pay no tax. In general, there are two reasons why companies pay no tax in Australia: either they are not making a profit – and have tax losses they can carry  forward  until they return to profitability – or they are taking advantage of the  international tax system to lower their tax liability. For example, companies may set up complex ownership arrangements that  allow  them to redirect profit to countries with lower tax rates. The Australian Taxation Office (ATO) attempts to fight this, with varying levels   of success – and the Turnbull Coalition government passed the Diverted Profits Tax (DPT), also known as the “Google Tax” into law in 2017, arming the ATO with some of the world’s strongest powers to fight multi- national companies.

The DPT laws are aimed at multinationals with global revenue of more than $1 billion and Australian revenue of greater than $25 million. They will be hit with a 40% tax on all profits – a rate 10% per cent higher than the 30% company tax rate. The Google Tax aims to ensure that the tax paid by global entities properly reflects the economic substance of their activities in Australia and prevents the diversion of profits offshore through contrived arrangements.

“Insecure”  work and  rising  “casualisation” of jobs are also in the ACTU’s sights. To be fair, where there is exploitation it should of course be punished, and the ACTU has a role to play in this. But it is also true that technology-enabled disruption has created new businesses with flexible work patterns,

 

and people have chosen to use this flexibility to their benefit – and the businesses have thrived because they have given consumers more choice and better-quality service at a lower price. For better or for worse, this bypasses organised labour.

McManus and the union movement are gearing up to fight all of these battles – and to use their influence over a potential Labor government to recast the system in a way more to their liking. Fair enough, that is their role. And while Bowen downplays the unions’ influence on a future Labor government, the potential next Prime Minister, Shorten, is cut from union cloth. Expect the Coalition to give plenty of pre-election airtime to his comments  from  2016,  that  he  “still  thinks like a union organiser,” and if he wins the election  he  will  “take  a  similar  approach to the office of prime minister as he did to leading the Australian Workers Union.”

Those sentiments will mystify the vast majority of Australians who are not members of a union that this mentality finds its way into public utterance. In the real world, union membership has sunk like a stone in recent years. In 2005, 27% of full-time workers, or

1.42 million people, were union members. The latest data from the Australian Bureau of Statistics (ABS) shows that union members now represent 14.6% of employees.

Workers aged 45 to 54 years made

 

up the largest cohort of union members, while just 6% of workers younger than 25 had joined a union. The ABS data did not include a breakdown of public and private sector – in the latter, union membership had fallen to 10.4% in 2016.

But despite this plunging membership, come the day after the 2019 election, the unions will be in the most powerful position they have been for four decades. Go figure.

And the world-view of the union leadership should be a concern to non-unionists – it is that companies are wicked, profit is bad, and wealth is the worst thing of all. If you have some, you took it from someone else, because there is only a finite amount of it, and it has to be redistributed more fairly. Ten years ago, that kind of world-view would have been laughed off the stage – but given the struggles of the global economy and political system since the GFC, and the backlash of populist left-wing rhetoric promising a new look at how economies are constructed, it’s back.

The Labor Party is not as gung-ho with this rhetoric as the Union movement – it has to try to temper its message to Middle Australia – but, emboldened by the polls and the general perception of drifting to defeat that seems to characterise the Coalition, Labor has been able to positions its higher-taxing, bigger spending, anti-business, pro-union stance as  critical  to  combating  Australia’s  main problem, which is in

equality. This justifies everything from higher taxes to abolishing the Australian Building and Construction Commission to throwing out Fair Work Commission decisions that the Labor sees as hurting workers or cutting penalty rates. Labor gets to frame this as improving the nation’s  prosperity  in  a  fairer  way:  on  the back of the likely success of the political arm of the union movement, McManus gets to frame it as a power shift in law and society, in favour of the nation’s workers.

Paul Kelly of The Australian sums it up perfectly: “In Shorten’s hands inequality is both a specific grievance and a branding for everything people feel bad about, from high energy costs to corporate rip-offs to cost-of- living pressures.”

 

Company tax differences

On company tax, the Coalition has begun cutting the company tax rate for small and medium-sized firms from the current rate of 27.5% to 25% by 2021-22. It tried to cut the rate for all companies from 30% to 25% for all companies, by 2026-27, but could not get this through the Senate

Labor is prepared to wear the company tax cuts, but wants to keep the rate at 30% for  big firms. It calls this attempted cut – and Coalition  policy  –  a  sop  to  the  “top  end of  town”  and  a  favour  to  the  Coalition’s “business mates.”

According to the Budget Papers, revenue in the current financial  year  is  expected to be $486.1 billion, an increase of 6.6%. Company tax (and resource rent tax) is expected to be $92.6 billion, or 19% of the government’s revenue.

Income tax treatment

Income  tax  generates  the  lion’s  share  of government revenue. Of the $486.1 billion in tax revenue expected to be raised in 2018- 19,  individuals’  income  tax  is  expected  to amount to $222.9 billion, or 46% of the total.

We know that the Coalition has already passed income-tax cuts worth about $144 billion over ten years, including relief for low and middle-income earners, and phased changes to tax brackets for the higher paid. Stage one, which kicked in last July, is worth about $530 a year to low-and-middle-income earners – at the cost of about $20 billion.

Stage two begins on July 1, 2022 and will take the $90,000 threshold under which the 37% tax rate applies to $120,000, meaning everyone under that income will pay a maximum 32.5 cents in the dollar. Stage three begins on July 1, 2024. It will abolish the 37% bracket and apply 32.5% to all earnings between $41,000 and $200,000, covering 94% of workers.

The rate above $200,000 will stay at 45%, which currently applies to earnings over $180,000.

Labor  says  the  Coalition’s  Stages  two  and three tax cuts are not affordable and are directed mainly at the rich. It has pledged to repeal all but the first stage of the changes if it wins office: it will scrap the second and third stages of the cuts, which provide relief to people earning above $90,000.

Labor  proposes  to  increase  Australia’s  top tax rate to an effective 49% (47% plus 2% Medicare Levy), to apply to taxpayers earning more than $180,000 a year.

Capital gains tax hike

Labor promises to cut the  capital  gains  tax (CGT) discount on assets owned for 12 months or more,  from  50%  to 25%. Currently, an investor who holds an asset (for example, shares, property, or managed funds) for more than 12 months pays tax on 50% of any gain made on sale. This means that an individual who is paying tax at the highest marginal tax rate of 47% (45% plus 2% Medicare Levy) pays an effective tax rate on a gain of 23.5%.

Under Labor’s policy, only 25% of the gain will be exempted, so that tax at the marginal rate will apply to 75% of the gain. For an investor paying tax at today’s highest rate of 47%, the effective tax rate would rise to 35.25%. But with the top marginal tax rate set to rise by a further 2% to 49% under Labor’s plan, the effective tax rate would be 36.75%.

The tax paid on  a  capital  gain  of  $100 of $23.50 would increase to $36.75, an effective jump of 56.4%. If Labor takes office, Australia will have one of the highest effective tax rates on capital gains in the world. The only comfort for investors is that Labor does not intend to apply the lower discount rate retrospectively, so that investments made before the effective date of the change – whenever it is legislated – will be grandfathered.

The Coalition will retain the 50% discount.

Changes to negative gearing

Labor plans to change the rules for “negative gearing,” which allows investors to claim the costs of owning a rental property, including mortgage interest, as a tax deduction against other income. Negative gearing will   be   limited   to   “new   housing.”   The commencement date will be announced after the election, with investments made before this date not affected.

While interest will still be deductible, it will only be deductible to the extent that the income and the allowable deductions  are  fully offset – investors will not be able to claim a ‘net’ investment loss.

The proposed changes to negative gearing would apply across the board to all investments, whether property, shares, a business loan or any other relevant asset class. But housing is the main aim – Labor says it wants to level the playing field for first home-buyers, so that they are “not competing with property investors who are  being  subsidised  by  the  taxpayers,”  in Shorten’s  words.  In  line  with  Labor’s  new branding as inequality fighters, critics of this policy are “the multi-millionaire brigade.”

There has been a war of words over this policy and its effect on house prices: if investors withdraw from the market, and house prices fall, Labor would presumably view it as a success in terms of housing affordability. But anything that lowers house prices is a negative for existing homeowners, and the Coalition is shouting this from the rooftops. According to property research firm CoreLogic, national dwelling prices fell 4.8% in the year to December 2018, with Sydney and Melbourne homes down 8.9% and 7% respectively. Expect the fight over this policy to get louder, especially if house prices continue to slide.

The other effect of Labor’s negative gearing policy is that it is likely to push rents higher, as investors require higher returns to compensate for the loss of the tax benefit.

The “Retiree Tax”

The uproar over the negative gearing changes and their potential impact on the property market has been a storm in a teacup compared to Labor’s policy to stop the refunding in cash of excess franking credits on share dividends, where they are not needed by investors whose tax rate is lower than the company tax rate – namely, investors  in  the  ‘accumulation’  phase  of superannuation, paying a 15% tax rate, or drawing a pension from a super fund, on    a nil tax rate. The franking credits act in investors’  hands  as  a  tax  offset  and  if  not used, are currently refunded in cash by the ATO, under changes introduced in 2001.

Labor says the 2001 changes were never envisaged when dividend imputation was introduced, and defeat the purpose of removing double taxation of dividends, by handing money back to the shareholders. Shadow Treasurer Bowen says that in 2014- 15, the government spent $5.9 billion on refunding dividend imputation credits, more than it spent on public schools ($5.2 billion) – and that the concession is “unfair and  unsustainable.”  He  adds  that  92%  of taxpayers are unaffected by this change.

Of course, if you are in the 8% of taxpayers who structured their affairs according to rules in place for almost 20 years, and the change to the rules are not going to be “grandfathered” – unlike the changes to negative gearing rules – that is not the way you will see the policy. True to its branding, Labor says the policy will mostly affect wealthier people: a barrage of criticism from the investment advisory industry says the opposite, that the change will hurt hundreds of thousands of self-funded retirees who are drawing a pension from their self-managed superannuation fund (SMSF).

According to retirement income industry group Alliance for a Fairer Superannuation System (AFSS), well over one million older Australians, including more than one- third  of  Australia’s  3.6  million  self-funding retirees, stand to be affected by the proposal

– with some retirees theoretically looking at a 28% drop in their income. Labor has already changed the policy to exempt people receiving the Age Pension: between now and the election, expect to see the political battle over this policy intensify.

The retiree tax appears to be based on a belief that franking credits are some sort of loophole, a gift from the ATO,  instead of   a thing that arises in respect of the tax that has already been paid by the company on its reported net profit.

There is also considerable scepticism that the union-aligned industry superannuation funds (and some retail funds) will still be able to offer their members the full value of franking credits. The proposal reveals a distrust of the SMSF sector and a desire to clip its wings – again, they’re the rich that have to be soaked – and if this Labor policy causes people to revert to an industry fund, well,   that’s   probably   just a coincidence. It couldn’t be any other way, could it?