From brandy to housing … tax reform beholden to vested interests

In tax, everyone has a vested interest.

From the staff member helping you find paint at the local Bunnings to the retired investor who checks stock prices in the morning, every person, business or partnership puts a value on key elements of the tax system.

We saw this most clearly in the fight over the Henry tax report’s Resource Super Profits Tax and in the 2019 election over Labor’s plans to change the treatment of franking credits. But vested interests are not new.

Every year, the Treasury produces a report called the Tax Benchmarks and Variations Statement. It tracks the cost of the thousands of quirks in our tax system.

The exclusion of fresh food from the GST will cost an estimated $8.2 billion in forgone revenue this year. The excise on cigarettes containing less than 0.8 grams of tobacco collects $1.7 billion more in a year than if they were taxed the same as cigarettes with higher tobacco content.

It also reveals strange tax treatments – a testament to the enduring power of vested interests.

The excise on brandy is slightly lower than that of other spirits, costing taxpayers about $5 million in forgone revenue this year.

It goes back to the 1954 federal election, during which the Menzies government sought to win over South Australian grape growers with a promise to reduce their tax burden. A few weeks after the narrow victory, the government cut brandy excise by 30 shillings a gallon.

Two decades later, the Whitlam government ended brandy’s tax advantage.

But in 1979, then agriculture minister Ian Sinclair convinced Malcolm Fraser’s cabinet to return the brandy tax lurk. His argument was based on a questionable Senate report that found people would drink brandy when it was appreciably cheaper than scotch.

A decision by the Menzies government to woo South Australian grade growers in 1954 continues to affect the tax treatment of brandy.Credit:Robert Banks

That was 42 years ago. Today, there is a $5.87 a litre of alcohol difference between the excise on brandy and other spirits – all thanks to the political interests of the Menzies government of 1954.

Any change to a tax – be it to reduce one, increase another or introduce a whole new impost – is going to upset a vested interest somewhere. In our politically charged environment with Federal Parliament on a knife-edge, those vested interests know how to block anything.

Scott Morrison is acutely aware of the power of vested interests. His changes to the tax treatment of superannuation as treasurer ahead of the 2016 election upset the Liberal Party base and contributed, in part, to the struggles of Malcolm Turnbull.

John Howard and Peter Costello won the 1998 election with their GST promise yet almost failed to get it through Parliament.

Years earlier, Howard vowed to repeal Paul Keating’s fringe benefits tax “lock, stock and barrel” as restaurant owners warned they would be forced to shut. They weren’t so interested in how the FBT broadened the tax base and enabled the deep cut in personal income taxes that accompanied this reform.

Keating, fortunately, didn’t have to face social media or 24-hour news channels that would have been filled with reports of the local steakhouse proprietor bemoaning what would come with the FBT, which last year raised $3.5 billion.

As any treasurer knows, tax reform is extremely hard. While Costello is rightfully remembered for the GST, he lost a key battle to overhaul trusts in the face of vested interests (in this case, the National Party and the finance sector). The arguments for reform to trusts remain valid today.

Keating was forced to abandon reform to negative gearing in the face of a concerted campaign by the NSW property industry in the 1980s.

Kevin Rudd lost the prime ministership in 2010 in part due to the response of the mining sector to the Henry review. The mining sector cost the rest of corporate Australia a deep cut in the company tax rate.

Long-time United States senator Russell Long noted many years ago the extreme tension when it comes to overhauling the tax system.

A tax loophole is “something that benefits the other guy. If it benefits you, it is tax reform.”

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