Paul Keating drove policy. Peter Costello gets driven in his ComCar. He’s never tried to flog an Option C. Tax is surely the clearest indication of the questions that surround the Treasurer’s ability to lead.

The Australian’s reaction to the Treasurer’s announcement on simplifying tax legislation: “Mr Costello wants to edit the tax system, not reform it,” was the title of its leader last Friday:

Those who argue for a simpler, fairer tax system will be
underwhelmed by the announcement from Peter Costello yesterday. True,
there is nothing wrong, and plenty right, about slicing the girth of
Australia’s tax legislation by more than a quarter. But this is a
pruning exercise, not reform…

Until he drastically changes tack, the tax system will continue to be
an affront to Adam Smith’s prescriptions for fair taxation: economy and
simplicity. Buried deep in the Board of Taxation’s report, released
yesterday, is an irony that should not go unnoticed: it says the
recommended effort of pruning and editing may have unintended
consequences, ‘essentially reflecting the complexity of current law
that has built up over many years’. Tax after tax, followed by
concession after concession, have created a beast that needs to be
taken to slaughter, not given a manicure and a coat-trim. In 1936, the
Income Tax Act was 126 pages long, or barely 1 per cent of what it is
now.

It is not, of course, this formal complexity that matters, so much as
all the misdirected activity it reflects and generates. A punitive top
marginal tax rate of 48.5c in the dollar (including the Medicare levy)
sends honest taxpayers scurrying to tax agents who know every deduction
in the 10,000-page book… More importantly, as revealed by The
Australian in September, a cut to the top rate would not have the
nation’s super-wealthy salivating, because they are not paying it in
the first place. As a result of their ability to use their investments
to minimise income and claim tax breaks not available to ordinary
workers – features of the present taxation system – the rich pay less
than a third of the tax paid by the nation’s highest-paid workers.

A leader leads – and so should a would-be leader.

That day, reports emerged of a near-record budget surplus of more than
$14 billion for 2005-06 – enough to fund the ambitious tax cuts
proposed by Malcolm Turnbull that Costello got so petulant over. Again,
this raises significant questions about the Treasurer’s judgement.

The Australian is right. The current tax system is unfair. The
wealthy do not pay their share – and most of us seek to minimise our
contribution.

There is a moral aspect to this – not only the injustice of those who
can afford the lawyers and accountants not paying their fair share –
but the morality of a system which encourages us not to contribute.
Simpler, lower tax systems are also simpler to obey. We are more likely
to honour the social contract. The Treasurer, with his background,
should understand this.

A third item in The Australian demonstrates the magnitude of
Costello’s failure. “A flat 30 per cent personal and company tax rate
– with a generous tax-free threshold – is affordable and would
generate 500,000 jobs,” the paper reports today. Quoting research from the Centre for Independent Studies, it says:

… a big-bang approach could create greater work
incentives for high – and low-income earners… a flat 30 per cent
personal and corporate tax rate could be paid for by scrapping welfare
and family payments to workers earning more than $30,000, according to
the proposal by tax economist John Humphreys…

Although it would be difficult to sell to the electorate, Mr Humphreys
says a system of individual packages – rather than family tax and
benefits – would deliver $15 billion a year.

The proposal is designed to illuminate the problem of effective
marginal tax rates – the situation where people lose welfare benefits
in tax as they move into work. It ensures that no worker receives
welfare at the same time as paying tax.

The 30 per cent tax on earnings over $30,000 and the 30 per cent
“negative income tax” paid by the Government on earnings under the
threshold would replace current tax scales and the tax-free threshold
of $6000.

While those on welfare would have their payments cut, the proposal
purports to benefit workers on low wages the most, with those earning
$50,000 a year losing 12 per cent of their income in tax, compared with
a loss of 21 per cent for those on $100,000.

This is think-tank stuff. Politicians play complicated juggling games.
But it’s also blue sky thinking. It’s leading. Peter Costello doesn’t
do that.