Grattan on Friday: Peter Dutton’s tax indexation ‘aspiration’ has merit – so why didn’t we hear about it before?

Peter Dutton, now seriously on the back foot, has made an extraordinarily big “aspirational” commitment at the back end of this campaign.

He says he wants to see a move to indexing personal income tax – an assault on the “bracket creep” that sees people pushed into higher tax brackets when their income rises due to inflation.

He suggests this would be a task for after a Coalition government had the budget back in shape, so he puts no timing on it.

If Dutton is serious, this is the most radical proposal we’ve heard for the election, apart from the nuclear policy.

The opposition leader produced the indexation idea, out of the blue, in an interview with The Australian, saying, “I want to see us move as quickly as we can as a country to changes around personal income tax, including indexation, because bracket creep, as we know, is a killer in the economy”.

When there are widespread calls from business and experts for an overhaul of the taxation system, but apparent deafness from most politicians, dealing with bracket creep would be one major step forward.

Economist Richard Holden from the University of New South Wales, is a strong advocate. “The current system has been built on tax increases on every working Australian all the time,” he says. An indexed system would be “more honest”, as well as forcing fiscal discipline on governments.

The latter constraint is one big reason governments shy away from it. Bracket creep provides a huge amount of revenue automatically, and indexing tax brackets would be very costly. The spending discipline the system would then require is probably beyond any modern government, given the enormous demands from voters.

There’s another point. Governments like to make good fellows of themselves by handing back some of this bracket creep in tax cuts at times of their choosing, particularly at elections – as we’ve seen this time.

Ken Henry, former treasury secretary and lead author of the major taxation review commissioned by the Rudd government, urged indexation in a February speech outlining a blueprint for tax change.

Henry is particularly concerned with intergenerational equity. “Young workers are being robbed by a tax system that relies increasingly upon fiscal drag,” he said. “Fiscal drag forces them to pay higher and higher average tax rates, even if their real incomes are falling.”

A conservative government did index income tax, way back in Malcolm Fraser’s day, when the then-prime minister described it as a “great taxation reform”.

Fraser argued: “Perhaps the single most important feature of the reform, is that it is not a once-and-for-all measure. It will continue to have significant beneficial effects in personal income tax payments from year to year”.

The change, however, didn’t last long – after introducing it in 1976, Fraser cut it back in 1979 and then scrapped it in 1982.

But, accepting the potential upsides of the idea, the fact that Dutton has come out with this ambitious, “aspirational” policy in this way, at this time, raises questions about his campaign strategy.

If he means it, this should have been front and centre of his election pitch, advanced much earlier and cast as part of a reform agenda.

Instead, all we got from the Liberals on tax was the weekend commitment to a one-off income tax offset. And that followed the party earlier saying it would not be able, for financial reasons, to produce anything at all. Also, of course, they rejected the modest tax cuts in the budget.

Some Liberal sources say Dutton always intended to float the indexation idea. If so, he and those running the Liberals’ campaign missed a big opportunity.

The other view is to think Dutton could have been freelancing – talking up his commitment to economic reform, going for an easy headline, but knowing he would never have to deliver. Most likely, he would not reach office. If he did win government – well, this was an “aspiration”, whose time would never arrive.

Questioned on Thursday about his idea, Dutton argued the difficulty of writing tax policies from opposition.

He pointed to the example of the Howard government, which unveiled the GST after winning power in 1996, then took it to a subsequent election in 1998.

It is a risky precedent to highlight, however. John Howard promised in opposition he would “never, ever” bring in a GST. Dutton can’t afford to fan any suggestion that we don’t really know his full tax agenda – that he might surprise if he won.

For its part, Labor this week found itself again caught in the weeds of a perennial tax debate – over whether, despite its denials, it might abolish the negative gearing tax break for property investors.

Anthony Albanese kicked an own goal in Wednesday’s debate when he insisted the government hadn’t commissioned Treasury modelling on the impact of negative gearing for the housing market. There was much to-ing and fro-ing last year about this, but it finally became clear Treasurer Jim Chalmers had requested advice.

Chalmers on Thursday made a Jesuitical distinction between asking Treasury for “a view” and commissioning modelling.

“I said last year […] I sought a view. That’s different to commissioning modelling,” Chalmers told a news conference alongside Albanese. “The prime minister was asked about commissioning modelling. I sought a view.

"The view from the Treasury is that a change to negative gearing wouldn’t get the sort of improvement that we desperately need to see in our economy when it comes to supply and that’s why our focus is not on changing that.”

Pressed to “rule out” any changes to negative gearing, Chalmers said “we’re not proposing any changes in this area”.

Dutton claimed Chalmers was “an advocate for the abolition of negative gearing”, and was “at war” with Albanese.

Once again, the opposition is trying to sow doubt about what Labor might do, regardless of what it might say, on this thorny issue. Or, as the government claims, it is trying to distract from its own problems.