There is a question at the heart of the Turnbull government’s position on tax reform that needs to be brought into the open and tackled head on.

The question is this: is the Australian tax system too progressive, about right, or not progessive enough?

Tax systems around the world are referred to as ‘progressive’ if they push proportionally more of the tax burden onto wealthier members of society, and less onto those with less ability to pay.

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This urge towards ‘fairness’, however, has its limits in both directions. If you tax lower socio-economic groups too much, the nation’s consumers won’t have much left to spend in the private sector.

And if you tax the wealthy too heavily, high earners can lose the incentive to work and contribute to economic growth.

So why ask this question now? Well the Coalition and Labor have taken starkly different approaches to tax reform, underpinned by very different views of what a progressive tax scale should look like.

The GST is regressive. Photo: AAP

First came the GST debacle. Value-added taxes such as the GST are, in themselves, regressive, because they impose a proportionally greater burden on the poor.

However, the rise in the GST from 10 to 15 per cent could have been balanced with larger tax cuts for lower-income earners and increases to transfer payments such as family benefits and pensions.

That argument never saw the light of day, except at The New Daily, because Labor’s GST scare campaign pushed Treasurer Scott Morrison into modelling a thoroughly inequitable GST plan, after which he could tell Australia ‘oh, that didn’t work so we scrapped it’.

That left three main areas of tax reform that could be used to plug the $40 billion or so hole in the budget each year – reducing superannuation tax concessions, reining in the negative gearing of investment properties, and reducing the discount applied to the capital gains tax.

Labor, having announced it would act on negative gearing and the CGT, is now fighting a campaign funded by vested interests in the property and finance industries to leave those laws untouched.

A new twist

On Tuesday, a third view was thrown into the mix by the Business Council. It wants income tax and corporate tax cuts, funded by a reduction in superannuation tax concessions and better enforcement of the tax code on multinational companies.

At the time of writing, it’s not clear how the government will respond to that suggestion – or even whether the BCA would bring the federal government closer to balance.

But the government has to do something. At present it only looks scared, and is joining the campaign against Labor’s negative gearing and CGT plans on the most spurious of grounds.

The PM had an audacious plan. Photo: AAP

Prime Minister Malcolm Turnbull, who audaciously released his own tax discussion paper just a year after being voted into parliament in 2004, knows there is no economic benefit to these combined tax breaks.

He himself noted in that paper: “… the treatment of capital gains and negative gearing offer a further reason for flattening the tax schedules. The arguments for taxing capital gains at the same rate as income are compelling ones, especially if the gains are indexed to inflation.

“The concessionary taxation of capital gains encourages people to invest in a manner which turns income into capital and, as in the case of negative gearing, allows them to deduct income losses at, say, 48.5 per cent, and then realise gains and pay tax at effectively half that rate.

“Many commentators, including the Reserve Bank Governor, Ian McFarlane, have claimed this divergence in the taxation of income and capital coupled with negative gearing has contributed to the asset bubble in residential real estate.”

And that was way back in 2005. Whatever must he really think about the housing bubble today?

An implied flattening

To simplify Mr Turnbull’s 2005 argument, if you try to tax high-income earners too much they will be pushed into tax minimisation strategies such as negative gearing and taking full advantage of the capital gains discount.

What that argument overlooks is that investors can’t be pushed into using loopholes that aren’t there.

Labor wants to restrict two of those loopholes, which you might think the PM would support.

But when Mr Turnbull wrote all those years ago of the damaging effects of the negative gearing and the capital gains discount, he was using it to justify a flatter personal tax scale.

That is a view that would find plenty of fans among the right wing of the Coalition party room – you know, the MPs who seem to have the PM over a barrel on tax reform.

If Mr Turnbull and Scott Morrison believe the current personal tax scale is too progressive, they should say that clearly.

Instead, we have been treated to a list of false assertions about the housing market crashing, or of scaring away capital investment from foreign investors.

• This article is the first of a two-part series. The second article will be published here.