Watching the public fall out of love with them and seek out new political homes, the Labor and Liberal parties have had the same idea at the same time as they scramble to rekindle the flame: maybe we try some tax reform?

There was nothing very new about the policies either party dished up this week. Labor’s trio of negative gearing, capital gains and trusts were dredged up from their 2019 election manifesto. And Liberals have fantasised about ending bracket creep for yonks.

What surprised was the suddenness. Anthony Albanese might actually have been sincere before the election when he swore until he was blue in the face that he wouldn’t touch negative gearing. The famously cautious PM showed no desire to pick that fight.

And when Peter Dutton mused mid-campaign that he might very well get around to indexing tax brackets some day, the most generous interpretation is that he was “riffing”. An actual, costed policy had been considered by his frontbench team and rejected.

The reason for the caution on both sides was that tax reform usually fails. Everybody agrees on what the problems are, at least broadly. But nobody can agree on the solution, and our politics emphasises ‘losers’ over ‘winners’. Fear campaigns usually work.

Out the window with all that: both of the major parties are now having a crack at clearing out their too-hard baskets, the Liberals because they have nothing to lose and Labor because they have everything to lose.

The rival visions share a fundamental insight — that the tax system is penalising ordinary people — but with radically different ideas of who is ordinary. And just as politics appears to be changing utterly, an ancient and very familiar left-right tax war has erupted.

There’s one for you, 19 for me

If there are two broadly-agreed problems with the tax system, they are that we don’t have enough of it and we get it from the wrong places.

The first is more contentious — Liberals tend to say we have enough and that spending should come down, whereas Labor’s view (and, it seems, Treasury’s) is that it’s a little of both. Either way, the fact that taxing and spending are out of whack is not in dispute.

But there is near-consensus on the second point — that our tax system is too reliant on collecting money from middle-class, working-age people. More than half of federal tax revenue comes from individual income taxes, the highest share since 2000.

The problem has a generational dimension. Whereas 50 years ago, there were seven working-age Australians for every retiree, today there are four. The social contract, under which people pay taxes when young and are cared for when old, is under strain.

It also has a wealth dimension. In various ways, those who earn income from assets — “making money from money” — can pay less tax than wage earners. As Greg Kaplan of the e61 Institute has said, it makes an employee “about the worst thing you can be”.

And it has an inflation dimension. Because Australia’s tax brackets are set in dollars, and do not change when the value of dollars change, people ‘creep’ into higher and higher brackets over time, occasionally getting bits and pieces back as tax cuts.

Labor and Liberal politicians have acknowledged all three dimensions at one time or another. But now, while both are framing their changes as generational because they are chasing the votes of the young, Labor has chosen wealth and the Liberals inflation.

Who’s at the top end of town?

The budget tax reforms to negative gearing, the capital gains tax discount and discretionary trusts have been shaped into an argument in favour of wage earners and against passive earners.

This is compounded by the new $250 tax offset for wages and salaries only, the first time investment returns have been excluded from a tax cut, and a model Jim Chalmers has called “architecture” to build future tax cuts on.

This is a subtle but important shift from the way Labor has talked about tax in the past. Its complaint about the stage three tax cuts designed by the Turnbull and Morrison governments, which it later redesigned, is that they favoured high-income earners.

It was referring to people earning $200,000 per year or more, who would get the largest share of the benefit from the plan to scrap the 37 per cent tax bracket and push the threshold for the top bracket to $200,000 from $180,000.

Labor’s redesign was targeted at lower earners, keeping the 37 per cent, settling for a top threshold of $190,000 and using the proceeds to cut the bottom tax rate from 18 per cent to 16 per cent, now to be cut even further to 14 per cent.

The case for those changes was “fairness”. But while it’s true that those who earn more than $200,000 are a small minority of taxpayers, that group was never quite the “top end of town” Labor had in mind.

To a person, tax experts will tell you that annual taxable income is a bad way to distinguish richer from poorer. Many very wealthy people appear to have a low income in a given year, but are in fact better off than a single-income family on $200,000.

The distinction between wages and wealth made by the new offset seems to recognise this. Labor’s case is that those who earn money from assets are the real “top end of town”, that they pay less tax at every income level, and that they should pay more.

Like any tax policy that creates winners and losers, this is controversial. Those who have turned to shares, ETFs, crypto or other investments to supplement or replace their wages are furious

Labor is seeking to remind those who are now asking where young people are supposed to invest to get ahead that their changes simply apply a tax of 30 per cent, the PM asking them to give some of their wealth to boost “the wealth of the country”.

If you don’t like it…

When Labor last pursued wealth-based tax changes in 2019, then-shadow treasurer Chris Bowen’s helpful suggestion that if people didn’t like it, they could vote for someone else became infamous. Bowen was speaking a basic truth.

The good thing about a tax contest, and the decision of a political party to embrace a policy with winners and losers, is that it puts democracy to good use, allowing those who feel short-changed to take their votes elsewhere.

That will include some young investors who feel targeted by the changes and, though they might have voted Labor in the past, may now contemplate switching their votes towards a party that takes their side.

Liberals, who have built their modern political brand on being the party of low taxes but strayed from that at the last election, have picked up that gauntlet with enthusiasm, confident they can offer an alternative tax vision to disaffected young aspirants.

Like Labor, it has adjusted its focus slightly from the last round of tax wars over stage three. Rather than target the top end of the income scale as it did last time, the Liberal tax plan outlined last night will start with the bottom tax bracket and work its way up.

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This may be a recognition that, despite the attention devoted to the 45 per cent top rate, it is those working their way up through the lower tax brackets who are most jolted by bracket creep.

Once again, the decision will come at a cost and create losers, both on the spending side of the budget — permanent bracket indexation will handicap federal revenues — and on the party’s side, which will mount an active defence of asset income.

The suggestion of one Liberal that Labor’s plan was to push Australians into “wage servitude” may appeal to budding young investors but is not exactly a tailor-made pitch to the millions of Australians who do earn wages and do not think themselves slaves.

That is to say, there’s going to be a fight about this, maybe even an ugly one. Neither offering is a perfect solution to the problem with Australia’s income tax system. But an argument over something is better than the nothing we’ve been stuck with for a while.

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