Tax reform is essential

Can important changes be achieved while Australia is stuck on the politics of 'nope' instead of 'hope'?

John Hewson

Economics and finance, Government and governance | Australia

25 July 2015

Disagreements over proposed changes to the Goods and Services Tax demonstrate how fiendishly difficult change is, but tax reform remains one of Australia’s most significant policy challenges.

Reform is always difficult, but especially now Australian politics has become so short-term, negative, and opportunistic. Most disturbingly, it seems that if one side proposes some policy initiative, the other side immediately opposes, such that policy ideas never get to be developed, nor debated. It has become the politics of “nope” not “hope”.

It is resulting in poor government, with longer-term issues and challenges ignored, left to drift, or just patched up temporarily.

New South Wales Premier Mike Baird’s call for an increase in the Good and Services Tax (GST) to fund longer-term health services was immediately met with opposition from a couple of his State colleagues, and the Federal Opposition, and engendered, at best, a lukewarm response more broadly.

Yet, our tax system is complex, anachronistic, inefficient, inequitable, distortionary, uncompetitive internationally, and anti-growth, investment and jobs. Tax reform is one of our most significant policy challenges. It has been consistently neutered by short-term politics for decades.

Over these years, tax changes have mostly been ad hoc and piecemeal, more about closing loopholes, and patching up, all of which have increased the complexity of the system, and probably increased its inequity, rather than achieving broad-based reform.

Clearly, it is not just a question of the rate of the GST, although that would inevitably be an element of any broad-based reform. All aspects of our tax system, local, state and federal, need a holistic review and reform.

This is especially so given the simultaneous review of our Federation, which provides an opportunity for a significant restructure of all three levels of government, to allocate responsibilities, once and for all, for policy development and delivery to one level, to minimize the opportunity for the blame game, and to then consider tax reform as the best way to fund the revamped structure.

While undoubtedly difficult electorally, the opportunity calls for a bold tax reform package, as the outcome of a consideration of all aspects of tax – personal and corporate, the GST, the major inequitable concessions (in relation to negative gearing, superannuation, and capital gains), state payroll and land taxes, local government rates and charges, and so on, as well as to address perhaps the need to compensate low income earners, depending on the tax mix changes proposed.

It should also provide an opportunity to reform the transfer system, especially pensions, unemployment, and other benefits, depending on the net revenue generated by the tax changes, and the overall need for compensation.

There are also important issues in relation to what level of government should do the taxing, and thereby the best means to reallocate revenue. For example, from an efficiency point of view, it may be desirable to just have national payroll and land taxes, with the proceeds redistributed to the states, as is done presently with the GST, although there are also important questions in relation to the present formulae for such distribution.

There are real pressures mounting for reform of personal tax, both because of the high top rates, and bracket creep as average income earners are being pushed up the tax scales, thereby increasing their tax burden. The large “tax-free zone” is a significant constraint, forcing higher rates at lower incomes, than perhaps is desirable from the point of view of incentives to work, save, and so on.

The corporate tax system is also under strain, especially recognising the effectiveness of the “tax industry”( that easily facilitates tax minimization, usually one jump ahead of the ATO and the legislators), and the capacity of multinational companies to shift their tax liabilities to low tax jurisdictions.

Perhaps we should scrap profit based corporate taxes altogether, and just have a simple tax as a percentage of corporate revenue?

Finally, it’s hard to imagine a genuine broad-based tax reform, that doesn’t include a broader based GST, at a higher rate. This would be the key to generate enough additional revenue to facilitate the reform of tax more broadly, to fund expenditure commitments, and to compensate appropriately.

Tax reform needs leadership, political and at all levels of our society, emphasising the need for, and the benefits of, such reform, while explaining the individual elements.

This piece was also published by the Southern Highland News.

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One Response

  1. SteveWhan says:

    John Hewson is right about the need for leadership on tax reform, the problem is that almost every participant starts by ruling something out rather than leaving everything on the table. Federal Opposition leaders rule out GST increases before elections, Abbott and Hockey say tax reform is about lowering tax, business says its about reducing inefficient taxes on business (implying support for shifting that load onto consumers) and so on.

    Australia’s tax burden as a proportion of GDP is the 7th lowest in the OECD so in my view we should start the debate by acknowledging (as Mike Baird effectively did) that we need more revenue. As a former State Minister I also recognise that several state taxes are inefficient and ideally should go, but the issue then is that without simultaneous reform to Federal structures we would see an even bigger vertical fiscal imbalance, almost three quarters of state revenue would then be controlled and collected by the Federal Government.

    The real problem we have is the disconnect we have in understanding in the community. We’ve been told for so long that we are overtaxed that people actually believe it, they don’t make the link between needing to pay tax to ensure we can deliver the education that will help us to retain the high wages, and world’s best living standards, we enjoy or to provide the health care we expect. The leadership Mr Hewson is talking about needs to start by getting a strong message across to the Australian people that this is not just a debate about the hip pocket it is a debate about the sort of Australia we want in the future.

    It’s not just about having an ‘internationally competitive’ tax regime, its about how we compete with the world overall, are we competing by being highly educated with good wages or by racing to match the company tax rates in countries that invest far less in their people?

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