Australia needs tax reform. The Tax White Paper must become a turning point to again grasp the nettle of reform.
When we consider our national challenges, almost all roads lead to tax. Therefore, failure to carry a decent tax reform package to the next election is not a viable option.
The North Asian free trade agreements of 2014 represent the strongest legacy items of the current government. Trade deals with Korea, Japan and China are broad-based but our tax system is holding back our prospects in these markets.
To capitalise on the trade deals and to prepare Australia for this century’s challenges, we need structural tax reform.
The Tax White Paper process is promoting an open discussion. The fact that all the sacred cows are on the table is a good start.
At a minimum, there are three issues we must address.
Firstly, the tax review must make the public case that the budget cannot withstand the ageing population if the community maintains its expectations.
Australians have high expectations for the Commonwealth to deliver health care, social security, infrastructure and now disability coverage. However, we can not afford the same level of services when our tax base is shrinking.
The number of working aged Australians for every person aged 65 and over will fall from 4.5 per cent today to just 2.7 per cent by 2055. We also rely heavily on personal income tax – it provides 50 per cent of the Commonwealth’s tax base.
Our reliance on personal and corporate income taxes is the second highest in the OECD – at over 70 per cent of Commonwealth taxes. We simply cannot increase these taxes and remain competitive in the Asian Century.
Based on the current spending trajectory, there will be permanent budget deficits of up to 122 per cent of GDP by 2055. Such levels of debt are not conducive to providing community services.
Therefore, the tax review must leave a lasting impression that future government spending will need to significantly reduce.
Secondly, we can not continue with a broken federation where the Commonwealth raises most of the money which the states spend. The states are currently spending $230 billion yet they only raise $130 billion
The vertical fiscal imbalance is terminology that would make most people cringe. In practical terms it means that states are forced to raise their own revenue. Currently they do this through inefficient taxes.
Inefficient state transaction taxes are a drag on the economy of $12 billion per annum and lead to perverse outcomes such as discouraging people from taking out insurance.
There are costs and inefficiencies in our federal system which can be addressed.
Thirdly, Australian business should have a competitive footing in the Asian Century.
We must capitalise guaranteed market access to three of our top four trading partners’ markets. We also need to compete for foreign direct investment in an era where capital is highly mobile.
A company tax rate of 30 per cent is uncompetitive for exporters and for inbound foreign investment.
The company tax rate of 30 per cent compares poorly to the Asian average of 21 per cent, many of these countries are our major trading partners.
This problem was identified in the Tax White Paper which states: “Many countries, including the UK and Canada, have reduced their company tax rate in recent years¬ our company tax rate of 30 per cent is now significantly above the average rate of other countries, particularly our Asian neighbours, with whom we compete for foreign investment”.
If this review leaves us with reforms on spending restraint, accountability between the Commonwealth and states and a competitive tax rates, it will count as a structural reform.
Tax reform is hard because it can create losers. But it can be done. We have done it in the 1980s and the 1990s under Hawke and Howard. Both sets of tax changes happened as the Economist Ross Garnaut coined, in the “reform era.”
Reform is now a memory and many of us wonder aloud whether 25 years of unbroken economic growth have made it impossible to carry a community consensus. But this is defeatist, intergenerational buck passing.
Reform is possible and for it to be carried, the community must first understand the problem before any solutions appear.
The lead up to the tax review is encouraging. The intergenerational report laid the groundwork on the demographic shift. Let’s hope we are seeing tax reform in the making.
Andrew Bragg is Director of Policy at the Financial Services Council
