Institute of Public Accountants (IPA) has once again called on the government to deliver holistic tax reform. You may be thinking, so what, haven’t we all heard it before? says Wayne Debernardi General Manager, Public Affairs IPA.
The reality is that true reform in Australia has stalled. This is partly due to the fact that most tax discussions have been the subject of political trench warfare. Further, change is unlikely unless a government has the necessary numbers in both houses of the Federal Parliament to successfully shepherd through reform.
In 2010, we had the release of the Henry Review into taxation followed in 2015 by the Rethink paper on tax reform. Keep in mind, the Henry Review’s scope did not include GST so achieving holistic reform without all components of the tax mix in play was never going to happen.
The tax system was already failing to address a changing pre-COVID-19 economy and was seen as holding Australia back in fulfilling its economic potential. The tax system is a key lever that the Government has at its disposal to reinvigorate a much-needed growth agenda.
For a long time, tax reform has been stated as a key part of successive government’s policy agenda to build jobs, growth and opportunity. Sadly, there has been little progress to date.
There is an even greater need to reform our tax system to manage the road to a post-COVID-19 recovery. Prior to the pandemic, Australia was in a relatively good position fiscally as compared to many OECD countries; relatively low government debt; and a Commonwealth budget almost back in surplus. Yet, we have a tax system ill-equipped to manage a downturn given the reliance on personal and company tax at the Commonwealth level and property transactions at the State level. Australia has a high reliance on income taxes, including company income tax.
Around 60% of the Commonwealth’s tax receipts come through personal and company income taxes, nearly twice the OECD average.
The increase in unemployment (even with JobKeeper subsiding wages), and even further expected weakness in wages growth, suggests that personal taxes will not provide a stable or growing base for the Commonwealth for many years.
The base and rate of our GST will also hamper the Government’s ability to make up for any lost revenue from direct taxes on personal and company taxes. The percentage of consumption on which GST is payable now stands at around 47 per cent due to exemptions on food, education and health. GST exemptions now disproportionately benefit higher-income households. To enable governments to support the economy back to health requires rebuilding the tax base with efficient growth-supporting taxes.
With additional government expenditure to support the economy, governments will be challenged to reinvent their tax systems without stifling economic growth and will need comprehensive tax reform. The COVID-19 pandemic has now exposed an ill-equipped tax system to support the recovery process.
An effective taxation system should be premised on achieving:
- fairness – or ‘equity’ as between taxpayers, with respect to ensuring that taxpayers in similar positions bear tax at the same level, but also that tax is borne at a level commensurate with the taxpayer’s ability to pay;
- efficiency – that is, the system should not encourage the distortion of economic decisions; and
- simplicity – the system should be relatively easy to understand and place a low administrative burden on taxpayers.
Different layers of Federal and State taxes increase complexity. There is a raft of inefficient taxes imposed by the State Governments (and each subject to its own legislative regime and rules). Taxes such as stamp duty and payroll tax are distortive and will often discourage business transactions and wage growth, respectively. It has been well documented that 90 per cent of total tax revenue collected by Australian governments, was derived from only 10 of the 125 taxes paid by Australians each year. Conversely, 10 per cent of tax revenue was contributed by the remaining 115 taxes.
Wholesale and well-considered structural reform of Australia’s taxation system is likely to provide an efficient way to manage Australia’s road to fiscal recovery in a post-COVID-19 world. The global environment is similarly impacted so we can expect pre-COVID activity to take years to recover to previous levels. The need to rebuild our own economy and the unprecedented expenditure used to fund Government stimulus packages requires a sustainable tax base.
At the time of writing, we are less than a month out before the Government hands down its Federal Budget and there is much talk of personal income tax cuts. I hear no talk of appetite for holistic tax reform. It is time to be bold and unshackle the economy from the restraints imposed by our current tax settings.
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