Liberal Backbencher: Give us broad-based tax reform

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By Leith van Onselen

One of the positive spill-over effects to come from Senator Tim Storer’s blocking of the Turnbull Government’s company tax cut package is that it has shifted the focus back towards comprehensive broad-based tax reform. The latest example of this change in narrative came yesterday from Liberal Backbencher, Tim Wilson:

Liberal MP Tim Wilson believes there needs to be “dramatic reform” to build an economy for the 21st century rather than relying on a tax system anchored in the 1950s.
“The costs associated with an ageing population are quite dramatic and the number of people we are taxing to support it is narrowing,” Mr Wilson told Sky News on Monday.

“That’s not sustainable, so we have to look at broad-based tax reform”…

Nearly three-quarters of the federal government’s tax base is generated from income tax, which means working age people are going to be continually hit hard.

He said every tax needs to be on the table for discussion, including the GST.

“Not just the tax but who’s paying it and critically at what stage of life,” he said.

Last month independent senator Tim Storer held off supporting the coalition’s business tax cut until the government agrees to broad tax reform.

Helleluyah. Some sense at last from within the Turnbull Government.

The below chart from the Australian Treasury is a bit dated but shows how Australia is just as reliant on income and profits taxes as it was in the 1950s, and will become more so over the coming years as bracket creep (aka “fiscal drag”) increases workers’ tax burdens:

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ScreenHunter_4151 Sep. 11 14.04

Of course, wages growth has been lower than initially projected, so any bracket creep would be slower than anticipated above. But the central point still remains.

To date, the Turnbull Government has only proposed piecemeal ad hoc changes to the tax system – namely cuts to company and personal income taxes – when what Australia really needs is a comprehensive tax reform package that broadens the base and shifts the tax burden away from productive effort.

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A broad-based package should include a combination of income tax cuts, measures to improve the interplay between the tax and welfare systems, broad-based land taxes, consumption taxes, unwinding inefficient and inequitable tax concessions, rationalisation of state and federal taxes, further measures to prevent multinational tax avoidance, and even company tax cuts.

The important thing is that the package is comprehensive so that the overall tax base is broadened and built around more efficient and equitable sources.

But to do nothing and rely on never-ending increases in personal income tax via bracket creep, while the base of workers shrinks as the population ages and the proportion of retirees rises, is neither efficient, equitable or sustainable in the long-term, and will ultimately lower Australian living standards, especially for the younger generations.

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It is also important that the Commonwealth’s share of revenue is reduced and the states’ increased so that their revenue and spending responsibilities are brought into line, thus ending the large vertical fiscal imbalances that have dogged the nation since the Commonwealth took over responsibility for income taxes in World War 2.

Unfortunately, Labor had a golden opportunity when it was in Government upon the release of the Henry Tax Review, but blew it. And this Government has done the same thing by abandoning its Tax White Paper process and throwing its support behind a narrow cut to company taxes and more recently personal taxes.

The only positive is that the political focus is now be shifting back towards the need for a comprehensive tax reform package that carefully balances efficiency with equity. This offers us hope that meaningful tax reform is still possible in the future.

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About the author
Leith van Onselen is Chief Economist at the MB Fund and MB Super. He is also a co-founder of MacroBusiness. Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.