Case for Australian tax reform builds

The OECD’s annual report shows that the total income tax burden on the ­average worker in Australia is now 23.2%. This compares with an 14.9% average among the 38 member nations of the OECD. This has made Australia the fourth-highest income-taxing nation among OECD members, behind Denmark, Iceland and Belgium.

Bob Breunig from the Australian National University has emphasised the need for changes to Australia’s inefficient tax system, believing the new federal government should spend its first term in office building a popular case for productivity-enhancing changes to the tax system.

From The Australian:

Professor Breunig said the new and future governments needed to address “the long-term challenge of our inefficient tax system, which everybody knows about: the OECD keeps pointing it out, the IMF keeps pointing it out, as did the Henry review”.

“We have a very inefficient stamp duty regime and a very heavy burden on economic ­activity through corporate and personal tax. At the same time, we have this growing wealth disparity, which we don’t do anything to tax,” he said. “Taxes that help people to be mobile and encourage people to work are really important. Some of the gains are pretty small, but over 20 years these small gains ­accumulate a lot”…

Professor Breunig said if given one opportunity for tax reform, he would “put in a federal land tax with a very low base”.

There’s no doubt that Australia’s tax system is too reliant on personal income, which will only grow over time with bracket creep, alongside the erosion of indirect taxes like fuel excise.

What Australia really needs is a comprehensive tax reform package that broadens the base and shifts the tax burden away from productive effort.

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 (just not in isolation).

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.

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 last in Government upon the release of the Henry Tax Review, but blew it. And the previous Coalition Government did the same thing by abandoning its Tax White Paper process and throwing its support behind a narrow cut to company taxes and personal taxes for higher income earners.

To add further insult to injury, the election campaign saw a raft giveaways to retirees, backed by both sides, which will narrow the tax base even further.

Politicians from both sides need to band together and support comprehensive tax reform that balances efficiency with equity. This is one of the most important structural economic reforms that our governments could undertake.