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”.

Tax-to-GDP shares

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.

Unconventional Economist
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  1. PalimpsestMEMBER

    Oh yeah. Like as if us Boomers would support that. We were asked four years ago if we wanted an efficient economy or a personal money grab. The ALP went into PTSD over the answer.

    • It is more complicated than that. Shorten’s parent visas would have loaded hundreds of thousands of elderly people who have not contributed onto our overstretched health care system. Extra resources cannot be magicked up overnight, and it would have meant much higher private health insurance premiums. Their franking credits policy would have hit low-income pensioners (until they changed it) and other people such as stay-at-home mothers who happen to own a few shares. If you want to be hated, just try taking $500 off someone on a low income.

      I think that opposition to the negative gearing and capital gains tax reforms on housing was not particularly important. Only around 8% of Australians own even one investment property, and plenty are resentful about high rents and high prices for housing due to investor competition.

      • Always an informed response from you. Thoughts on your models, both blue-sky ideal and realistic?

        • Sorry, Ginger. I studied science, not economics, so my opinion on the best way to do tax reform probably isn’t worth much. I don’t have much confidence that Labor will end the rorts by the rich and the multinational corporations or use taxes to reduce house prices down to a sane level, but we can hope. My dearest wish is to have politicians who accept that unlimited economic growth and unlimited population growth are not possible on a finite earth.

  2. Add to this the subsidies the Gov will now throw at climate change, and the increased cost of power, and then lets see how they vote next time.
    the money cost doesn’t matter attitude needs to stop somewhere.

  3. Land tax instead of stamp duty rewards those living in the highest of high-rise and punishes those who keep a bit of nature. If we need more poorly built towers, urban flooding, wind tunnelling and less trees, privacy and natural light ..sure..

  4. They need to change a few rules
    franking credit refunds disallowed.
    all money in super past age 65, pays tax at the accumulation tax rate, i.e pensions pay tax on earnings, not pension income.
    max of $5,000 depreciation allowance, to limit investors hold over the prop mkt.
    flat 5-10% tax on rev re international companies.

    • It would be better to do like most OECD countries and fully tax withdrawals from superannuation as normal income in the pensions phase rather than taxing in the accumulation phase (up to a reasonable benefit limit). We could change over by giving people a tax credit for taxes already paid in the accumulation phase.

      This would eliminate the rorting by rich people and not hurt people without much in the way of wealth or income. Agree about ending rorts in the property market and by international companies.

  5. working class hamMEMBER

    Tapering, loopholes and enforcing is where the Aust Tax system fails the most.
    Instant asset write-offs that help micro businesses and sole traders, become a rort when divisions of much larger companies abuse the same rules with complex company structures.
    Tapering the benefits of negative gearing, franking credits, CGT discounts, stamp duty/land tax etc. to a reasonable level, so the average retiree/investor can gain the benefits, without taxpayers supporting multi-millionaires passive incomes. Creating a Tax bracket that captures extreme income and taxes it just as extremely.
    Reducing loopholes by dismantling complex company/trust/company tax structures that hide extreme wealth from their tax responsibilities. Including international corporations that transfer profits between subsidiaries to avoid meeting local obligations.