OECD

THINK GLOBAL ON TAX REFORM

Think global, not local on tax reform

Australian Financial Review - 10 November 2015

A global perspective is required to fix Australia's tax system. As a trading nation, this should be obvious.

But we risk allowing introspection and internal bickering to compromise one of the core objectives of tax reform – to improve Australia's competitiveness in the Asian century. To lift our competitiveness, which is code for more investment and employment, reducing the company tax rate is an essential component of any tax reform package.

Increasing the GST and ploughing the proceeds into unindexed income tax cuts and spending commitments will not pass as structural tax reform. Our growth-retarding company tax must be in the mix for the tax white paper to be a genuine reform endeavour.

Two ingredients are necessary for this to happen. Firstly, the problem we are trying to fix must be explained as the potential community dividend of changes is outlined. Secondly, the business community must stop running scared from advocating good policy, and state premiers must rise above provincial concerns.

The problem starts with our 1950s tax system, which has become a great inhibitor of competitiveness. Australia's company tax at 30 per cent is high in OECD terms and very high in Asia.

Compared with the Asian average rate of 22 per cent for companies, it is one of the main reasons Australia continues to fall in the global competitiveness indices. The latest World Economic Forum Global Competitiveness Report cites tax as the single biggest drag on our competitiveness.

We come in at 21st place, well behind similar nations such as New Zealand at 16 and Canada at 13. Both have lower corporate tax rates than Australia. We live in an age where capital and labour have become increasingly mobile. At a minimum, we compete with our Asia-Pacific neighbours for investment and job creation opportunities.

The Opposition Leader is on the right track when he says we should have a 25 per cent rate. Indeed, we should be targeting 20 per cent. The deeper we head into this century, the services sector will only become more important to our national prosperity.

Seventy per cent of our economy is in services. Unlike "bricks and mortar" manufacturing, the services sector is nimble and it will invest and create jobs in the best business environment possible. The financial services industry provides numerous examples where investment and employment opportunities disappear to competitors such as Singapore or New Zealand.

Both of these nations have achieved substantive tax reforms and provide a competitive tax environment. It is much easier to move a component of the services economy offshore, such as a trading desk, accounting function or a legal team, whereas a car making plant cannot easily be transplanted.  

We are not Robinson Crusoe in cutting company tax. A significant economic dividend accrued to Britain which has reduced company tax from 28 to 20 per cent in just five years.

British Treasury modelling shows the tax reductions are increasing investment by up to 4.5 per cent and GDP by 0.8 per cent. But the business community has barely started explaining why a high company tax rate will slow Australia's growth in this century.

Business Council President, Catherine Livingstone said in early November: "While absolutely recognising the critical importance of personal income tax reform, the experience of other countries has shown that nothing will stimulate innovation and growth more than a reduction in the tax rate for all businesses, as part of a broader tax reform agenda … " 

Amen. Business must continue to counter views  that cutting company tax is "rent seeking". Previously, this job had fallen to former Treasury Secretary Martin Parkinson, who at the national reform summit stated: "(As for) company tax cuts, about half the benefit ends up in the hands of workers because it helps stimulate growth and create new jobs, it creates opportunity for people to get jobs."

This discussion needs to occur in circles beyond the peak business group and former Treasury officials. There are over two million businesses in Australia, not all are incorporated but all face a similar fate of sagging competitiveness. It is incumbent on the premiers to lift above the domestic fray and focus on external competition.

While it is understandable they are immediately focused on their own budgets, a longer term view reveals they too need a lower company tax rate. More employment means more economic activity and more revenue to be collected by the states as the rising tide lifts all boats in our federation.

Without a global lens for tax reform, we risk exporting investment and jobs rather than goods and services. 

Andrew Bragg is director of policy at the Financial Services Council.

http://www.afr.com/opinion/think-global-not-local-in-the-great-tax-debate-20151109-gkuacn

WE NEED BIGGER, BROADER GST

We need bigger, broader GST

The Australian 13 July 2015

The tax system has three major problems – it is unsustainable, inefficient and it reduces our global competitiveness.

Australia is already a relatively high taxing country so raising taxes is not the answer. Rather, we need to fix the tax mix.

Of the OECD nations, Australia ranks second in its reliance on company and personal taxes. We also have one of the lowest and narrowest consumption taxes. This mix of taxes will be unsustainable as our population continues to age.

We need a new mix of taxation. This will involve lowering company and personal taxes, broadening and increasing the GST and abolishing inefficient state taxes. 

This cannot be achieved without the states. The Prime Minister's leader's impending retreat with the state Premiers is a unique opportunity as it occurs in the midst of a tax review. Continuing reformist leadership by the Premiers of NSW and South Australia will be essential to achieve tax reform.

A new tax mix will boost the sustainability and efficiency of our tax system and our national competitiveness.   

Reliance on company and personal taxes as the major source of revenue is unsustainable as our society ages.

Personal income taxes currently provide 50 percent of the Commonwealth revenue base. By 2055 this will be significantly diluted when  there will be half as many working-aged, tax paying Australians as we have today.

Our expenditures, however, will not diminish.

According to the recent Intergenerational Report, cumulative budget deficits will see net debt balloon to 60 per cent of GDP by 2055 – an unsustainable debt.

But we continue to lock new expenditures onto a fragile tax base. Without changing our budget trajectory, Australia will be unable to fund worthy concepts such as the National Disability Insurance Scheme (NDIS) – which will grow at 46.2 percent per annum from 2013-14 to 2023-24.

The inefficiency of Australia’s tax mix stems from our federal structure where the states are hemmed in by their funding gap – they raise $100 billion less revenue than they need to spend on schools, hospitals and roads. 

Aside from relying on a multitude of confusing grants from Canberra, the states close the funding gap by imposing inefficient, distorting taxes such as stamp duties on property and insurance.

While NSW Premier, Mike Baird recently acknowledged the inefficiency of some of these taxes, the states remain too narrowly focused on raising revenue to notice the drag these inefficient taxes impose on business and consumers.

Stamp duty on insurance is one of the most damaging taxes. The Victorian Government, for example, recently created a new insurance tax – a 10 per cent annual on disability insurance.

This discourages insurance coverage which will lead to higher demand for the Disability Support Pension and NDIS.

Our global competitiveness is also impacted by our tax mix which impinges our companies even where we have free trade agreements.

This is because our 30 per cent company tax rate is uncompetitive for exporters and for inbound foreign investment.  It compares poorly to the Asian average of 22 per cent.

The UK, Japan and New Zealand have embarked on significant company tax cuts and tax mix changes. Singapore and Hong Kong have long had nimble, competitive tax systems.

The UK has reduced company tax from 28 to 20 per cent in just five years. These have been positive reforms for the UK economy. Modelling by the UK Treasury shows the tax reductions will increase investment by up to 4.5 per cent and GDP by 0.8 per cent.

So if company and personal taxes as well as state insurance taxes are cut, which would cost the states around $6 billion per annum, where will the revenue come from?

This is where the GST comes in. And while the politics of GST reform are undoubtedly hard, there are signs that the community understands the status quo is not sustainable.

Australia has one of the lowest and narrowest consumption taxes in the OECD. At 10 per cent, it is in fact the fourth lowest compared to the OECD average of 19 per cent.

Our GST accounts for just 47 per cent of goods and services whereas New Zealand’s covers 90 per cent.

If we built in compensation for low income earners, a 15 per cent GST with a broader base would deliver $42 billion in additional revenue in 2015-16. This would allow us to significantly reduce direct taxes.

Sustainability, efficiency and competitiveness factors cannot be addressed without cooperation from the states as they receive the GST revenue and must abolish transaction taxes.

The culmination of the leader’s retreat, and the tax and federation white papers, present a rare opportunity for Australia to fix the tax mix.

Andrew Bragg is director of policy at the Financial Services Council

http://www.theaustralian.com.au/opinion/gst-reform-needs-to-be-bigger-broader/news-story/e4c754fad51f34c1c53da045c6e0feb5