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.