The Australian 18 January 2016
“Tax reform” has become an opaque, insider term.
Few people know what it means or that change could create a faster growing economy, more investment, more jobs, higher wages, and improved public accountability.
As Reserve Bank Governor Glenn Stevens said last year: “Reform is a word that excites the intellectual elites and interest groups, but doesn’t do much for the general public. People are more likely to grasp a conversation about economic growth. Growth in jobs, in incomes, in standard of living, wealth and prosperity.”
In a globally competitive environment, we need a 21st century tax system.
So how can “fixing the tax system” solve our economic problems? The problems are clear.
The Intergenerational Report found our living standards are falling. We are losing investment and jobs offshore. The recent Global Competitiveness Report from the World Economic Forum shows Australia sliding to 21st place. The report cites Australia’s tax system as the single biggest drag on our competitiveness.
Australia’s productivity growth has languished for more than a decade: the RBA and Treasury have both downgraded their view of how fast the economy can grow, and the budget deficit is yet to be reined in.
The FSC has presented the ambitious package Australia needs. This is a 22 per cent company tax rate, lower, flatter and indexed personal income taxes, abolition of stamp duties and fully funded by a higher, broader GST.
There are six key benefits of the FSC’s productivity enhancing, revenue neutral tax package costed by KPMG: (1) higher GDP, (2) more investment, (3) more jobs, (4) higher wages, (5) a system which drives accountability and (6) is fair for all Australians.
First, Australia’s economy will be 2 per cent bigger. KPMG’s analysis shows higher GDP drives stronger capital and labour usage output. Higher GDP means a bigger pie — more opportunities and a stronger Australia in every sense. It also improves budget sustainability, better positioning governments to meet health, education and social services costs as our population ages.
Second, investment skyrockets under this package. KPMG’s modelling finds investment rises by 3.7 per cent. Around half the boost in investment is new foreign capital. The simple fact is a high company tax like Australia’s increases the cost of investment. Reducing the rate to 22 per cent means projects in Australia become more attractive to investors. To increase investment in Australia, we need more foreign capital. We have relied on it since 1788.
Third, KPMG finds a flow-on benefit from a larger economy, predominantly driven by investment, is tens of thousands of new jobs. Many new jobs will be in the services economy as our competitiveness increases.
Fourth, there will be higher wages. The larger pool of capital provides more capital per worker so we become more productive. This in turn increases real wages.
Fifth, public accountability will improve by indexing the personal income tax scales. As the Intergenerational Report found, Australia is developing champagne tastes on a beer income because our population is ageing and tax base is getting smaller. Our ageing population, spending habits and 1950s tax system have created a structural deficit.
Unfortunately, fixing the tax system will not immediately improve the budget position. We also need spending restraint. Canberra has been relying on the easy money of bracket creep to fund new initiatives. The Treasurer has rightly called bracket creep “Australia’s silent tax.”
Without change, by 2016-17 an average wage earner will be on the second highest income tax rate. That’s why indexing the tax scales is the most credible solution. Yes, this was tried in the 1970s and it didn’t work in a period of incredibly high inflation.
If virtually every government payment is indexed, why not index the revenue? Not doing so means we will have more bracket creep issues in five years and another reform malaise will subject middle Australia to even higher marginal income tax rates. This reduces accountability and the sustainability of these changes.
Finally, we cannot fix the tax system without being fair to all Australians. Increasing the GST is the cleanest way to reduce our incredibly high personal and company income tax burden.
Our direct taxation rates are too high and we need a tax mix switch. Corporate and personal income taxes account for 58 per cent of revenues in Australia, compared to an OECD average of 33.6 per cent.
Clearly, lower income earners must be compensated under a higher and broader GST. In our modelling, the lowest quintile and second lowest quintile are respectively $683 and $562 better off as a result of these changes, including compensation. Ultimately, the growth dividend will create a stronger economy which is fairest for all.
The movement of three billion people into the Asian middle class by 2030 should not encourage complacency. Australia cannot open the door and expect the money to fall in. Our competitors are constantly improving their business conditions to attract investment, enterprise, jobs and growth.
Capital is mobile and we must apply this global lens as we talk about fixing the tax system.