Broken tax system needs more than a Band-Aid solution

The problem with tax reform is that Australia’s tax system is fundamentally broken.

Piecemeal reform simply won’t cut it and our political leaders simply don’t have the capacity or the willingness to embrace widespread reform. As such, yesterday’s AFR Tax Reform Summit didn’t offer anything we hadn’t heard before.

Fiscal policy in Australia is a function of two concepts: tax revenues and government expenditure. Without one there is no need for the other, and therefore when we consider tax reform we must address both.

The summit provided clear insight into how limited the debate is and why so few believe genuine reform is possible.

For example, Labor treasury spokesman Chris Bowen was only too happy to embrace a cut to the company tax rate but quickly closed the door on a hike to the GST.

“I would like to see the corporate tax rate come down over time,” Bowen said. “I have previously said the nation should be aiming for a 25 per cent corporate tax rate.”

He is absolutely correct to want a lower company tax rate — it’s a horribly inefficient tax that is ultimately borne by a firm’s employees — but by limiting the available options for reform he is part of the problem. Both Abbott and Hockey showed similar limitations when they categorically shut down talk about superannuation tax concessions.

It is the same limited thinking that has let to our bastardised tax system in the first place. Years of tinkering around the edges — introducing the GST, cutting taxes on capital gains etc — has created a system that is as complex as it is poorly understood.

It’s a system that cannot be fixed via piecemeal reform. We need a sweeping revolution that strips the tax system back to its core elements, identifies how much money the state and federal governments require to provide adequate services, and then determines the most efficient avenue towards raising those funds.

As economist Saul Eslake said yesterday: “Australia’s personal income tax base is like a giant Swiss cheese, riddled with holes that allow people to pay less tax on particular types of income.”

He’s not wrong. According to the IMF, no other advanced economy foregoes more tax revenue, through ‘differential, or preferential, treatment of specific sectors, activities, regions or agents’, on an annual basis than Australia. These decisions — whether they be negative gearing, the capital gains discount or superannuation concessions — are largely arbitrary in nature and can rarely be justified on any sound economic basis.

In other words, there is no advanced economy in the world in greater need of tax reform than Australia. At some point, we lost sight of what is important — providing equality of opportunity, essential services such as health and education, and promoting investment and productivity — and became a refuge for rent-seekers.

The tax debate as it currently stands seems to be a battle between a lower company tax rate and a higher GST. It’s as limited as it is reactionary, and it will do nothing to address the fundamental problems in Australia’s tax system.

The reality is that Australia simply doesn’t raise enough revenue to fund the services that we demand. The existing situation will deteriorate further as the Australian population ages. Spending on healthcare and aged care services will skyrocket in the next couple of decades and both are non-negotiables. Just ask the Coalition, which thought it was a good idea to mess with Medicare.

So the fundamental task for Australian politicians is to come up with a tax reform agenda that allows the public sector to generate more revenue without raising the overall cost to Australian taxpayers. This is possible but only if they place greater emphasis on efficient revenue streams, such as the GST and land taxes, and less emphasis on the likes of income and company taxes and stamp duty.

By virtue of the fact that a GST is a regressive tax (since lower income earners spend a higher proportion of their income on consumption), any increase will need to be offset by further wealth redistribution to protect those who are most vulnerable.

Some people view this as a weakness of the GST, but in favouring a different tax mix they are almost inevitably advocating for a tax system with greater distortions that hurts employment and income growth.

State governments need to be weaned off their reliance on stamp duty, preferably before the next housing downturn makes mincemeat of their state budgets. They have a perfect replacement in a broadbased land tax that could raise the same amount of money, without both the distortions and volatility associated with stamp duty.

Meanwhile, the federal government needs to be weaned off its reliance on income taxes and embrace more efficient revenue sources.

At the same time, we need to close existing loopholes where possible and ensure our tax system creates greater incentives for employment and productive investment. We need to stop being a paradise for parasitic rent-seekers.

The current tax system is a woeful failure of both Labor and Liberal policies and ideology. It’s become a plaything for political hacks who largely ignored the wide-reaching review of the Australian tax system completed by then Treasury secretary Ken Henry back in 2010.

For the first time in two decades, Australia has a prime minister who can adequately explain the need for wide-reaching tax reform to the Australian public. Now we just need a political body that doesn’t aspire to mediocrity and then blame the other guys when it falls short.

Article source: http://www.theaustralian.com.au/business/business-spectator/broken-tax-system-needs-more-than-a-band-aid-solution/story-fng7vg0p-1227540267978