The Parliamentary Budget Office report into Australia’s future tax base paints a picture of declining revenues and increasing demands on the public purse.
Changes in Australian society and demographics are impacting on the tax base and putting an increased burden on those who pay personal income tax, according to a report from the Parliamentary Budget Office (PBO).
A combination of the ageing population and trends such as more fuel-efficient vehicles, the decline of smoking and the popularity of wine over beer are all eroding collections from consumption-based taxes, according to the PBO.
The report shows that income tax from workers has increased from 8.6 per cent of GDP in 1971-1972 to 12.6 per cent by 2015-2016, while the contribution from taxes on consumption (the GST and various excise duties) has only moved from 5.3 per cent to 5.7 per cent over the same period.
Contributions from capital, in the form of company tax, have declined as a percentage of GDP from 3.3 per cent to 3.2 per cent.
Australia’s future tax revenues under pressure
Paul Drum, head of policy at CPA Australia, says the PBO report shows that Australia’s future tax revenues “cannot be sustained by an ever-decreasing workforce”.
“By 2045, the Intergenerational Report (of 2015) showed that we will have around 2.7 workers for every five retirees,” says Drum.
“So we will have an ever-decreasing population of workers to support an ever-increasing retired population.”
Income tax revenue falls while government costs rise
Drum pointed out that as people age and retire they not only stop paying income tax but increasingly direct their spending to categories which do not attract GST, such as health and medicines. At the age of 65, a large percentage of the demographic are entitled to a tax-free age pension.
As the PBO report says, “Since the GST was introduced, households have spent progressively more of their income on products that are exempt from the GST.”
Who pays the highest tax burden?
Even among those who are employed, the trend toward the so-called gig economy and self-employment is taking people away from pay-as-you-go taxpaying towards working as sole traders or setting up their own companies.
The growth in this peer-to-peer share economy could increase the volatility in income tax receipts “as well as increasing the scope for tax minimisation,” says the PBO report.
The PBO shows how the consumption tax base, comprising the GST and excises, has stalled.
Less tax from electric cars
More fuel-efficient vehicles have seen the amount of fuel consumed by households decrease from 11.4 litres/100km in 2001 to 10.6 litres/100km in 2016.
Combined with the abolition of indexation on the fuel excise in 2001, which was only reintroduced in 2014, the contribution from the excise has declined from 1.6 per cent of GDP in 2001 to 1.0 per cent in 2016-2017.
Electric vehicles (EVs) are forecast to become increasingly popular over the coming decades, and while this will seriously undermine collections from the petrol excise there has been little discussion on the tax contribution from EV drivers.
“How are governments going to get a road user in an EV to pay for the infrastructure, when at the same time we are trying to encourage the transition?” says Drum.
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Should the GST be increased?
Australians are drinking more wine than beer than in the past, but the report shows that while full-strength beer is taxed at a rate of A$37.10 per litre of alcohol, wine is taxed at around half that at A$17.60 per litre.
Hikes in the tobacco excise rate have propped up its contribution to revenue, from 0.6 per cent of GDP in 2001-2012 to 0.7 per cent in 2016-2017, but with the percentage of daily smokers in the population falling from 22.4 per cent to 14.5 per cent over this century, this source of tax revenue is also not sustainable.
All of this, says Drum, should prompt a discussion about a broad-based consumption tax and increasing the GST from the current 10 per cent, and also potentially broadening the GST net.
“The report amplifies a problem which is not going away, but there seems to be a lack of political appetite to embrace the challenge head on,” he says.
“And even if there was the political will from government, we have become used to the difficulties in the process when the federal government doesn’t control both houses of parliament.
“We have an election coming, and it’s difficult to picture that either party will be coming out with a grand plan to address the issues in this report, which highlights some very real long-term structural issues.”
Government tax cut proposals
Both major political parties, in fact, have programs to reduce tax.
The PBO report says that bracket creep among income tax payers has been one factor in increasing their burden, and while this could be addressed by the Coalition’s tax plan for a flatter tax structure it is unlikely to shore up the wider tax base in the long term.
“Unless we can think of some new rivers of gold then none of these issues are going to go away,” says Paul Drum.
“Our view at CPA Australia is that it would be better to do something about this before it becomes an even bigger problem.”
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