Is it time for tax reform?

Some economists insist that reforming the tax system is the only way to pull the nation back from the brink of economic disaster.

As Australia sinks into a deep post-pandemic recession, a number of academics and tax system experts are demanding tax reform be put at the top of the government's agenda.

At a glance

  • Calls for reforming Australia’s tax system have been growing louder as economists ponder post-pandemic economic recovery.
  • Critics argue that the current system is the product of new provisions and ideas piled on existing ones, without consideration of how they relate to different aspects of the law or how they affect economic activity.
  • Another concern is that the tax system is too reliant on personal and company income taxes and places a disproportionate compliance burden on small businesses.

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By Nina Hendy

Australia’s tax system has been called inefficient, complex and unfair by some of the country’s most prominent tax experts, who are pushing for major reforms.

In the midst of a pandemic-fuelled recession, poised to become one of the worst in living memory, some economists insist that reforming the tax system is the only way to pull the nation back from the brink of economic disaster.

That is because, while the current tax system raises the revenue needed to run the country, the structure applied to raising taxes may not withstand the heavy lifting required for economic recovery, let alone growth in the future.

Tax system critics

One of the most vocal critics of the current tax system is Dr Ken Henry, the author of the extensive Australia’s Future Tax System Review, informally known as the Henry Tax Review, who was a key adviser to the government during the introduction of the goods and services tax (GST) in 2000.

Henry is concerned that the current system is overly reliant on personal and company income taxes. He argues that the deteriorating tax system will fail to support the recovery in economic activity from the COVID-19 pandemic, calling for a new tax on business cash flow to replace the GST, payroll tax and insurance systems. He proposes a new system that indirectly taxes consumption and slashes tax compliance for small business.

Reserve Bank of Australia’s Governor Philip Lowe is also pleading for tax reforms in response to the recession, urging state and federal governments to overhaul tax on income generation, consumption and land structures. He also wants further investigation into how infrastructure is priced and built, and how students and workforces are equipped to navigate the modern economy.

Elinor Kasapidis, CPA Australia’s tax policy adviser, says, “Australia’s tax system is complex and burdensome, especially for small businesses. We need a reform agenda to address issues such as adjusting the tax mix, our internationally uncompetitive tax rates and simplifying the system”.

Robert Breunig, director of the Australian National University’s Tax and Transfer Policy Institute, goes one step further, labelling the current system inefficient, complex, unfair and ill-equipped for the 21st century. The system needs to be changed, and our current situation presents a golden moment to do so, he says.

"In any tax reform, the vision must again lift above tax alone. It must also address real needs and concerns as part of a bigger package." Greg Smith, Committee for Economic Development of Australia

“We need to ask ourselves whether it is really doing the job we want, and whether it is up to the demands of how the economy has evolved. The fact is that it is holding us back from more economic growth, which is going to start to matter a lot more due to COVID-19,” Breunig says.

Having worked as a senior executive in the Commonwealth Treasury, Greg Smith has seen the inner workings of the country’s tax system up close. He has led committees dealing with budget, taxation, retirement incomes and financial system policies, and is a member of the Committee for Economic Development of Australia (CEDA).

Smith agrees it is time for major tax reform that is “built on decisions, not slogans”.

“In any tax reform, the vision must again lift above tax alone. It must also address real needs and concerns as part of a bigger package. We need a new employment security contract, a better housing deal, fairer taxes on savings and investments and a guarantee that revenues can meet needs and manage through crises,” Smith says.

Tax lawyer Melinda Peters has recently joined the growing chorus of the tax system’s detractors, describing the current system as being far too complex for small businesses to navigate for even basic financial affairs.

“On the whole, the system is inefficient, encourages distortion and does little to achieve equity between taxpayers,” says Peters, who is partner at McCullough Robertson Lawyers.

The redesign of tax policy should not be a piecemeal approach, but a radical overhaul, she says. “It’s time to take stock and start from scratch. We need long-term structural change that will stand Australia in good stead – not just for the next 12 to 24 months, but for the next 50 years.”

“Even on an individual level, much can be done to simplify the tax and transfer system and neutralise its distortive impact. For low-income earners, or a second-income earner within a family unit, our current system will often act as a disincentive to re-engage within the workforce,” Peters says.

Tax reviews

The Australian Government has conducted two major tax system reviews in the past 12 years, although findings have largely not yet been acted upon.

A decade ago, the Henry Tax Review outlined a raft of opportunities for tax reform, which remain on the table for policymakers.

Five years ago, the Re:think Tax Discussion Paper contemplated a new tax system that supports higher economic growth and living standards. Again, there has been little traction in achieving any real reform since 2015, despite the paper stating that the current tax system was already “holding Australia back”.

The COVID-19 pandemic has shifted the goalposts further still.

“Even with our global environment changing so quickly, many of the ideas from the Henry Review and Re:think remain valid, but would benefit from refreshed parameters and updated modelling," Kasapidis says.

“We need to have a conversation about the GST, as well as the drag of tax on economic recovery. COVID-19 presents the opportunity for tax reform to support economic recovery.”

Breunig says direct taxation should be abolished, for a start.

"We don't want people deciding what to do with their money based upon tax. We want them deciding what to do with their money based upon what's best for the economy." Robert Breunig, Australian National University

“We have a very high corporate tax and personal income tax. We tax things that we want people to do less of. We tax alcohol... because we want people to drink less, but we don’t want less jobs and less economic activity,” he says.

The tax system also needs to address intergenerational inequity, because most of the cost of the pandemic will be paid back by younger people in terms of lost jobs and future higher taxes, Breunig says.

Meanwhile, some savings are taxed heavily, while others are taxed at concessional rates. “We don’t want people deciding what to do with their money based upon tax. We want them deciding what to do with their money based upon what’s best for the economy,” Breunig says.

He is calling for the creation of a bipartisan think tank, with experts from across academia, business, the social service sector and public service to be charged with the task of designing a fairer and more equitable system.

However, the first step towards tax reform is securing support from all tiers of government, which makes already complex negotiations even more is grappling with a pandemic.

What triggers tax reform?

Most tax reformers dream of lower tax rates. However, the “reformed” tax rate must still produce enough money to pay for the delivery of government services the public demands.

The total tax take, from all taxes and tiers of government, is equivalent to 36 per cent of Australia’s GDP. Therefore, tax reform may focus on changing the mix of taxation, rather than reducing taxes overall.

Smith says that the trigger for tax reform is either the system falling over because it fails to raise an adequate amount of revenue, or the system being sufficiently unfair or ill-suited for purpose.

“Genuine tax reform is very hard and only happens rarely,” he says.

Past tax reform has been delivered as part of a broader social deal.

The Bob Hawke/Paul Keating tax reforms of the 1980s closed major tax loopholes while cutting taxation rates. “It increased social benefits and introduced dividend imputation and universal superannuation,” Smith says.

“The Howard GST promised a better deal for state funding of hospitals and schools,” Smith explains.

Kasapidis adds, “Tax is only one part of the equation, and society as a whole must be better off to justify changes. The government will face significant political challenges, such as federal-state fiscal relations, potentially removing valuable concessions or changing entitlements, so it’s important that tax reforms connect with a broader vision.”

Breunig agrees: “The reason tax reform is difficult is that it creates winners and losers. Generally, the people who lose from tax reform will protest very loudly that they’re losing, but tend to have little influence within the political system, where it’s vested interests that are already getting a good deal in the tax system. And then, if you take that away, they will ‘squelch’ very loudly.”

Calls for permanent change to tackle poverty and inequality

The need for tax reform aimed at supporting the most vulnerable

Tax reform could be the solution for the millions of Australians facing unemployment and years of hardship due to the post-pandemic recession, points out the CEO of the Australian Council of Social Service, Dr Cassandra Goldie.

“We know that people on higher incomes are saving money, likely due to ongoing uncertainty, while people on low incomes have no choice but to spend on the day-to-day essentials in order to get by,” she says.

Goldie believes government support will need to remain in place both to stimulate the economy and to give people and businesses the certainty they need to recover. “This will help avert mounting homelessness, mental health and domestic violence crises,” she says.

“Bringing forward high income tax cuts instead of putting in place a permanent, adequate increase to JobSeeker would be a dangerous mistake with lasting and devastating consequences that would drive up damaging social and economic inequality,” Goldie says.

Instead of wasting money on high income tax cuts that may be saved by those in a position to do so, Goldie suggests the government help those who need financial support the most and will spend in the real economy on the basics.

The government should invest in care services, including aged care, as well as social housing and energy-efficient retrofits, all of which are guaranteed to create jobs and deliver important public benefits, Goldie says.

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