Everyone Wins if We Simplify Tax
11 February 2016
This opinion article by Catherine Livingstone, President of the Business Council of Australia was published in The Australian on 11 February 2016.
Australia needs to take a step back from the polarised national debate we are having about the goods and services tax, and instead consider the role of the tax system and what kind of tax structure best supports the “business model” of the country.
Real tax reform is not a bookkeeping exercise - it is about re-shaping the system to better support our economy to adapt and thrive in the face of major global economic, demographic and technological change.
A company’s business model is based on how it can earn income in a competitive and dynamic market environment - how it allocates its resources to achieve this, and how it can reinvest to create long term wealth and value for its shareholders, staff and customers.
In the same way, the business model for the country should describe how we employ our human and physical endowments to grow the income we earn, and how we invest to support the long term wealth and well-being of the nation and its citizens.
The tax system is an integral element of this business model and how successful it can be, having regard to the challenges and opportunities we face.
Our current position is a concern. The terms of trade are now 30 per cent lower than their peak 4 years ago. Growth in China, Australia’s major trading partner, slowed through 2015, posing a significant risk to Australia’s own growth prospects.
Nominal GDP growth is the lowest it’s been in over 50 years.
Real net national disposable income per capita has been falling for three years. This is the longest period of sustained falls since the 1960s.
Real wages growth is the slowest in over 15 years.
In the vastly more competitive global economy in which businesses now operate, continued success – for business and for the nation - depends on continual investment and innovation.
Last year’s Innovation and Science Agenda reflected the realisation that the next decades of economic growth in Australia must be innovation led. We therefore need to approach tax reform through this lens.
The tax system is either an accelerant or a deterrent to the forces that drive innovation led growth.
It encourages or deters people from embracing new opportunities, from increasing their participation in the workforce, or from participating at all. It encourages or deters businesses from innovating, investing and adding value.
The tax rate really matters at the margin, whether it’s an individual deciding to take on extra work, or a company deciding to make an additional investment.
As it stands, bracket creep means that a person earning $150,000 will pay 11 per cent more income tax in three years’ time. A person earning just $36,000 will pay 27 per cent more.
Australia’s statutory corporate tax rate of 30 per cent compares to an average of around 23 per cent in Asia and around 25 per cent across the OECD, deterring investment in Australia because of the lower after tax rate of return. Not surprisingly, our global competitiveness is slipping, dropping from 15 to 21 in the world over the past six years. In 2014, we were overtaken by New Zealand.
On innovation, we’re ranked 17th in the world, a position which hasn’t improved since 2007.
We also have a narrow tax base where 12 companies, all susceptible to external economic forces, pay one third of the total corporate tax take.
So what does this tell us about the kind of tax system Australia needs: we need a system that imposes far less of a drag on growth - this means lower rates of both personal and business taxes, taxes with a broader base, simpler taxes that have lower compliance costs and greater integrity in personal as well as business taxes.
Australia’s business model also needs to describe how the nation distributes and invests the wealth that’s created by successful, competitive, profitable businesses.
Primarily this wealth flows to Australian households as higher real incomes though more, better-paid jobs and lower prices. It also flows into tax revenue that can be used by governments for the social and public services Australians want and expect - a good social safety net, high quality health and education systems, and capacity building infrastructure.
Tax reform is not about increasing the overall level of taxation. And there must be a clear understanding that tax reform and spending reform are interdependent.
The tax reform challenge is, therefore, whether, and how, we can build a tax system that balances the need to promote growth and raise revenues, and which is also fair and based on capacity to pay.
This challenge has to be addressed in the context of having a national business model.
When we really look at all the options being discussed, we need to ask ourselves whether they are sufficiently transformational – whether they change the structure of the tax system to support the business model.
Incremental changes to superannuation tax concessions, negative gearing or the manner in which multinational companies are taxed could improve the performance of the system, subject to avoiding unintended consequences.
The Prime Minister and the Treasurer have been clear from the start that the goal of changing the tax system is growing the economy and creating more jobs.
What the community needs are the facts on the tax structure, the options for a different tax mix, possible compensation arrangements and the extent to which the overall package could advance our national aspirations.