Australia's Inevitable Reforms

05 May 2006

The Wall Street Journal Asia

By Michael Chaney
Business Council of Australia

MELBOURNE – Australia's economic expansion is powering ahead, thanks to the current government's continuing commitment to free-market reforms. But there's one crucial leg that's missing: comprehensive tax reform. There's no better time to address this issue than now, when economic growth is healthy and business booming.

The Australian tax system and its relatively high rates haven't impeded economic expansion – yet. Australia is enjoying a record 14th consecutive year of growth, accompanied by all-time high employment levels. Much of this wealth creation can be attributed to the 1980s market liberalization and reform program which opened up the economy to trade and investment. This has been expanded on by the nation's current leader, Prime Minister John Howard.

But relying on past reform isn't enough to keep Australia competitive, particularly at a time when governments around the world are reviewing their tax regimes to attract more investment and skilled workers. The Business Council of Australia (BCA), which represents 100 of the nation's leading corporations and which I chair, is lobbying the government to undertake a new program of major reforms to refresh key areas of the economy where we risk losing competitiveness. We are particularly concerned that there is no overarching plan or vision for Australia's tax system.

Consider Australia's competitiveness in two areas: Its relatively high corporate tax burden and the high marginal tax rates on skilled workers. A recent BCA study showed Australia's overall corporate tax burden, a measure of the total tax take paid by companies, was higher than a wide range of competitors including the U.S., U.K., Japan, Singapore and both the Organization for Economic Cooperation and Development and European Union averages. Australia's corporate tax burden as a percentage of GDP stands at 5.3%, far higher than the U.S. at 1.8%, the U.K. at 2.9% and Japan at 3.1%.

Similarly, although Australia's personal tax levels have come down since the reforms of 2000, the top marginal rate of 47% is higher than the top rates in many countries with whom Australia competes for global talent, including, most notably, the U.S and the U.K. While the income threshold for Australia's top rate will increase to $125,000 from $95,000 on July 1, it will still cut in at a lower level than a number of Australia's peers.

The government isn't standing still. In February, Treasurer Peter Costello announced a review of Australia's tax system, to gauge its competitiveness with nations in the Asia Pacific region and further afield. This is a welcome step and follows major reforms to taxation over the past decade, including the introduction of a goods and services tax in 2000 -- an overdue step to modernize Australia's tax base. These changes were also accompanied by welcome personal and corporate tax cuts. As significant and worthwhile as those reforms were, the BCA is concerned that Australia cannot stand still, nor rely on an ad hoc approach to tax reform. Mr. Costello's review, which has confirmed that key areas of the Australia's tax system are not competitive and need immediate reform, provides the conceptual groundwork for a program of more comprehensive and sustained reform.

A more comprehensive approach would include ongoing analysis of how Australia's regime compares to global trends in tax changes, not simply whether the current tax rates are competitive today. It must also include a serious attempt to remove some of the complexities and inefficiencies in the existing system. This may include simplifying the wide array of Australia's personal tax deductions and removing barriers to saving, among other things.

Given the increasing importance of a competitive tax system for Australia's ongoing prosperity, the absence of a strategic reform agenda is not an option. Tax reform is never easy, but putting off changes needed now or failing to anticipate future challenges will only make inevitable reforms harder in future.



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