Australia’s Prosperity Rides on Tax Revamp

28 February 2006

The Age
28 February 2006

By Katie Lahey
Chief Executive, Business Council of Australia

Just another tax review, or the start of fundamental tax reform? That’s the question being asked in the wake of Treasurer Peter Costello’s announcement on Sunday of a major review of Australia’s tax system.

From the perspective of the Business Council of Australia, the announcement is a positive, if not brave, initiative. Positive, because after months of debate and shared concern among business, politicians and the media that the tax system is losing its way, a major review is overdue.

Brave, because expectations are high that the review can only result in one outcome: major changes to the tax system’s rates and structure.

The most positive aspect of the review is that it has been framed around the key question that many in the business community have recently raised: is our tax system competitive with the rest of the world?

This is a basic question for the prospects of any modern economy. The tax system takes in a third of Australia’s total income. Its influence on the country’s economic direction – from business and personal investment to decisions to enter the workforce – is profound.

Electing to do nothing, or being content to point to current prosperity rather than addressing the risk of declining competitiveness, is a recipe for inevitable decline. But a fundamental shift in tax policy could help lock in Australia’s prosperity for the long term.

Elevating the competitiveness of the tax system as the core issue of this review should be recognised as a significant improvement on the usual tax debate around tax cuts in the budget, who should get them and how much.

The “competitiveness” framework of the review is important because it implicitly recognises that in a global economy, governments around the world are in competition with each other to attract jobs and investment.

Because both capital and labour are increasingly mobile, governments cannot be wedded to tax structures and rates – or define tax reform simply as a continual round of short-term tax cuts - without considering the impact on their economies’ competitiveness internationally.

Detailed analyses by the BCA and others interested in the debate demonstrate that in a number of tax areas we are simply not competitive.
This declining competitiveness has an impact on issues that go to the continuing success of Australia’s economy.

Our personal tax rates are too high in comparison with other countries, particularly in higher-income brackets where lower rates are imperative if we want to attract and retain highly skilled workers.

While Australia’s headline corporate tax rate of 30 per cent is often used by business and government as an indicator of tax competitiveness, the total take from companies’ balance sheets is the highest among all Organisation for Economic Co-operation and Development countries, except Norway and Luxembourg.

This is mainly due to government levying a broader base of taxes on companies, with fewer concessions than other countries.

The government’s tax review also needs to look at other issues that go to the heart of productivity and workforce participation, including reducing effective marginal tax rates that discourage Australians, particularly those on welfare, from joining the workforce.

In the short term, the BCA believes the review should result in an initial instalment of tax changes that are needed in the May federal budget to protect Australia from immediate threats to its competitiveness.

These should focus on improving Australia’s ability to retain and attract highly skilled people and increase new entrants to the workforce. There should also be initial measures to boost investment and savings.

In the longer term, the review needs to start on fundamental changes to make sure Australia’s tax structures and rates remain competitive in the longer term.

This requires a detailed examination of Commonwealth–state tax and spending roles and responsibilities, including a major overhaul of state taxes; a comprehensive simplification of tax administration and compliance; and linking tax reform to other areas of the economy, such as infrastructure development, to drive improvements in these areas.

At a time when the costs of outdated or uncompetitive tax policy are magnified by the pace of change, we need to act now to fix the obvious problems and set long-term directions for the most competitive tax structure.

The Treasurer’s announcement of a review is welcome, but the review should not be a one-off.

As the BCA has argued, we need faster, better processes to regularly review and improve areas of the tax system well before they become barriers to competitiveness and growth.

We need to be ahead of the pack in tax, not playing catch-up.



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