I am very pleased to have this opportunity to make some opening remarks to the Business Tax Session of the forum.
The central question this session has been asked to address is ‘what is the appropriate business tax system for Australia to maintain business tax revenue and economic growth?’
The question is well framed and goes to the heart of the role of the tax system: How do we raise enough revenue to pay for services and support the social safety net? and How do we do this in a way that allows the size of the overall economic pie to grow?
On business tax, let me start by saying that Australian businesses know we have an obligation to contribute to the revenue raising task of the nation.
But – along with the rest of the community – we want to know that our taxes are being well spent.
Business also believes that revenue should – to the extent possible – be raised in a way that doesn’t hold back the economy.
This is important because a strong and growing economy will do much of the heavy lifting when it comes to meeting the longer-term fiscal challenge unfolding for Australia over coming decades.
Once you add the spending pressures faced by the states to those of the Commonwealth, that challenge is daunting and beyond the scope of the tax system alone.
Before I go to specific business tax issues can I make a couple of points about broader tax reform.
In two days we are not going to nut out detailed tax policies. But we should aim to agree on a few critical things.
First, we could agree that tax reform is an essential element of averting the unfolding fiscal crisis that will not be addressed by our current tax or expenditure arrangements.
Second, we can agree on a 10-year comprehensive approach, with all taxes and all options on the table and identify some clear priorities to tackle first; recognising there will be competing needs.
Third, we can agree on some principles which are well documented – efficiency, equity, simplicity and so on – and recognise there will be trade-offs amongst them.
Our view is that the most important principle is the capacity to raise sufficient revenue but through a system founded on a broad tax base with low tax rates.
Finally, we can agree on the kind of independent institutions that could help progress long-term tax reform, and tackle things that might otherwise go into the too hard basket.
So in turning to specific business tax issues.
The priority must be to focus on changes with economy-wide effects that support productivity, growth and competitiveness.
Let me go first to corporate tax.
Reductions in corporate tax can help boost overall investment, improve productivity and spur inflows of foreign investment.
I appreciate some people will say that Australia is experiencing an investment boom and we don’t need to lower company taxes.
But we need to take a step back and look at the complete picture. Latest ABS figures show that while mining investment is growing strongly, in the combined non-mining sector, it is declining.
The best thing that can be done is to assist every business in Australia by pulling out all stops to make the economy as competitive as possible.
This means lowering the regulatory burden and lowering the tax burden on businesses, to reduce their costs. A lower tax burden means not just a lower company tax but the abolition of other inefficient state transactions taxes, like stamp duty and insurance taxes.
Lowering the company tax rate to stay competitive is not a ‘race to the bottom’. In Australia’s case it’s more like a ‘race to the middle’. Aiming for a 25 per cent company tax rate – as recommended by the Henry review – barely gets us to the average of our trading partners.
But in pursuing lower tax on corporate investment, we do have to be realistic.
The reforms that are needed will involve trade-offs.
If we are to lower taxes on capital – which we believe will help improve productivity in the economy – then we’ll have to find ways of replacing any lost revenue.
There is scope for businesses to fund part of this by giving up certain concessions but this needs to be part of a comprehensive approach.
The timing of any reductions in corporate tax will have to be subject to the economic and fiscal circumstances, and should be taken over time.
So in overall terms, improving tax arrangements for business essentially comes down to two choices:
We can fundamentally change the way we tax businesses by moving to expenditure taxes (such as the allowance for corporate equity) and cash flow taxes. These sound good in theory but they are untried.
Or we can try and make the existing system work better.
One way of doing this would be through incremental changes like streamlining capital allowance arrangements and improving the treatment of tax losses.
Another way of improving the current system involves more significant change by broadening the base and lowering the rate of corporate tax.
All of these ideas have merit. All of them should be looked at and this should be done in the context of broader tax reform.
We have to approach this task with a clear focus on our central objective: a strong future economy afforded by productivity growth and competitiveness.
And we need a process most likely to achieve that objective. Tax policy can’t be rushed and the processes, including consultation, must be open and thorough.
In terms of a way forward, let’s not allow ourselves to get bogged down in the finer detail over the next two days. Arguments over winners and losers at this time will be counter-productive.
Instead, we should aim to agree that it’s in all our interests to improve the tax system in a way that will raise sufficient revenue and in a way that doesn’t hold back the economy.
The opportunity over the next two days is to find the areas of common ground not the points of difference. We all want to preserve our social safety net and our living standards.
Let’s agree that we need to start a process now that will gradually and carefully improve Australia’s tax system over the next 10 years.