Boldness Will Put Us on Top by 2012

16 May 2008

The Australian

By Greig Gailey
Business Council of Australia

Everything should be on the table when it comes to tax reform, urges Greig Gailey

Federal Treasurer Wayne Swan’s first budget has made a good start towards realigning fiscal policy with the needs of a capacity-constrained economy.

From the perspective of business one of the most crucial opportunities for reform in Tuesday night’s budget was the inclusion of the terms of reference for the government’s promised “root and branch” reform of the tax system.

This was of course one of the key proposals to emerge from the Australia 2020 Summit last month. As the Business Council of Australia advocated in its submission to the summit, Anticipating Success, one of the most important challenges for Australia is to form a comprehensive vision of where it wants to be in 2020 and put in place a clear plan to get there. A fair, efficient and globally competitive system of taxation must be an integral part of that vision.

The forthcoming tax review provides a once in a generation opportunity to do this, by delivering long-term reforms that underpin our national competitiveness.

So the question we must ask ourselves as we embark on another tax reform adventure is: where can our tax system take us?

Past experience shows us the answer lies in how bold we are prepared to be right now at the start of the review, and how true we can remain to the vision that we set ourselves. Tax reform comes along so rarely that it can be easy to lose sight of the bigger picture as we focus on the minutiae of the reform process itself. The BCA wants Australia to be among the top five countries in the world in terms of living standards by 2012. How can the tax system help us get there?

Critically, we must recognise that tax is not a stand-alone reform. As a key part of Australia’s economic and social policy settings, it can promote – or hinder – progress in every sector of our economy. The right tax settings can boost investment, participation and competitiveness, core issues for a capacity-constrained economy. The wrong settings can hold us back, and undermine much needed progress in crucial policy areas such as infrastructure, education, regulation and innovation.

We know from observing the outcomes of past reforms that the scope is crucial. Calls for tax reform restart every decade or so because past reform efforts have been limited at the outset by political sensitivities and further diminished by piecemeal implementation. Relative to some of these past reforms, the terms of reference released with Tuesday night’s budget are broader than many. It is imperative that they stay this way. It is essential that we put greater equity back into the personal tax system by stripping out the tax/welfare churn that is a serious drain on workforce participation. Simplistic discussions about who is paying the “fairest” share miss the critical point: we all benefit if we reduce the deadweight losses from our tax system and put in place measures that will grow the economy, and hence the size of the tax pie.

Looking at the role and structure of company taxation is also long overdue: Australia’s reliance on corporate tax as part of the tax mix is far higher than many other countries, leaving us vulnerable to cyclical downturns in economic conditions. If we want a tax system that will really underpin growth for the next 50 years, the tax mix must be considered carefully.

The BCA, through its Tax Nation report, has also been at the forefront of calls to make serious changes to the federal-state tax divide, an extraordinary drain on the resources of the increasing number of businesses that operate across state borders. Reforming the financial interactions between the federal and state governments will be a crucial test of broader efforts to reform Australia’s federation.

The 2020 Summit was about developing a vision. The opportunities are great. But just how much further could we get in the absence of the inevitable ring-fencing that has already begun? How far could we go if we didn’t already have to factor in predetermined (though admirable) aspirational income tax scales? If we considered the balance between income and all consumption taxes, including the GST, the roles and responsibilities of the federal and state governments, and intergenerational challenges including the role of superannuation?

Genuine tax reform is not a short-term proposition. The review may take 18 months, but implementation will take years, and it will be perhaps a decade before the real benefits of reforms start to come through. There will be at least two federal and many state elections during that time. That means many more temptations to rule additional things out of the review if we can’t keep our focus on the end result. That’s why we need a clearly articulated vision for reform.

We need to keep our eyes on where we want Australia to go. And it will only be through bold, comprehensive reform action that we can reach our goal to make Australia the best place in the world to live, work, learn and do business.



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