Governments Must Target Tax System for Fundamental Reform

Business today called for a broad review of fundamental aspects of the tax system that pose major threats to Australia’s future prosperity while proposing a series of reforms to address immediate problem areas.

Releasing the Business Council of Australia’s Taxation Action Plan for Future Prosperity, BCA President, Mr Hugh Morgan, said Australia could no longer ignore the need for major tax reform when the structure of the current system would increasingly undermine Australia’s future sources of growth and competitiveness.

“As with business, economies are in competition with each other. Governments cannot be wedded to tax structures and rates without considering their impact of their economy’s competitiveness internationally,” Mr Morgan said.

“Both capital and labour are increasingly mobile and this acts as real constraints on what governments can or seek to do with their tax systems.

“Our analysis demonstrates in that in a number of tax areas, we are not competitive and it is impacting upon issues that go to the continuing success of Australia’s economy.

“We need a comprehensive debate on the entirety of the tax system that examines radical reform of the system’s basic structures and overall tax burden.

“The issue is not whether the tax system should be significantly changed, but when and how,” Mr Morgan said.

Major Reform of the Tax System

In calling on federal and state governments to start on fundamental changes to make sure Australia’s tax structures and rates remain competitive in the longer term, the BCA’s Taxation Action Plan proposes as a focus for reform:

  • An overhaul of Commonwealth–state tax and spending roles and responsibilities, including a major overhaul of state taxes.
  • Personal income tax to be levied ideally at a single low rate for upper income earners of 30 per cent to bring it in line with company tax and reduce the reliance on income tax.
  • Comprehensive simplification of tax administration and compliance.
  • Linking tax reform to other areas of the economy, such as infrastructure development, and health and education in order to drive improved outcomes in these areas.

“The economies that Australia will be increasingly competing with for growth and investment are building far more competitive tax policies than we have had to confront in the past,” Mr Morgan said.

“We need to move beyond the piecemeal changes and periodic catch-ups that characterise the current tax debate and put all the cards on the table.

The tax system takes in one-third of Australia’s total income so its influence on Australia’s present and future economic direction – from business and personal investment to decisions to enter the workforce – is profound.

“A more radical, fundamental shift in tax policy has the potential to lift Australia beyond its current, slowing growth trajectory. With its Taxation Action Plan, the BCA aims to set the strategic directions for major reform.”

Areas for Initial Reform

In the short term, the BCA is calling for an initial instalment of tax changes to be implemented by the 2006–07 Budget that protects Australia from immediate threats to its competitiveness.

These changes focus on improving Australia’s ability to retain and attract highly skilled people, increase new entrants to the workforce, initial measures to boost investment and savings and ensure the business tax regime is competitive.

Proposals include:

  • Cutting the two highest tax personal income tax rates to 40 per cent over a two year period to encourage, attract and retain highly skilled workers.
  • An immediate review of the company tax regime, to ensure Australia does not fall behind in the short term in competing for business and investment.
  • Abolish remaining inefficient state business taxes.
  • Ensure the taxation on temporary workers is in line with competing countries.
  • An immediate review into four key areas of the tax system, with a program of reforms to be announced in the 2006–07 federal Budget. These priority areas include:
  • – reducing effective marginal tax rates that discourage Australians, particularly welfare recipients, from joining the workforce;
    – implementing an initial program of cutting compliance costs and red tape around the 9,600 page Tax Act, which has   increased from 3,600 pages since 1996;
    – better support for savings; and
    – a review aimed at improving and streamlining Commonwealth–state spending and revenue raising roles and responsibilities, as a platform for more fundamental change.

The Chairman of the BCA’s Business Reform Task Force, Mr Richard Humphry, said business acknowledged the reforms already undertaken by the current Government and that there were political costs associated with even small changes to the system.

“But 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,” Mr Humphry said.

Ongoing Review

“We also need faster, better processes to regularly review and act on areas of the tax system that are barriers to competitiveness and locking in prosperity.

“Benchmarking and continuous improvement are important concepts that must be built into the system.

“In short, we need a simpler and more effective tax system. The current system is too complex and unwieldy for it to remain a part of Australia’s growth equation.”

SUMMARY OF BCA TAX ACTION PROPOSALS
 
PERSONAL TAX AND SAVINGS

Problem

Australia’s tax system imposes its two highest marginal tax rates on nearly everyone on skilled incomes.

Income tax rates for these people are higher than other countries. In the US and UK, higher income workers have tax rates of around 40 per cent, compared to 48.5 per cent in Australia.

Australia is less likely to attract high-value workers at a time when such workers are in short supply.

Australia needs to find new workers to reduce the impact of an ageing population. In important age groups, Australia has below average OECD workforce participation rates.

The current interaction between tax rates and social support payments (which produces high effective marginal tax rates) is a disincentive for many to join or re-enter the workforce.

Australia has, at negative 2 per cent, the second lowest net savings rate of disposable household income among OECD countries.

Short-Term Solutions (see Chapter 6, part 6.6/1)

Reduce second highest tax rate from 42 to 40 per cent and highest rate from 47 to 45 per cent as part of 2006–7 Budget.

Reduce top rate to 40 per cent in 2007–8 Budget. (cost = $1.45 billion in 2006–7 rising to $5.16 billion in 2008–9 when both tax cuts take full effect).

Review effective marginal taxes to reduce barriers to workforce participation with a package of reforms outlined in the 2006–07 Budget.

Review the tax system for highly skilled temporary residents with reforms outlined in the 2006–7 Budget.

Treasury to undertake an immediate review of tax-related disincentives to savings with a program of reform outlined in the 2006–7 federal Budget.

Longer-Term Proposals (see Chapter 6, part 6.1)

Introduce a basic rate for upper income earners of 30 per cent which would give Australia a competitive advantage over many countries while bringing income rates into line with the company tax rate.

Other fundamental changes such as schedular taxes, taxes on gross rather than net measures of income (streamlining deductions) and one-tier taxation on super funds.

BUSINESS TAX AND INVESTMENT

Problem

Australia has a very high total tax take from business (4.4 per cent of GDP) compared to other OECD countries (3 per cent–3.5 per cent).

Its headline corporate tax rate of 30 cents in the dollar is broadly in line with its major competitors but not at the competitive end of this range and significantly above other important economies in the region (for example, Hong Kong, Malaysia and Singapore).

Australia will face growing competition for investment, reflected in aggressive ‘tax competition policies’ by other economies to attract capital and labour.

Investment is increasingly more sensitive to differences in tax regimes.

Short-Term Solution (see Chapter 6, part 6.6/4 and 5)

Government to commence an immediate review of the company tax system focused on whether it will remain competitive. The review should include: reviewing company tax rate with a view to lowering it; reviewing options for reducing other company tax costs including depreciation rates on capital investment; and removal of the most inefficient state business taxes.

Longer-Term Proposals (see Chapter 6, part 6.6/5 and 6)

Abolish other highly inefficient state taxes on business, such as payroll tax.

Major examination of the state tax base.

Governments to establish regular processes to review and amend the competitiveness of the corporate tax regime.

TAX ADMINISTRATION AND COMPLIANCE COSTS

Problem

It costs Australia $1.19 to collect $100 of Commonwealth tax. This compares to the United States (53 cents); Ireland (95 cents); and Sweden (45 cents).

The Commonwealth Tax Act has grown from around 3,500 pages in 1996 to 9,600 pages at present.

Sharp increase in reported business perspectives of tax complexity and workload.

Too much complexity for individuals to meet their basis tax obligations without professional advice.

Short-Term Solution (see Chapter 6, part 6.6/6)

Government to review tax administration to make the system simpler and reduce costs, with a program of reform outlined in 2006–07 federal Budget.

Longer-Term Proposals (see Chapter 6, part 6.6/6)

Major simplification of tax administration and compliance, undertaken in parallel with a fundamental review of Commonwealth–state financial arrangements, both of which aimed at reducing the overall tax and tax compliance burden.

COMMONWEALTH–STATE TAX STRUCTURES

Problem

Allocation of taxing powers between Commonwealth and states relative to current and future spending requirements.

Half of the state tax base is highly inefficient.

Short-Term Solution (see Chapter 6, part 6.6/5 and 6)

Removal of most inefficient state taxes.

Commence a review of how to improve and streamline Commonwealth–state spending and revenue raising roles and responsibilities, as a platform for more fundamental change.

Longer-Term Proposals (see Chapter 6, part 6.6/6)

Overhaul of Commonwealth–state taxing responsibilities combined with review of government spending responsibilities.

Radical reform of state taxes by abolishing all or most of the remaining highly inefficient state tax bases (i.e. payroll and financial taxes). 

Download the BCA Taxation Action Plan for Future Prosperity here.

Taxation Action Plan for Future Prosperity