Long Way to Go on Crucial Tax Reform

The Australian Financial Review

By Robert Milliner
Chairman, former BCA Business Reform Task Force

The federal government’s climate change package includes some changes to personal income tax arrangements, but it is important not to confuse climate change policy with tax reform. The job of fundamental tax reform is by no means done.

Over the past few months, some small steps have been taken to address the way the tax system interacts with the welfare system to discourage workforce participation. However, there is a long way to go and it is critical that the government maintains its appetite for reform.

While there should be a clear acceptance of the need for tax reform, we all acknowledge that the task of effecting it is difficult.

Other countries in our region have recognised the important role of tax policy in creating a more business-friendly environment. Singapore’s corporate tax is 17 per cent, while the government of South Korea has announced it intends to reduce its headline company tax rate from 24.2 per cent to 22 per cent next year. Last year, New Zealand reconfigured its tax mix to lower personal income and company tax rates and lift the rate of the GST.

It is incontrovertible that further reform of the tax system is needed in Australia. The present system will simply be incapable of raising the revenue needed to fund the services the community expects from the government in the decades ahead.

The current system does not sufficiently reward productivity, and distorts decisions about workforce participation, savings and investment.

Australia’s company tax rate is uncompetitive in our region and there are simply too many taxes that collect very little revenue. Most people would agree that the tax system in Australia is too complex and that it is costly for businesses and individuals to comply with all its requirements.

The Henry review highlighted these points against a backdrop of demographic ageing, changing social contexts and expectations, the rise of Asia and globalisation, increasing environmental pressures and technological advances.

Without change, the tax system will not be able to keep pace with these trends. If we are to achieve the results and benefits of tax reform, it needs to be done properly, not through a series of piecemeal moves.

It is time to put aside the current structure and look to the best system of raising revenue while encouraging growth, productivity and investment through tax arrangements that are internationally competitive.

Having determined what this system might look like, the second step is to consider how to move to the new arrangements, recognising that the kind of comprehensive tax reform we need in Australia will take many years to achieve.

Governments can be rewarded in the long-term for meaningful and well-implemented reform – both electorally and more widely in the community’s view. If reform is undertaken comprehensively, openly and transparently, it is far more likely to receive community support. If it is approached sensibly, business will readily sign on.

October’s tax forum needs to be taken seriously by all invited participants and the government alike as an opportunity to set out a credible long-term reform path. A worthwhile goal would be to work towards agreement on what sort of tax system Australia should aspire to in the longer term.

Elements of a better tax system should include having a small number of broad tax bases; abolishing a raft of inefficient taxes; changing the tax mix to reduce reliance on those taxes most harmful to economic growth, such as company tax and personal income taxes, and increasing reliance on indirect taxes such as the GST; and reducing effective marginal tax rates that affect workforce participation.

Clearly there are many issues around these propositions, and difficult trade-offs will come into play. There will be different views on the right mix of taxes, different economic and social priorities and views on different mechanisms and processes for managing change. These are matters deserving serious discussion.

Against this background there are two things the Business Council of Australia would like to see happen at the forum. First, it should be open to a discussion on the full range of tax reform options available and, second, there should be agreement to a process for taking tax reform forward over the coming decade.

The challenge for advocates of policy reform is to work with the community to ensure that people are genuinely engaged on the benefits and that there is an awareness of the risks from failing to strengthen the foundations for a prosperous economy.