The Australian

By Katie Lahey
Chief Executive, Business Council of Australia

The Victorian and NSW premiers have delayed their states’ response to the national hospital reform plan, saying that before they will agree to a lesser share of GST revenue they need to see the detail of the federal government’s overall tax reform package.

With the weekend announcement by Wayne Swan that the Henry tax review will be released before the May Budget, the premiers’ cross-referencing between the two areas of reform reinforces a case argued by the Business Council of Australia. If government is prepared to revisit the GST, introduced almost a decade ago and broadly accepted by the community, consideration must extend beyond ad hoc changes to help package a single policy initiative. It must form part of an overall strategy for tax reform to support our next wave of growth.

Worldwide, there is evidence that faster economic growth is associated with taxation arrangements that rely less on income tax and more on broad-based consumption taxes and taxes on property. This type of system creates fewer disincentives to saving, investment, entrepreneurship and workforce effort.

Australia’s tax system relies heavily on taxes collected from the incomes of companies and individuals. It’s an approach that defies international trends, which show taxing company profits is counterproductive as it impedes investment and, as a consequence, jobs and wages. Reductions in company taxes provide incentives for firms to invest in plant and equipment, and other capital. This in turn supports workers’ productivity and increases the firm’s capacity to hire more people and pay them higher wages.

The Henry tax review offers an opportunity for Australia to build on its advantages by strengthening economic settings to enhance productivity and growth. It offers us a chance to improve our taxation arrangements so we can raise revenue more efficiently while making Australia a more attractive place for investment.

Despite the exclusion of the GST from the review’s terms of reference, the BCA will continue to argue that first-best tax reform involves a switch in the tax mix to reduce personal income and company taxes and make greater use of the GST. This is the way to encourage investment and offer greater incentives to working Australians. And it would allow us to simplify tax arrangements by replacing inefficient state taxes.

Collections driven by the consumption base display less volatility than personal income and company tax collections. A case could be made that Australia’s budget deficit would be smaller if the revenue side of the budget were less reliant on taxes more sensitive to the economic cycle.

Our taxation practices suggest we have considerable scope to make this transition. Our reliance on broad-based consumption taxes is lower than the Organisation for Economic Co-operation and Development average: we collect one dollar in eight from consumption taxes while the OECD average is one dollar in five. Our GST rate is 10 per cent compared with the OECD average of 17.7 per cent.

The rate of the GST has not been increased in 10 years and there have been few changes to the base. The GST is already in place, so an increase in the rate would involve minimal administrative cost.

Equity is clearly an important consideration in tax reform and, while the GST ranks highly in terms of simplicity and efficiency, the community has concerns about how a rate rise would affect the least well-off. The BCA’s position is that to the extent tax reform delivers greater investment, more jobs and higher wages, equity concerns can be ameliorated. Measures can be put in place to compensate those in need. A more robust revenue base overall will provide greater capacity for Australia to provide this support.

Australians want their leaders to pursue economic growth and social benefits simultaneously. It’s hard to imagine they would not respond favourably to knowing that important national reforms are part of a comprehensive plan to improve their children’s future.