This opinion article by Jennifer Westacott, Chief Executive of the Business Council of Australia was published in The Australian Financial Review on 12 November 2015 under the title 'Start tax debate with right objective: boosting growth'.
The national discussion about tax reform has been all too quickly consumed by a narrow focus on whether or not to raise or broaden the GST, and what extra GST revenue would be spent on.
While the GST has to be part of a sensible tax discussion, the reality is that effective tax reform must be about a total package covering personal and company income taxes, consumption taxes, state taxes, concessions and savings arrangements. It is wrong for people to run a scare campaign on one aspect of a potential tax reform package because none of these measures will be considered in isolation.
Let's get back to why we need to be having a discussion about changing our tax system in the first place.
The bottom line is we need to lift economic growth in Australia. If we want more revenue it has to come from higher growth. If it comes from increasing the overall tax burden it will just dampen growth. Higher growth not only directly increases living standards but also generates a revenue dividend without increasing the overall burden of tax as a proportion of gross domestic product. Treasury estimates that 1 per cent extra GDP would increase revenue by $4 billion this year.
This growth dividend can be used in the best interests of the community – improving the fiscal position, tax cuts or spending.
But our tax system was developed for a different economy and a different world. It's like a virtual ball and chain, discouraging investment, entrepreneurialism, saving and employment.
The tax system is holding Australian businesses back from getting ahead in today's competitive global economy. For example, in the Organisation for Economic Co-operation and Development, only Norway taxes its companies more as a proportion of GDP than Australia.
Our company tax rate of 30 per cent is now way out of step with an average in Asia of 22 per cent and 25 per cent across the OECD. Australia's tax law now runs to more than 14,000 pages and costs businesses and the community around $40 billion a year to comply with. For businesses, that's money they could spend on growing their enterprise, employing more Australians and paying higher wages.
And individual Australians are also being discouraged by the current tax system which is eating up more of their wages every year. Bracket creep, or income tax inflation, is a big driver in the growing contribution of personal income taxes to Australia's GDP, which will rise from 10.5 per cent in 2012-13 to 12.4 per cent in 2018-19. In today's dollars that's $30 billion extra coming straight out of people's pockets within three years.
A person earning $150,000 will pay 11 per cent more income tax in that time unless we deal with bracket creep, and a person earning $36,000 will pay a whopping 28 per cent more tax. The effect of bracket creep is regressive and it's unsustainable.
Globalisation and the emergence of global supply chains means it is harder to compete these days, which makes it increasingly important for Australia to strengthen the economy through innovation and lower barriers to businesses based here from tapping into new markets around the world.
Tax reform is essential for providing incentives for businesses and individuals – in existing and new sectors – to invest, innovate and take risks. In a globalised economy, factors such as company income tax rates are vital. Businesses now can all too easily invest in a more competitive country and when they do, we miss out not only on the investment but the jobs that come with it.
There are always commentators who will say that the Business Council wants lower rates of company and personal income taxes because somehow we want to pocket the proceeds for ourselves.
But remember there are more than 2 million Australian businesses, large and small, which employ nearly 11 million Australians; there are hundreds of thousands of mums and dads investors who have shares in Australian companies, and there are millions of Australians who have their retirement savings invested in large Australian businesses through their superannuation. In this way most Australians have a stake in what happens to the company tax rate. Treasury estimates that as much as two-thirds of the company tax burden is borne by Australian workers through lower wages and the remainder by shareholders.
Let's start from the right end of the debate – a focus on what we want the tax system to do and what needs to be fixed. Let's end the rule in and rule out debates, and eliminate the simplistic one tax solutions to complex reform challenges.
Those who want to deny the community the opportunity for an informed debate on all of the options need to answer what are their plans for a tax system that will grow the economy, shore up revenue, create more jobs, deal with income tax inflation and promote investment and higher wages.
The community deserves more respect.