By Richard Humphry
Chairman, Business Reform Task Force
Business Council of Australia
Australia’s record growth and prosperity are undisputed. The question is, is it sustainable? Reforms begun in the 1980s have delivered enormous benefits, from substantial improvements in average incomes and high employment, from low interest rates and low inflation to record highs in consumer and business confidence.
All this flows through to individuals, households, families and the community. Governments too have reaped the rewards, through record tax receipts, which in turn helped fund services for the public.
The corporate tax take is one of the fastest-growing revenue sources, increasing from $27 billion in 2000 to a projected $48 billion for this financial year.
But we should not let this windfall distract us from a basic fact – that the underlying tax system, so central to the way we work and live, is flawed and in urgent need of reform.
Granted, the system has undergone several worthwhile reforms including changes to personal tax thresholds, the lowering of the company tax rate and the introduction of the GST.
But our tax system still has several fundamental weaknesses that the Australian economy and community cannot afford.
The size and impact of the system is profound and its collected revenues represent a third of Australia’s gross domestic product. The tax system can influence business and personal decision making, and is one of the key levers of Australia’s future prosperity.
Early this year, the Business Council of Australia published an in-depth analysis of Australia’s tax system identifying potential barriers to Australia’s future prosperity.
It recommended changes to the system needed if we want to support sustained high levels of economic growth.
Globalisation and technological advances, moving at ever-increasing speed, are making labour and capital more mobile. The greater the options for where money and people can be used, the greater the sensitivity of their responses to a country’s taxation system.
As globalisation increases, so does competition between governments. And as we integrate more closely with global markets, any flaws in our tax system are greatly magnified. This is true of any country’s taxation system – and our competitors know it.
Economies around the world are proactively and regularly reviewing their tax systems and rates to make sure their regimes help, not hinder, sources of growth.
The BCA’s plan of action outlined the most pressing areas for reform of Australia’s tax system.
It tackled weaknesses in our personal tax regime that combine to constrain the size, composition and quality of our future workforce.
As Treasurer Peter Costello has pointed out, Australia has a demographic date with destiny. By 2020, the mass retirement of baby boomers, declining fertility and our ageing population will reduce our labour force by 10 times. When this hits, it will make the current debate on skill shortages pale into insignificance.
Our tax system has a damaging impact on workforce participation, at the high and low ends of the income scale.
We have very high marginal tax rates that cut in at low thresholds compared with our largest competitors. This makes it difficult to win Australians back from higher-paying overseas markets and even harder to attract and retain skilled workers from overseas.
At the other end, when the personal taxation and welfare systems intersect, it imposes high marginal taxes on people who are seeking opportunities to enter or return to the workforce.
Add to this a further concern: as our population ages, it will reduce the number of people upon which tax can be levied and increase the number of people relying on this revenue.
Our key competitors, themselves facing similar demographic challenges, will be actively looking to expand their workforces by making their markets as attractive as possible and using tax policy as a key instrument to do so.
On the business tax side, the story is just as sobering.
At 5.3 per cent of GDP, Australia’s corporate tax burden is higher than most of its regional and OECD competitors. We are taxing our most mobile sources of productivity at unsustainably high and uncompetitive rates.
Business must deal with both uncertainty and complexity from a system that grows larger and more complex every year.
Our federal tax legislation has ballooned three times since 1996 and now exceeds 10,000 pages. An increasingly large number of people need to consult an agent to help them lodge tax returns. The system must be simplified.
Competition for labour and capital will continue to increase, not only from our traditional competitors, but from several fast-growing and emerging regional economies.
In this environment, our present system of taxation for businesses and individuals is not sustainable and must be reformed now.