This article by Rob Scott (Wesfarmers), chair of the Business Council's tax and federation working group first appeared in The Australian on Monday 17 August 2020.
Today, more than at any time in recent decades, the importance of delivering more Australian jobs is clear.
I speak regularly to many of the 107,000 Australian employees of Wesfarmers working across Bunnings, Kmart, Target, Catch, Officeworks and our industrial businesses. When I do I am constantly reminded a job is far more than just a pay cheque. A job provides many of us with a stronger sense of purpose and connection to our community, and gives us the financial independence to aspire to live a life we choose. Jobs matter immensely to our wellbeing.
Unfortunately, for far too many Australians, a job is out of reach or at risk.
More than 1.4 million Australians are receiving JobSeeker payments, with about 528,000 losing their job in the past few months. More than 3.5 million others are being supported by JobKeeper, which means almost one in three working Australians’ incomes are being subsidised by the federal government. This level of government support cannot last forever.
Unfortunately, Australia’s unemployment figures are likely to become worse before they get better as Australian governments manage the delicate balancing act of optimising health and economic outcomes. As the CEO of a large Australian business, I understand that Wesfarmers and other companies have an important role as we target a return to full employment. Business does, and should continue to, create many more jobs than government.
As the Prime Minister has asserted, job creation must be the national priority and every part of the system must be working in favour of this goal.
Yet the design of Australia’s tax system works against this.
But why focus on tax reform when we are addressing the health and economic pandemic crisis? Well, indeed, it has never been a better time and leadership demands an eye to the future as well as today’s crisis. As a federation, we must use all the levers at our disposal to rebuild jobs and prosperity.
Taxes need to raise enough revenue for essential services such as health and education, but not stifle activity nor leave us uncompetitive internationally. The system should be simple to comply with and levied in a way that doesn’t distort investment or discourage job creation.
Taxing something changes the way it is consumed. For example, Australia has taxed tobacco over decades, discouraging its consumption.
Australia also taxes jobs through payroll tax, discouraging employment by making jobs more expensive for employers. This tax on jobs is paid exclusively by businesses who employ more Australians and, like taxing cigarettes, changes behaviour.
Simplicity matters too. Australia has more than 100 taxes and just 10 of them raise 90 per cent of tax revenue. Complexity makes compliance burdensome and wastes time better spent growing a business and employing more people.
Tax systems also must evolve, keeping pace with changing economies. Ours hasn’t and is now so uncompetitive that investment dollars are flowing out of Australia.
For the first time since the 1970s, more is being invested offshore than overseas investors are investing here. This should sound alarm bells.
Our largest investment partner, the US, is a case in point. US direct investment into Australia fell sharply last year, to about $600m after averaging $15bn per year in the previous decade. What changed? While there are many factors at play, a key one was reform of the US tax system, leaving ours even less competitive.
Domestically, the problem is just as stark. Even before COVID-19, investment was weakening and with that, productivity growth was slowing. Now the outlook is worse. Treasury forecasts non-mining business investment will decline by almost 20 per cent this year.
We cannot pin all of Australia’s slow jobs growth and falling investment on our tax system, but it is much to blame. We need a cutting-edge, competitive system better suited to 2020, not 1999 when it was last reformed – almost a decade before the first iPhone was released.
The federal government can act now.
A 20 per cent investment allowance should be introduced to encourage businesses to bring forward investment and create jobs. A similar policy was introduced during the GFC to drive investment. It works. A 2018 review of the GFC investment allowance by the Reserve Bank found it boosted investment and brought on new investment, and modelling has suggested GDP would have been lower without it.
The GFC investment allowance applied generally to plant and equipment. This time around, an investment allowance should apply to all new assets, making it less likely to distort investment decisions and less complex to administer. Crucially, this would incentivise investment in data and digital assets, and intangible assets like intellectual property and computer software, helping Australian businesses be more competitive globally and aligned with the future of our economy, not the past.
About 80 per cent of investment comes from larger companies ($250m or more in turnover) and their investments have large, economy-wide impacts. An investment allowance should encourage these businesses as well.
Over the longer term, overhauling Australia’s ageing, complex, and uncompetitive tax system must be a priority for national cabinet, which has already delivered such benefits for us.
The scale of tax reform required cannot be achieved by the federal government alone.
We all have an interest in the tax system and all would agree the principles of reform must be to encourage job creation, make the system simpler for taxpayers and more reliable for governments.
Importantly, we must ensure all Australians are better off.
Recognising the federated nature of the system, national cabinet should focus on major reforms that will take our economy forward for the next 20 years – a system designed to support the industries of the future. We must have the courage to put all tax reform options on the table, including changes to the GST, if that means other taxes that hinder employment can be reduced or removed entirely and households are appropriately compensated.
This is not an easy process, and there will be complexities to navigate, including elections. We should commit our support to this critical reform process and the national cabinet, and rise to this challenge, each asking ourselves, “If not now, then when? If not me, then who?”.
We owe it to all Australians to design a better, smarter tax system that works for, not against, Australian jobs and investment. If we get this right we can ensure that Australia not only recovers, but that our nation can be even stronger than before.