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Chance for meaningful tax reform recedes in looming election hue and cry

Reform of Australia’s taxation system has to be high on the agenda to raise national productivity, for greater simplicity, and to improve equity. However, because of the magnitude of the challenges to…

The case for significant, productivity-enhancing tax reform has been made by the Henry Review - but the challenge will be for meaningful reform not to swallowed by pre-election noise. AAP

Reform of Australia’s taxation system has to be high on the agenda to raise national productivity, for greater simplicity, and to improve equity. However, because of the magnitude of the challenges to reform it is unlikely that achievable blueprints will be available for the September election.

Challenges include renegotiating commonwealth-state financial relations, explaining the longer term effects and benefits of reform to electors, and the inevitable complaints from some losers in the short run. Rather, it would seem more sensible for the main political parties to recognise the importance of tax reform, perhaps to indicate general directions of reform, and then to prepare draft or green papers early in the next term of government for community discussion, followed by legislation around mid-term.

The case for reform of the taxation and social security systems, together with reform blueprints, were provided in the Henry Review released in May 2010. To the Henry Review reform proposals should be added a more comprehensive and higher rate GST, and the option of no-bars reform of the taxation of superannuation, both of which were excluded from the review’s terms of reference.

A comprehensive taxation reform package could involve any one of, or a combination of, the following:

  • A comprehensive income tax base which removes current exemptions, such as the concessions for remuneration taken as fringe benefits and superannuation, and a simple progressive tax rate schedule which is automatically indexed for inflation;

  • Greater neutrality of the effective tax rates on different saving and investment choice options, and a low rate on the taxation of capital income to reflect the relatively high elasticity of supply of capital to Australia;

  • increased taxation revenue from comprehensive tax bases on the economic rent earned on land, mineral and energy deposits (to replace current royalties), and other natural resources;

  • Greater revenue from a comprehensive GST base along the NZ model, and at a higher tax rate;

  • Reform of special taxes on selected products to correct market failures associated with motor vehicles, alcohol, and carbon and other forms of pollution;

  • Removal of all state stamp duties; and simplify the social security system as proposed by the Henry Review.

The potential gains to national productivity of tax reform are large, and in some cases much larger than the gains from new technology, management and work practices. Taxes change relative prices facing households and businesses. Smart decision makers shift their choices from the high taxed to low taxed options.

For example, to reduce income tax, households shift from taxed employment to untaxed leisure and home production; and to avoid conveyance stamp duty they stay in the old house rather than sell and move with a change in location of employment or family circumstances.

Then, a dollar of tax involves a dollar transfer to government, plus an additional efficiency or productivity cost for the lower well-being from the changed decision. This efficiency cost varies from a few cents to over 80 cents per dollar of tax revenue according to Henry Review estimates.

Replacing a high efficiency cost tax, such as state stamp duties, with a low efficiency cost tax, such as the GST, involves a net efficiency gain of the order of 50 cents per dollar tax mix change. Again, an aggregate revenue neutral reform package with a broader base to fund lower rates can generate efficiency gains of at least 10 cents per dollar tax revenue.

Considerable investment of political capital and time is required to sell comprehensive tax reform. One needs only to reflect on the income base broadening and lower personal income tax rate reforms of the mid-1980s, the base broadening and lower tax rate package for corporations at the turn of the century, and the GST replacement for more distorting indirect taxes and lower income tax package.

Many of the proposed reforms spread across the commonwealth and the states; with memories of failures of the Rudd and Gillard government over the special taxation of the mining industry to do so.

Previous Australian tax debates, and particularly those reported in the media, focus on the night after, or no changes in decisions, scenario. Explaining that a lower Australian tax burden on capital income will encourage more investment, and several years in the future result in higher labour productivity and higher wages which benefit employees rather than capital suppliers, will require an advanced level of political explanation and time.

The current fiscal situation, and also that likely in the future, is tight with very limited options to support tax reform that involves a net revenue cost. Inevitably, a revenue neutral reform package will involve some losers, at least in the short run before the longer term efficiency gains are realised.

Together, the challenges to taxation reform seem very large in the context of an election, and it will take time and expenditure of limited political capital to overcome these challenges. But, the productivity pot-of-gold from comprehensive reform provides the case for reform in the next term of government.

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8 Comments sorted by

  1. Michael Shand
    Michael Shand is a Friend of The Conversation.

    Software Tester

    It all sounds very well thought only question is what problem are you trying to solve? it wasnt clear

  2. Felix MacNeill

    Environmental Manager

    Given that Australia is a relatively low-taxing country, I wonder about the reasoning that tax reform could improve productivity faster than other means, like technology, management, etc.

    There's no denying that we've probably milked most of the benefits we can from, say, technology, unless and until there are some pretty major breakthroughs. Management and work practices are almost imfinitely 'improvable' but, again, we have generally fairly good standard in Australia (there are exceptions, of course!).

    But, for all that, I'm wondering how effective a lever tax policy would be to improve productivity - particularly given how contentious the whole productivity question is...

    1. Chris O'Neill

      Victim of Tony Abbotts Great Big New Tax

      In reply to Felix MacNeill

      "Given that Australia is a relatively low-taxing country"

      Not that low. The fundamental point is that tax on any economic action (working, investing for taxable income) discourages and reduces that action, especially if there are alternative actions that avoid the tax, e.g. payroll tax on using labour that could be replaced with either a labour-saving investment or imports. Taxation of land, however, is not a tax on any action so does not discourage any economic action. Taxing land does not discourage the production of land. It is there regardless.

      Land Values Research Group:

  3. nickolas kondratenko

    logged in via LinkedIn

    A debate that we have to have considering that Tax Law is the most complex piece of legislation(s) we have:

    Other points to worth considering include-
    The tightening of transfer pricing rules that allow multinational companies to avoid tax on income they derive from an economy;

    The sometimes artificial distinction between capital and income and how that is taxed in an economy;

    Reform of Payroll tax.

    I do agree that goods and services that produce negative externalities should be taxed to pay for the real costs. How to measure this is an another issue entirely.

  4. Iain Brown


    What is role of negative gearing in this reform. I believe that the subsidy of approximately $6 billion but never gets a mention.

  5. Chris O'Neill

    Victim of Tony Abbotts Great Big New Tax

    "Replacing a high efficiency cost tax, such as state stamp duties, with a low efficiency cost tax, such as the GST, involves a net efficiency gain of the order of 50 cents per dollar tax mix change."

    Of course, an even more efficient tax is land tax. It's not possible to discourage the production of land.

  6. Theo Pertsinidis
    Theo Pertsinidis is a Friend of The Conversation.

    ALP voter

    Given that everybody has an opinion and opinions are either right or wrong or in progress... and we are talking money... aren't we no different than players at a casino?

    A speculative tax... financial transaction tax... is a tax on financial speculation by investment banks, hedge funds and other finance institutions that would raise billions to tackle poverty and climate change, in Australia and overseas.

    This allows the government to raise revenue for health…

    Read more
  7. Chris Reynolds

    Education Consultant

    Without being too smart about it I( hope I believe that it's pretty hard at the moment to work out who the "Hue" is and what there is to "Cry" about. The real questions are the ones Peter Garrett recently answered (i.e What's happening with Gonski?) and the Japanese whaling adventurism in the Southern Ocean. he is he or is b he not going to beat up about Rudd can be safely be left to News Ltd journals. They are pursuing their customary version o push journalism (a version of push polling) which is designed to turn every interview into a grilling about ALP leadership - not so much a newspaper as a political campaign - but Rupert has never been able to tell the difference sadly..Thankfully these columns allow for some useful conversation. A pity the dwindling mass media doesn't wake up to the public hunger for this. Tony Abbott wont give it to hem. His only interest is to keep the policy spotlight off his side of politics right up until voting day.