The government’s long-awaited tax discussion paper says Australia has a relatively low tax burden compared to other developed countries but its system faces “challenges from a changing world”.
The paper, aimed at launching a national dialogue on re-thinking the tax system, says tax reform “offers one of the biggest opportunities” to improve productivity, and foster jobs and growth.
Key factors putting strains on tax systems here and abroad are technological change including the rise of the digital economy, highly mobile investment and greater labour mobility. These developments pose two critical issues: they can weaken the ability of tax systems to raise revenue from traditional bases, and they can increase the economic costs of taxation, dampening economic growth.
The present Australian system relies heavily on income tax, especially company tax, compared to other developed countries and Asian competitors, the paper says. Australia has a lower reliance on consumption taxes than most developed countries.
“Australia’s reliance on income taxes remains much the same as it was in the 1950s, despite changes in the economy.”
This reliance is also projected to increase further, largely because of wages growth leading to individuals paying higher average rates of tax – bracket creep.
Bracket creep is when taxpayers face higher average, and sometimes marginal, tax rates over time due to their income increasing because of inflation.
Between 2014-15 and 2024-25, the percentage of taxpayers in the top two tax brackets – that is, with taxable income of more than A$80,000 – is estimated to increase from about 27% to 43% under current policy settings.
“It is estimated that over two million more taxpayers will be in the third income tax bracket (taxable income from $80,000 to $180,000) in 2024-25, compared to 2014-15,” the paper says.
“While bracket creep exists because of the progressivity of the individuals income tax system, unchecked bracket creep affects lower and middle income earners proportionately more than higher income earners.”
The paper says economic modelling suggests that the taxes with particularly high costs to economic growth are company tax and stamp duties.
“The benefits of reducing the economic costs of taxation are spread throughout the economy, including to workers through higher wages.”
Australia’s 30% corporate tax rate “is higher than many countries we compete with for investment”.
“As economies become more open, barriers to investment can have a greater impact on economic growth and real wages growth. In response, corporate income tax rates have fallen world wide in recent years.” Since 2008, the United Kingdom, Canada and Singapore have all cut their main corporate rates.
Releasing the paper, which canvasses issues but does not make not recommendations, Treasurer Joe Hockey said that “as a result of changes driven by globalisation and the rise of the digital economy, Australia’s heavy reliance on income taxes may be unsustainable”.
Hockey pointed to bracket creep hitting individuals and the international pressures on the corporate tax system.
“In Australia about 70% of Commonwealth tax revenue is collected from personal and company income taxes. A dozen companies pay around one third of Australia’s company tax.”
The paper, of nearly 200 pages, is the first stage in a process that will see submissions, a green paper with options in the second half of this year, then more feedback before a white paper. The government will put policy proposals to the 2016 election.
The coming tax debate will test the government’s reform credentials. Taking a package for major change to the election will be extremely difficult if the government is still tracking poorly in the polls.
The paper canvasses the politically sensitive GST, pointing out that its rate is one of the lowest among developed countries and is roughly half of the average rate among OECD countries. Of the 33 OECD countries that operate taxes like the GST, only Canada, Japan and Switzerland have lower rates.
Since 2002-03 GST revenue has declined relative to the size of the economy – from 3.9% of GDP to 3.5% in 2013-14.
This was caused by two main factors – a decline in household consumption as a share of GDP, and a decrease in the proportion of household spending spent on taxable goods and services and a corresponding increase in spending on GST-exempt items such as health and education.
On the vexed issue of the exemption from the GST of imported goods worth up to $1000, the paper says that other developed countries have relatively low thresholds compared to Australia “suggesting that a cost-effective reduction in the low value threshold could be feasible”. So far, Commonwealth and states governments haven’t been able to agree on an approach to lowering the threshold.
The paper asks to what extent the tax settings – the rate, base and administration – for the GST are appropriate.
It says that as part of the white paper process, interested parties are invited to put forward proposals to change the GST. “However, the Australian government will only consider progressing any such proposals if there is a broad political consensus for change, including agreement by all state and territory governments.”
Looking at various tax breaks, the paper says that negative gearing “does not, in itself, cause a tax distortion, but it does allow more people to enter the market than those who might have had the equity alone to do so”.
“Contrary to popular perception, negative gearing is not a specific tax concession for taxpayers with investment properties – it is simply the operation of Australia’s tax system allowing deductions for expenses incurred in producing assessable income.”
On superannuation, the paper says that while there are policy grounds for it being taxed at a lower rate than income from labour, “there are issues around the distribution of the impacts and their effectiveness in supporting higher retirement incomes, as well as their complexity.”
“The flat rate of tax on superannuation contributions means that most high income people receive a larger tax concession, relative to their marginal tax rate, than low income people. The same is true during the accumulation phase and even more so during the retirement phase when there is no tax on earnings.”
The paper puts up for discussion the question: “How appropriate are the tax arrangements for superannuation in terms of their fairness and complexity?”