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Tax Forum: Critical reform is worth the effort – and the wait

The Tax Forum must ensure we have a sure-footed approach to reform. AAP

Periodic tax reform is necessary as governments respond to new patterns and forms of economic activity and the inevitable political pressures these changes create.

Yet the politics of tax reform is politically fraught because vested interests who may incur short-term losses will always be vocal, often drowning out the less tangible and more diffuse benefits of reform.

Given these political dynamics, successful tax reform requires three elements.

First, given the political risks associated with tax reform there needs to be a consensus that the policy status quo is untenable and that reform is needed.

Second, there needs to be broad technical and political consensus on the priorities for reform and the broad direction of policy change.

Last, and most critically, government needs to be convinced that reform proposals are politically viable.

Expectations for the upcoming Tax Forum – which I am attending – may be modest, and the prospects for near-term reform may be low, but it is important to recognise that building political support for contentious and complex tax packages takes years rather than months.

In this context, the Tax Forum should be regarded as an opportunity to build the political foundations for the next round of tax reform.

Fortunately, the forum is not starting from scratch. There is both a growing recognition among experts and awareness among the voting public that tax reform is required.

The view that the Australian tax system required an overhaul was one of the few concrete proposals to come out of the 2020 Summit held in early 2008, which inturn gave rise the Henry Review which reported two years later.

If anything, the view that reform is necessary has been reinforced by the financial crisis and the growing recognition that the global economy has changed and the Australian tax system will have to respond to this new reality.

Labor’s initial response the Henry Review has attracted a good deal of criticism, but the review’s real contribution to the national tax policy debate is that it presented a detailed, and in my view, credible agenda for reform.

Just like the Asprey Review of the mid-1970s, which set the national tax reform agenda for the 1980s and 1990s, the Henry Review has created an important blueprint for the tax policy debate over the coming decade.

The challenge from here on is political rather than technical.

Tax reform can be a difficult and thankless task, and one that has ended many a political career. Yet despite these risks, there are many established paths to reform success.

One approach is to build a bipartisan consensus for reform in the parliamentary arena. While a tacit agreement between Australia’s major parties underpinned the liberalisation of the Australian economy during the 1980s, such bargain seems extremely unlikely in the adversarial, opportunistic and increasingly dysfunction climate which prevails in Canberra today.

Another strategy is the selective use of compensation to minimise the number of losers from reform. This is a tried-and-true approach and no doubt was central in Wayne Swan’s mind when he commissioned the Henry Review in mid-2008, before the financial crisis really started to bite.

We now live in a different world and it is clear that the Federal Government won’t have surplus funds to devote to tax reform until at least 2017.

Given these constraints, at this stage of the tax reform process it is important to start gauging interest group and broader community support for the wide range of proposals to be considered by the Tax Forum.

History, both in Australia and abroad, shows us that if a reform proposal has technical merit and enjoys support from business, community and labour interests, then the political viability of the policy is greatly enhanced – even in the face of almost inevitable partisan opposition.

The decisive development in the Australian GST debate in the late 1990s was the community sector’s (and Australian Council of Social Services in particular) decision to support a broad-based consumption tax with appropriate compensation. This left the ALP looking opportunistic and shrill.

The aim of the Tax Forum should be to identify those reform proposals which enjoy broad-based support and this should be established by a simple post-forum survey of participants.

Reforms which enjoy broad-based support should then be subjected to more refinement, consultation and policy development and the proposed Tax Research Centre could play and important, independent role in this process.

Having completed this technical and political groundwork, whoever forms government after the next federal election will be able to start implementing the next round of Henry reforms knowing the agenda is backed by a solid coalition of stakeholders.

More contentious, but structurally important, reforms may have to wait until the end of the decade when more generous compensation is more likely be available.

Tax reform is a long game. My hope is that the Tax Forum will represent a small but important step in what will be a decade-long process.

Read more of our Tax Forum coverage:

Should nannies for high income women be subsidised?

Reforming how property is taxed means we’ll tackle affordability

The overlooked role of local government in tax reform

The GST exemption should come off food

The GST needs changing, so lets debate it

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