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Taxation reform: is Canberra serious?

The Roman emperor Nero, apocryphally, fiddled while Rome burned in 64 AD.

Few politicians in modern times can play a violin or fiddle but they are very good at rhetoric, filibustering and back-flipping. And this explains why in Australia they consistently score so low on the Roy Morgan ethics and honesty ladder: indeed, below 15 points out of a hundred, sitting with union leaders, but above drug dealers, car salesmen and realtors. If that is any consolation.

The wasted tax enquiries and summits of recent years testify to the insincerity or lack of courage of governments since the Howard/Costello era.

Facts have rarely been put on the table for the voting population to get perspective, either historical or international. Vested interests, as usual, go as hard as they can to muster support for their rent-seeking, bleeding-heart platforms or political opportunism.

Voters should be advised or reminded that we are living beyond our means, and need to raise taxes - or cut welfare and support (political suicide) - to balance our budgets and arrest the growing national debt being left to our children. The public deserves perspective.

What are the realities?

The first exhibit reveals that government at all three levels raised $555 billion in 2015, just over a third of the nation’s GDP. The vast majority of it is via taxes, supplemented by income from GBEs (government business enterprises) and borrowings for the deficit.

It is nearly three times the share of GDP as when the nation federated in 1901, but then and for decades later, helping the less fortunate was a case of charity and family or tribal support. There was no national defence force, no pensions for the olds, no unemployment relief, no free education, little health care, no support for industries nor many other support services which we take for granted today. And want to keep.

If anything, we could be regarded as a bit mean-spirited with a current level of taxation at 27.7% of GDP in 2015. This compares with over 30% not so long ago, and is far below the OECD average of 35% of GDP; but not as lavish as many so-called nanny-states at over 40%.

The mischievous, self-serving and fallacious argument about the damage done by an increase in the GST and removing current exemptions on food, education and health to fixed and low income earners is scaremongering. It ignores the accompanying protection to such vulnerable households that would be given by legislation: governments are loathe to commit electoral suicide when it comes to taxation reform. Pensioners and other disadvantaged individuals and households would be largely compensated.

So let’s turn to some of the myths and lies about our current taxation system.

Myth Number 1: We are highly taxed already

No, we are certainly not taxed highly by international standards, as seen in the second exhibit, and not by historical standards.

Let’s put the lie to the suggestion that we are highly-taxed or over-taxed once and for all.

Myth Number 2: Raising the GST is regressive

We are the lowest GST nation in the developed world at an effective average rate of 4½% on goods and services, given the aforementioned exemptions. This compares with an effective average rate of 14% in the OECD; over three times our rate. It is hardly an unprecedented or risky step to raise the level as a way of balancing our budget.

Leaving the nominal rate at 10% but removing exemptions from the present regime would in itself lead to a balanced budget, provide room for compensation of the low and fixed income sectors of our population, and allow for adjustment to the tax thresholds arising from bracket-creep.

Raising the level to 12.5%, again without exemptions, would create room for a number of other initiatives as well, such as substantive reduction in personal income tax scales; reduction in corporate tax levels; elimination of some state taxes (eg stamp duties, payroll tax), or at least most of them. Doable, one would think.

Myth Number 3: Our payroll taxes are a disincentive to employ more staff

There is always talk of getting rid of payroll taxes, they being one of the bêtes noire of business. However, by international standards, we are low down the ladder of those that have labour taxes. Even if we lump in super payments (although they are not a tax, like social security taxes in other countries) into labour taxes, we are just over half the OECD average.

Myth Number 4: Our corporate rate of tax is uncompetitive

There has been a more recent push to lower our corporate tax rate from 30% to, say, 25% (and lower the Small to Medium Enterprise tax rate of 28.5% as well).

But the Australian corporate tax rates are not really too far out of kilter, being close to the average of developed economies.

There is a case to lower the tax rate if it would lead to higher investment from retained profits, thereby creating growth and productivity in the economy. A 27.5% rate would be a good start.

Myth Number 5: The rich don’t pay enough taxes

One of the few ugly genes in the Australian ethos is envy and covetousness, in stark contrast to the aspirational genes in the USA. Fairness and equanimity is one thing – and we are good at those things by and large – but pulling down the ‘tall poppies’ is just plain silly.

The rich and well off, 40% of Australian households, pay the vast bulk of all taxes anyway, a stonking 87%! Some 60% of households pay less than 13% of all taxes. So, there is a lot of humbug and politicking in the area of who is copping the tax load. As usual, facts ruin a good story, or lie.

That said, bracket-creep in the individual income tax regime - the automatic follow-on from rising wages and inflation - is an issue that governments must, and do, address from time to time.

Our maximum individual income tax rate sits uncomfortably near the top of the international ladder as seen in the above chart, so this and other threshold rates do need addressing as part of a reform package. The Treasurer is addressing this issue in the government’s deliberations. We are taxing our citizens - rich and middle class alike - too highly. We should be lowering these direct taxes and replacing them with higher indirect taxes, especially the GST. The rich and well-off will pay much more of this GST as a result anyway, compared with the lower income households.

After all this, what should we do?

We are blessed with a very low national debt in 2016 that acts as a fiscal safeguard to our economy, but we need tax reform nevertheless. We are living beyond our means, primarily by not raising enough taxes by historical or international standards to cover spending, although that is not wildly out of control.

To try and save our way into balanced budgets is regressive, and unachievable anyway. We would lose services considered essential by 21st century standards, and equanimity in the community.

We should alter the mix of taxes in favour of the indirect (wealth spending) taxes to encourage savings, investment and productivity. The GST should be increased. Income taxes should be lowered. And the potentially disadvantaged poor and fixed income earners need to be compensated at the same time. All doable, with vision, courage and salesmanship.

 

Phil Ruthven is Founder of IBISWorld and is recognised as one of Australia’s foremost business strategists and futurists.

 

9 Comments
Pablo B
February 20, 2016

While I'm glad Phil values social services and believes they need to be protected, the most disappointing thing about this article is that someone who is one of Australia's pre-eminent futurists can ignore the challenges and economic ills brought about by growing inequality and instead proposes changes which would make it worse.

Nor does he mention significant environmental and social externalities like climate change where a price on carbon could be used to both internalise currently externalised costs, transition the economy to low carbon and raise revenue.

Other significant reforms like fixing the federation so governments responsible for providing the services are able to raise revenue to fund them are also missing.

While the article may sound compelling, sadly it does so by not providing a balanced view and cherry picks data to make its case.

Three examples:
1. It breaks up the tax paid by different income groups but not the income earned by those groups, if the income earned by the 40% is greater than 87% of the total would us paying 87% of the tax be an issue? It’s like looking at only half the P&L.

2. The maximum tax rates used for both corporates and individuals assumes people actually pay that. Higher income earners can put large sums into super at 15%, negatively gear some investments, take advantage of capital gains discounts and franking credits more than lower income earners can. It also doesn’t mention at what point those highest rates cut in, except for the US because it suits the argument. On the corporate side, the recent ATO disclosure of corporate tax payments show the vast majority paying less than the maximum and a high percentage paying close to zero.

3. The GST is regressive because (a) compensation will probably go to the bottom 5-10% of earners, even if it were as high as 20% it would mean that someone on the 21st percentile would pay the same rate as someone in the top percentile. By definition this is regressive. (b) people on lower incomes use a higher proportion of their income on consumption because they save less meaning the rate of GST paid by lower income earners will be higher.


Personally I don’t have an issue with raising the GST if the right level of compensation is provided, but not to cut income taxes (there may be other ways to fund that) because it shifts the burden from the most able to pay to the least at a time when inequality is increasing anyway.

David T
February 20, 2016

Hallelujah! Objective facts presented dispassionately and argued compellingly. Why, oh why, can't our political class and our media conduct this kind of exercise? We are so ill-served by our politicians and our media that it's enough to make one weep.

Tom Alford
February 22, 2016

Do not fret Rod I am sure the Australian Treasurer has access to far more info than you can imagine and it frustrates the likes of you and the ALP that he and Turnbull are keeping their powder dry until their review data is in.

Rod Hucker
February 19, 2016

I can't believe Scott morrison doesn't have these facts. so, the leadership he showed with the boats must be being adulterated by the lack of stomach Malcolm Turnbull shows for change. When the facts are so clearly seen and absorbed in this excellent article it's difficult to understand why reform is so hard to sell.
Thanks for this clear and concise expose.

Doug
February 19, 2016

The simplest answer to bracket creep is to index our rates to the CPI. No bracket creep but no kudos for pollies when they announce income tax rate cuts.

Ramzi N.
February 19, 2016

Great article. Would have liked to have seen some analysis on tax dodging corporates. Not just the international companies such as Apple, Google and Shell, but our own copy cat versions - Westfield, James Hardie, Toll Holdings and many others.

A recent report indicated that almost a third of our largest corporations are paying less than 10 cents in the dollar in corporate tax.

This may not have been deemed a big deal in Phil's analysis but to me, this is another piece of a broken system that is failing all of us.

K de Plater
February 19, 2016

Please note that Toll Holdings is now owned by Japan so you may have to exclude it from being one of our own in the future.

Gary M
February 19, 2016

Black & white answers are often not so clear cut and are open to equally compelling opposite arguments. (eg the ‘myth’ that payroll taxes are a disincentive to hire. The proof that our payroll taxes are low compared to other countries only compares a small set of rich countries, not all countries) – and therefore the fact that they are low compared to a few rich countries (OECD), they are not a disincentive.

Richard Wishart
February 19, 2016

Anyone who enters the budget debate should have this Phil Ruthven material in front of them together with a breakdown of where the revenue is spent. The truth to often does not suit the political agenda nor the media penchant for sensationalism. The result we can expect is that decent reform of taxation and its expenditure will continue fall foul of vested interests, political scare campaigns and sensational headlines.

 

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