Tax reform is the key to solving Australia’s public budget problems: ACOSS
Monday March 30, 2015
In response to the Treasurer’s launch of the Government’s Tax Reform White Paper at our tax reform breakfast in Melbourne this morning, ACOSS argued that tax reform is the key to resolving our long term public Budget problems. The tax system should be redesigned and strengthened so that people contribute to the cost of services according to their ability to pay.
“We welcome the dialogue on tax reform opened up by the release of this discussion paper. It’s an opportunity for the community and business to take the initiative: these hard issues can’t be left to Governments alone,” ACOSS CEO Cassandra Goldie said.
“People understand we have a public Budget problem: they want solutions that don’t impose the greatest burden on the least well off. To solve our public Budget challenge in a way that’s fair and economically sensible, we must reform the tax system.
“Instead of searching for Budget savings in community services, charging more for doctor’s visits, denying young people income support for six months, or reducing the future value of pensions, Governments should clean out the ‘hollow logs’ in our tax system.
“It is too easy for people with high incomes to avoid paying their fair share of tax through devices such as negative gearing and private trusts, for some international companies to artificially shift their profits elsewhere, and for retired people with substantial assets to churn their income through their super accounts to reduce tax.
“If too many people play the tax avoidance ‘game’ then either tax rates will have to rise or essential services will wither on the vine.
“The starting point for tax reform should be to strengthen the fairest taxes, especially taxes on income, and to make them more efficient. Too many investment decisions are made for tax reasons and that’s one of the reasons we have over-investment in housing that drives costs up for everyone.
“Tax reform must not be reduced to a narrow argument over increasing taxes on consumption such as the GST. This would concentrate the risks of reform on those least able to bear them: people on low incomes. A tax on bank deposits is a consumption tax since it will be passed on to consumers, just as the former State Government bank deposit taxes were. We should not start the process by ruling things out.
“Tax reform would not be complete without a restructure of State taxes. The States lack a solid revenue base to fund future health, education and community services. There is a broad consensus that the least efficient taxes include Stamp Duties and insurance taxes, and the State Governments should make better use of Land Tax and Payroll Tax.
“There will be a degree of cynicism about Governments starting a ‘conversation about tax reform’ rather than simply making decisions. We don’t share that view. One of the main reasons the public rejected the 2014 Budget is that the Government didn’t take people into their confidence by clearly explaining the problem, or listen to alternative views on how to fix them.
“We need a different approach to an issue as tough and as important as tax reform,” Dr Goldie said.
Media Contact: Fernando de Freitas 0419 626 155
Key points from the White Paper:
- “Australia has a relatively low tax burden compared to other wealthy countries” (p16).
ACOSS comment: Data in the White Paper shows that we are the seventh-lowest taxing country in the OECD.
- On the mix between taxes and income, consumption and property: “Direct forms of taxation - individuals and corporate income taxes, compulsory social security contributions, plus payroll taxes – raise 63% of all taxation in Australia compared to an OECD average of 61%” (p18).
ACOSS comment: That is, our reliance on taxes that ultimately fall on income is close to average.
- On the impact of different taxes on growth:
ACOSS comment: The White Paper confirms our view that consumption taxes like the GST are not much more ‘growth friendly’ than taxes on income. The taxes that have the worst impact on the economy are Stamp Duties levied by the States. See Chart 2.9 (on p25).
- On the progressivity of personal income tax: “Progressive individuals income tax rates and thresholds underpin the overall progressivity of the tax system” (p29).
- Distortions in the tax treatment of different investments probably have an impact on investment decisions: “particularly in Australia’s real estate market, where investment is primarily domestic. If this is the case, any additional savings in housing will amount to additional investment in housing and given housing supply constraints, lead to increased housing prices” (p 59).
- On inequity in the tax treatment of superannuation: “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” (p 70).
- On private trusts and companies: “As a business grows, it would be increasingly rational for it to adopt the legal structure that would minimise its tax liability. This may involve incorporating, or utilising a trust, but more likely it wold involve a combination of structures. …The tax treatment of different structures means that economically similar activities can be taxed in different ways depending on the legal structure employed by the business…A perception arises that those with additional resources are able to ‘play’ the system” (p 109).
- On a failed experiment with a lower company tax rate for small business ‘start-ups” in the UK: “it introduced disincentives for companies below the threshold to grow. …The Mirrlees Review concluded that this policy was ineffective and costly” (p 119).
- On the impact of GST exemptions: “As a proportion of their income, lower-income households spend more on GST exempt goods and services than higher-income households. This is largely due to higher-income households saving a greater proportion of their income” (p 136).
- More on the impact of GST exemptions: ”While households may spend a similar proportion of their total spending on GST-exempt goods and services in aggregate…lower income households may be more likely to spend comparatively more of their total spending on GST-exempt food, medical products and health services, or residential rent” (p 136).
- On Stamp Duties: “Stamp Duties are some of the most inefficient taxes levied in Australia.” (p 145).
- On Land Tax: “Land Tax as currently implemented in Australia is far from [the ideal model] because of exclusions and because different types of land attract different rates of tax” (p148).