The obstacles to the Abbott Government achieving any meaningful tax reform are numerous. Not only is there a Senate arguably incapable of delivering any decision in the overall national interest, the Abbott government is equally inept at selling any idea to the voting public with its clumsy attempts being lampooned by a left leaning or ill-informed press, and a well scripted opposition. The end result is most likely that the taxation system will continue to fail Australians for many years to come.
As of 30th March we have a new Tax Discussion Paper and a groovy looking website. In it the government states that it is committed to a better tax system to deliver taxes that are "lower, simpler, fairer". Unfortunately that is the complete opposite of what transpired in Joe Hockey’s first Budget. The theme of the latest paper is the overreliance on income tax, particularly that levied on individuals. The key tax change in the May 2014 Budget was an additional 2% “temporary” 3 year levy on high income earners taking their marginal tax rate to 49%. Not exactly what you would call fair to burden this very specific demographic with paying for the GFC and wasted opportunities of the mining boom. The quality of a tax system is determined by its equity, efficiency and simplicity. Based on our experience at the coalface the Australian System seems to be failing these benchmarks at an increasing rate.
The latest discussion paper is an attempt to inform the public of the need for tax reform for the sake of future prosperity. This is intended as the lead up to the release of a White Paper which will outline the Coalition Government’s policy leading into the 2016 election. The result of the discussion paper is 66 open questions with an invitation for submissions.
Some key quotes from the paper:
- “annual growth in incomes is likely to fall to around 1 per cent over the next decade, less than half the rate to which Australians are accustomed”
- “the number of people aged between 15 and 64 for every person aged 65 and over is projected to fall from an estimated 4.5 people today to a projected 2.7 people in 2055”
- “Australia’s overall tax burden is relatively low compared to other developed countries”
- “Australia relies heavily on income taxes, particularly company income tax, compared to other developed countries as well as our Asian competitors”
- “Tax compliance costs are in the order of $40 billion per year”
- “Unlike most other developed countries, Australia does not levy social security contributions”
- “Australia has a lower reliance on consumption taxes than most developed countries”
- “Modelling suggests that some taxes with high costs to economic growth and living standards are company tax and stamp duties”
- “Around 72 per cent of Australian tax filers engaged a tax agent to assist them in meeting their tax obligations for the 2011-12 income year. These costs represent resources diverted from other more productive or enjoyable activities”
- “Only Australia and New Zealand impose FBT on employers, with all other countries taxing fringe benefits in the hands of employees and using far fewer valuation rules, concessions and exemptions.”
- “Australia’s top marginal tax rate takes effect from a threshold of around 2.3 times the average wage — a relatively low income threshold compared to other OECD countries, such as the UK at 4.2 times the average wage, the US at 8.5 or Canada at 10.6.”
- “As at 2010, 16 OECD countries offered concessions on individual income tax and/or social security contributions to attract ‘knowledge workers’, researchers, managers or specialists — including incentives targeted at encouraging residents who currently live in other countries to return home.”
- “Compared to some other countries, Australia’s tax system is relatively generous in respect of work-related expense (WRE) claims, which are widely utilised.”
- “In Australia, the varying tax treatments of different vehicles, physical assets and types of savings income have led to wide disparities in their effective marginal tax rates.”
- “Belgium, with the highest reliance on estate, inheritance and gift taxes in the OECD, raised only 1.4 per cent of total tax revenue from these taxes in 2012.”
- “Australia relies more heavily on corporate income tax than most other countries. In 2012, Australia’s corporate taxation was 5.2 per cent of GDP, while the OECD average was 2.9 per cent.”
- “The distinction between revenue and capital is often unclear, even in simple business transactions.”
- Australian small businesses (= <20 employees) “account for about 43 per cent of private non-financial employment and 33 per cent of private non-financial sector production.”
- “Any change to the GST rate or base would require the unanimous support of the state and territory governments, the endorsement of the Australian Government and the passage of relevant legislation by both Houses of the Australian Parliament. These requirements are codified in the 2008 Intergovernmental Agreement on Federal Financial Relations and the A New Tax System (Managing the GST Rate and Base) Act 1999.”
- “Australia’s GST rate is one of the lowest among developed countries and is roughly half of the average rate among OECD countries.
- It is very early days in terms of knowing whether anything will come out of this.
- Unless fiscal policy is removed from politics through an independent tax policy board the ability for Australia to deal with these issues is highly questionable.
- The trajectory of government overspending on day to day items will result in deficits that can only be paid for by those who can afford to. This is very evident in tax policy since the GFC and will continue.
- A failing tax system teamed with a failing industrial relations system is very bad for enterprise in this country.
- There seems to be momentum gathering in terms of tightening up on superannuation and imputation concessions. Any changes are likely to be prospective meaning that the horse has bolted in relation to the baby boomer generation.
- The discussion paper does not seem to address the issue of intergenerational wealth and the apparent disadvantage of younger generations.
- GST is one obvious solution to many problems with the tax system including its overreliance on taxes on income. Changes to GST will at least be covered in the White Paper though community understanding and acceptance is a long way off.
- Complexity in small business tax and structures is likely to result in dusting off the idea of a simplified new small business structure along the lines of the S Corporations in the USA.
- It could be that the White Paper will be in support of increasing taxes associated with land ownership because of ease of collection and retention of the proceeds by Australia in relation to foreign ownership.