by Tony French.
It’s tax time. How often have we heard this line reminding us to lodge our individual tax returns? But – as we more or less agree the current tax system needs fixing – it is also a timely call for us to engage in some constructive debate about what we want.
Of course there has been incessant talk about what if any changes should be made, coming from those most likely to be affected by any changes – the business groups, the unions, and social service organisations. So far, they have had opposing ideas about which taxes should be raised, lowered, or abolished.
In 2009, the talk turned to a formal review, with the release of the comprehensive Henry Tax Review. Henry made recommendations on personal income, work-related expenses, negative gearing, super, raising GST, and lowering the company tax rate. His recommendations were never implemented. Politically, tax reform is too difficult.
It seems Government turns reluctantly to tax reform when there is a fall in tax revenue. The Global Financial Crisis prompted the Henry Review, and now, following the collapse in mining receipts, we have the newly released Treasury Discussion Paper on Tax. It poses 66 questions for consideration, and is a timely reminder that as a nation we don’t have enough money to pay our debts or maintain our lifestyles.
It has been 15 years since any major tax reform, the last being the introduction of the GST. And that nearly undid the Howard government. Tax reform is political, so whatever the reviews and discussion papers recommend, consensus is necessary. Unilateral tax reform is lethal to government – just recall the ill-timed and ill-fated Rudd Government Mining Super Profits Tax.
Since 2007, any reform has been impossible. We have endured dysfunctional government at Federal and State levels, and in three years we can count four prime ministers. Politicians are better at opposing than at governing, and there is no longer a battle of ideas, rather a battle of personalities, says Michael Fullilove in the current Boyer Lectures.
But we can’t heap all the blame on our politicians for evading tax reform, for we too must accept some responsibility. Having become cynical of politics and politicians, we are incapable of engaging with big issues, and tax reform is a very big issue.
While we continue to talk ineffectually about the pressing need for tax reform, the tax base continues to shrink. Tim Colebatch reminds us that there is a prevalent attitude that it’s okay to pay little or no tax, encouragingly assisted by advisers and tax havens. Onshore, there are plenty of tax minimisation opportunities too – super, negative gearing, trusts, and companies. Any notion that there might be some moral basis for paying tax is, well, simply absurd. Prior to their fiscal tragedy, the Greeks infamously used to say, only the dumb pay tax. Here, the people who don’t have any choice to minimise their tax are wage and salary earners.
We ignore the reasons for tax reform – an aging population with its increasing demand for pensions and health services, housing non-affordability, climate change, inadequate infrastructure, under-funded education (Gonski) and health (Disability Scheme). 80 billion dollars have been lopped so far from the States, which bear the brunt of providing health and education,
So, what is wrong with our tax system? It punishes the wrong people. For example, mothers wanting to return to work face high marginal tax rates, discouraging them from coming off welfare benefits. On the other hand, it rewards people, for example super retirees who pay no tax. The system favours debt (think negative gearing), and there are myriad legitimate loopholes to reduce the incidence of tax by arranging your affairs through convenient companies and trust structures.
And if any tax actually happens to be payable, it can be concessionally taxed, like the 50% discount on realised capital gains, or disregarded with dividend imputation.
Contrary and complex, our tax system is failing to produce sufficient revenue; it lacks fairness, and encourages avoidance. You would have to doubt a better system could have been invented for the Tax Agent industry. The educational level of an 11-year-old is all that is required, says the Australian Tax Office, for a wage and salary earner to complete and file their tax return, yet the reality is that very few people can actually fill out and file their own tax return, worried perhaps about having to work out deductible work-related expenses
In contrast, over in New Zealand, where tax loopholes have been closed, work-related expenses abolished, and negative gearing advantages quarantined, only a third of people have to file a tax return. Personal and company tax thresholds are lower there than here.
So are we closer to actual reform? Well, we have a new Prime Minister and a ditching of the previous promises not to rule out certain proposed tax changes. Remember Joe Hockey pre-emptively ruled out changes to Capital Gains Tax and Dividend Imputation the moment the Treasury Discussion Paper was released?
Impatient vested-interest groups recently took the initiative and came together at the National Reform Summit to see if consensus is possible between them. The business groups advocated raising and / or widening GST, lowering the company tax rate, and increased simplicity in regulation. Representing the other major stakeholder, the ACTU and Australian Council of Social Services were opposed to GST changes, wanting increased taxes on top-end super, a crackdown on tax avoidance, and closing loopholes for high-income earners. But they did agree there was room for consensus.
So, too, in the community, there is a uniting view that super tax treatment is too generous, that multinationals are evading paying tax in Australia, and that raising the GST may not be as regressive as initially thought. If GST is increased, perhaps then it should all flow back to the States to pay for hospitals and schools. Relieved of that burden (ponderously known as the ‘vertical fiscal imbalance’), the Federal Government could cut the company tax rate.
Keep talking; you could be surprised by how many agree. It may even embolden our politicians to perform actual tax reform.
Tony French is a Melbourne lawyer, and a member of the SPC board.