Spending under the spotlight as tax reform hopes fade

The Treasurer, in his speech at the Press Club in Canberra yesterday, emphasised the need for restraint on public expenditure.

I agree with him on that point. But it is undeniably disappointing that the debate now seems to be moving away from necessary tax reform, which we have been building up to for over the past 2 years.

There are few moments in history that are ripe for tax reform, and with a healthy lead in the polls, this can still be one for the Coalition Government. A second term in office inevitably becomes more about holding onto power.

The simple fact is that tax reform is essential sooner rather than later. The longer we leave it, the harder it will be, and the more it will cost.

Our fundamental issue is that tax reform should be done on a ‘whole of system’ basis rather than picking off component parts. Our two major periods of successful tax reform in 1985 and 1998 were done this way.

It is unfortunate that GST reform has been taken off the table. The government seems to have done this because it does not pass the test on a single trade-off in terms of winners and losers. Raising the base and rate of GST is the only way to get sufficient revenue to make other necessary tax cuts but needs to be done by addressing the tax system in its entirety as well as the transfer system and health and education budgets.

The current negative gearing debate also suffers from this approach of addressing individual taxes in isolation. We propose that a 25 percent discount is applied to all capital income and expenses to ensure consistency of treatment. The capital gains discount would be reduced from 50 percent to 25 percent, and while the imputation system would remain, unfranked dividends would also receive the benefit of a 25 percent discount.

Some commentators have argued that bracket creep is currently not a priority because wage inflation is relatively low. The opposite is true. Tax revenues from wages and salaries have been adjusted in the forward estimates to reflect this lower growth, so instigating changes to eliminate bracket creep is cheaper now in budgetary terms than it will be in the future. I agree with the Treasurer that addressing bracket creep in our personal income tax system should be a high priority, with its insidious and unfair impacts on all of us, but especially low to middle income earners.

So are the high effective marginal rates, particularly for part-time women, when one considers the interaction of the tax system and the loss of child and family benefits with an increase in income. These have a negative bearing on our productivity.

Lack of action on corporate taxes too is damaging our economy. Again, some voices caution that there is no evidence of foreign investors staying away from Australia, so why invest precious resources on cutting company tax? But my answer would be that with many countries lowering their corporate tax rates, staying the same is effectively falling behind. While there may be no current shortage of overseas capital looking to find a home things change quickly in the international investment environment and Australia needs to have a competitive rate, given our position as a net importer of capital.  A long term plan of company tax deductions is needed.

As a nation we seem to have parked many of these issues. The time will come when we have to deal with them – and the sooner we start, the better.

Read the full report here.


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