Taxation

Australia’s tax system is among the least competitive in the world, ranking 110th on the effect of taxation on incentives to work, 101st on the total tax rate as a share of profits, and 91st on the effect of taxation on incentives to invest.

Australia ranks well below most other advanced economies across all three indicators. For example, New Zealand’s tax system ranks 12th for effects on incentives to work, 59th for tax on profits, and 14th for effect of tax on incentives to invest.

Modelling has shown that major reform of Australia’s most inefficient taxes, such as company tax and stamp duty, could boost Australia’s national income by tens of billions a year.1 

2

Tax reform is difficult, but with the right policy settings and an appetite for meaningful change, it can be achieved. Tax reform should not disadvantage the genuinely vulnerable nor unfairly penalise the prosperous and should focus on maximising growth, efficiency and productivity.

Corporate tax is the most inefficient major federal tax 3, with both major parties acknowledging the current rate is too high. Reducing the corporate tax rate to the average of other advanced economies over ten years will deliver higher wages for ordinary workers through an upfront investment boost. Cutting the company tax rate is one of the priorities in the Australian Chamber’s Top 10 in 10: Ten steps towards a world-class Australia.

Modelling 4 purporting to show that corporate tax does not boost national income has significant methodological problems 5. Australia is also much too reliant on personal income tax. Greater reliance should be placed on consumption taxes like the GST, which are more efficient because they do not distort decisions about whether to spend or save 6.

On average, OECD countries collect 30.9 per cent of revenue from consumption taxes like the GST, whereas Australia collects just 23.3 per cent 7.

The tax burden on ordinary workers increases every year due to bracket creep. The middle tax bracket now includes workers on well below the average income and those on below average incomes will see the biggest increase in taxes if brackets are not immediately indexed.8

Bracket creep is fundamentally a tax on growth and raises taxes on ordinary workers by billions each and every year.9 This is unsustainable and is taxation by stealth. The Australian Chamber is strongly encouraged by measures to address bracket creep in the 2016 Budget that included measures. It is important the next Australian government works to implement the necessary changes and policies to continue to stem the tide.

Practically, this is a good starting point for tax reform because ordinary Australians will see the benefits immediately.

The Australian tax system also contains a host of inefficient ‘nuisance taxes’. A key example at the federal level is Fringe Benefits Tax (FBT), which effectively taxes all workers at the top marginal tax rate if their employer gives them a non-cash benefit.

FBT is also complicated, and businesses report that compliance often costs almost as much as they actually pay in tax. Taxing fringe benefits in the hands of employees at their marginal tax rate would solve many of these problems.

Our tax system should aim to be broad based, but it is important to realise that ‘negative gearing’ is a normal feature of income tax rather than a tax concession. Similarly, capital gains tax concessions are a simple way to prevent double taxation of savings due to inflation.

States are responsible for some of Australia’s most inefficient and damaging taxes, and the Federal Government should keep up the pressure for change. Payroll tax discourages employment growth. Stamp duty should be abolished over time in favour of a more broadly based property levy.

Recommendations:
 
5.1 Boost incomes by cutting the company tax rate to 25 per cent within ten years through annual reductions.
 
5.2 Fix bracket creep by indexing personal income tax brackets.
 
5.3 Improve equity and reduce red tape by taxing fringe benefits in the hands of employees at their marginal tax rate.
 
5.4 Put pressure on State Governments to reform inefficient taxes, including fixing payroll tax and gradually replacing stamp duty with a more broadly based property levy.
 
5.5 Address other tax reform issues by moving to more efficient tax bases and providing compensation for the genuinely vulnerable.
 

References:

1 See for example on company tax Kouparitsas, M. et al (2016), Analysis of the Long Term Effects of a Company Tax Cut, Commonwealth Treasury Working Paper; on stamp duty, KPMG (2016), Taking on Tax: Reforming NSW Property Taxes, prepared for the NSW Business Chamber; on other tax reform option KPMG (2015), Tax Reform in Australia - the Facts, prepared for CPA Australia.

2 Source: Arnold (2008) Do tax structures affect aggregate economic growth? Source: Source: Arnold  (2008) Do tax structures affect aggregate economic growth? Note: All tax structures excluding property taxes: other property taxes are statistically significant at the 1% level. Control variables are added progressively beginning with income taxes (model 1), personal and corporate income taxes (model 2), consumption and property taxes (model 3), consumption taxes (excl. property taxes) and property taxes (model 4), consumption taxes (excl. property taxes), property taxes: recurrent taxes on immovable property and property taxes: other property taxes (model 5). The vertical axis is the coefficient of variation presented here as a % difference from output per head of the sample which includes 21 OECD countries over the period 1971-2004 (total number of observations = 675).

3 Cao, L. et al (2015), Understanding the economy-wide efficiency and incidence of major Australian taxes, Treasury Working Paper, 

4 Dixon J. M. and Nassios, J. Modelling the Impacts of a Cut to Company Tax in Australia, Centre of Policy Studies Working Paper, http://www.copsmodels.com/ftp/workpapr/g-260.pdf

5 See Murphy, C. (2016), Budget Forum 2016: The Economic Impact of the Company Tax Cut, ANU Tax and Transfer Policy Institute, http://www.austaxpolicy.com/the-economic-impact-ofthe-company-tax-cut/.

6 Cao et al (2015)

7 OECD (2014), Consumption Tax Trends 2014, OECD Publishing.http://dx.doi.org/10.1787/ctt-2014-en

8 See Carling, R. and Potter, M. (2015) Exposing the stealth tax: the bracket creep rip-off, Centre for Independent Studies, https://www.cis.org.au/app/uploads/2015/12/rr8.pdf; Deloitte (2015), Shedding light on the debate: Mythbusting tax reform, http://www2.deloitte.com/au/en/pages/tax/articles/tax-reform-debatemythbusting-perspective.html;

9 As above

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