Some clever restaurants have exploited human nature to provide a better service for less cost. They do not provide a menu with detailed prices. Nor do they provide waiters who deliver the food and add up its cost to the last dollar. Rather than let the customers do their own thing. They are permitted to select eat as much as they like, with the restaurateur hoping they will not fill up doggy bags or feed their mates. Others at the wealthy end of society prefer fine dining with all the bells and whistles.
Tax is a bit like that. Some people cry for simplicity. Give us the smorgasbord and one price per plate, they cry. Others cry for fairness. Give us full attention and precise billing, they cry. The cries are hopelessly incompatible. With taxation law you cannot have both fairness and simplicity, just as in restaurants you cannot have both silver service and all-you-can-eat at one price.
Ten years after the Tax Summit it is time to revisit this conundrum before we collapse under the weight of the tax law. It is time also to acknowledge the summit’s achievements and to assess its shortcomings.
It is now clear that the five major changes made at the Tax Summit were major improvements that took a great deal of political courage and tenacity in the face of loud special-interest bleatings. Those changes, in order of merit, were: capital gains, fringe benefits, dividend imputation, foreign tax credits and lowering marginal rates.
Before capital gains were effectively taxed, higher income earners could easily convert slabs of their otherwise-taxable income to capital which was realised tax free in later years. It mocked taxation fairness. Similarly, before fringe benefits were taxed many higher-income earners could take slabs of their income in kind … cars, housing, children’s education, phone bills and other personal spending … and these were effectively tax-free. On the other side of the ledger, many higher-income earners who invested in companies or who earned their income through companies suffered double taxation, once in the hands of the company and again when they received dividends. Similarly, they suffered double taxation if they earned income abroad. Before the Tax Summit marginal rates were stiflingly too high.
These reforms should not be underestimated or discredited just because Australia does not have a perfect tax system now or because the summit did not achieve the more important reform of a consumption tax.
None the less, the summit did not go far enough. Ten years later, Australia’s tax system suffers major drawbacks: taxing income and savings not consumption; complexity; tax creep giving governments an ever greater tax grab through inflation rather than an exposed process; and a narrowing tax base for the states with greater reliance on the Commonwealth. Australia is the poorer for it.
A rationalisation of sales, wholesale and petrol taxes is needed through a uniform consumption tax balanced by a reduction in income tax and taxes on interest earned from savings. A consumption tax is harder to avoid. The result would be to discourage consumption and encourage savings.
On complexity, given that both a simple and fair law cannot co-exist, the Government should look at a dual system. One would be a simple law in plain English coupled with an absolute discretion by the Commissioner to assess tax so that simplicity cannot be a vehicle for avoidance. The other would be the present complex law with all t’s crossed and i’s dotted. Taxpayers would chose which regime they would work under. It would mean that the vast bulk of taxpayers who can be trusted in the “”eat-as-much-as-you-like” restaurant would have a simple law and those who would abuse such as system with doggie bags and children would either be caught by the commissioner’s absolute discretion or elect to move to the a la carte restaurant where everything is complexly itemised.
On tax creep, despite the Federal Government magnanimously giving what it calls “”tax cuts”, inflation and increasing higher average earnings is still pushing people into ever higher tax brackets and the total governmental take is getting higher. If the Government wants to increase taxes it should do it in the open, not by stealth. One of the advantages of a fixed-rate consumption tax is that it is automatically adjusted for inflation. If prices go up the tax rate stays the same; if inflation pushes a worker’s wage up the worker goes into a higher tax bracket and the tax rate is higher.
On the states, the present arrangement under which states rely on the Commonwealth for about half their revenue allows the states to escape accountability. The government with the spending function should take the legal and electoral responsibility for raising the money, too. The Federal Government should hand back some income-tax power. At present the states’ tax base is too narrow and is distorting the economy. In all, Australia’s tax system needs an overhaul.