Momentum is gathering for a national tax summit of all the major political parties with all options on the table. It is not before time. The Victorian Premier, Jeff Kennett, made the call at the weekend. He was supported by the leader of the Australian Democrats, Cheryl Kernot. The moves from leading politicians come after leading community groups, notably the Australian Chamber of Commerce and Industry and the Australian Council of Social Service set up their own tax conference, to begin later this week, out of sheer frustration at the lack of political will to do anything to reform the tax system. That lack of will is the direct result of the Coalition’s loss of the 1993 election after it proposed a goods and services tax. The political myth is now that any party that proposes such a tax is suicidal. However, there was more to the 1993 election than the GST.
The extra-political meeting this week should go some way to dispelling the some of the fear politicians have of discussing tax. It might also help the electorate understand that government services do not come without tax and that the way tax is levied (as distinct from the ultimate size of the tax grab) is very important because it affects the efficiency of the whole economy.
There are some serious defects in the Australian tax system which need urgent review.
Mr Kennett’s call for tax reform cited the folly of the Commonwealth collecting a much larger slice of the tax cake than it consumes. It passes the balance to the states. Mr Kennett would like the states to raise a greater proportion of what they spend and for the Commonwealth to tax less. There are merits to the argument that the tier of government that spends the money should also carry the burden of raising it. The business of the Commonwealth levying the money then making special grants to the states to spend and setting up bureaucracies to monitor the spending is very inefficient.
Further, it has resulted in the states having a far too narrow band of taxes. They are far too dependent on gambling and other sin taxes and have raised stamp duties on dwellings and cars so high that they form a disincentive to people to change to more appropriate dwellings and cars. The dependence on gambling taxes is now so great that state governments are actively encouraging gambling with all its social cost, rather than taxing it to discourage it. Their reliance on tobacco taxes mutes their anti-smoking messages, so the nation’s cost.
The fact services largely escape tax action in Australia is foolish. Services are used disproportionately by the wealthy and visitors who could contribute more to tax so that income tax could be lowered.
Marginal income tax rates are too high, causing a disincentive to earn. Consumption, on the other hand, is taxed too low, once again sending the wrong incentive messages.
The wholesale sales tax is a confusing mess of different categories of goods and different rates of tax, adding to business costs. Moreover, it is foolishly biased in favour of imports and against exports, in a way that an overall consumption tax would not be. However, as wholesale taxes generally exempt necessities and impose higher taxes on luxuries care would be needed to compensate low-income earners in any reform.
The tax system also very foolishly does not pay enough attention to very large transactions, particularly foreign currency. Huge amounts of currency can be moved about for windfall profits, without worthwhile production, and the movement does not attract a transaction tax like a wage-earners bank account. A small tax would go some way to preventing destructive speculation as well as contributing to the revenue.
The tax system has a number of tax differentials which invite avoidance schemes. The difference between personal and company tax is an example. The way capital gains tax gets discounted for inflation, whereas the interest earned on a cash deposit is taxed without any allowance for inflation’s effect on the capital, favours people who can deal easily in shares and property and discourages saving by ordinary wage-earners.
And governments do not seem to learn. This government has added to differentials with the treatment of the Medicare levy and superannuation. The superannuation surcharge is ripe for avoidance by people in business who can artificially cut income one year (when they put in double their usual super) and boost income the next year (when they pay nothing into super).
Retirement-incomes policy and savings policy, which are related to tax, also need reform. The present mentality is that having contributed taxes for a lifetime “”entitles” someone to a government pension. Rather our tax and savings policies should encourage self-provision for retirement.
The defects in Australia’s tax system are so widespread that they provide an opportunity for people from all parts of the political and social spectrum to see an opportunity to push their barrows at any summit. It would be a pity if that resulted in worthwhile reform being stymied.
It would be a pity if the arguments in favour of broadening the base of taxation became confused with arguments about whether the total amount of tax should be increased or lowered.
The essential problem has been that short-term political expediency and a hyperbole have warped the tax system. It is too narrow and its incidence too erratic. Without reform, overall wealth will be reduced, irrespective of the total tax take. This is because the present system is riddled with costly inefficiencies and inappropriate incentives and disincentives.