The difficulty of tax reform has been highlighted again with the leaking this week of a discussion paper prepared by state treasuries. It suggested a state value-added tax or a state income tax. Immediately, virtually everyone disowned it. And then various industry bodies came out piously stating the need for tax reform, as long as any special treatment for their particular industry were retained.
Politicians have fears bordering on paranoia about being seen remotely connected to any tax proposal. Those fears stem from the 1992 election. New taxes are seen as election losers. This presents a conundrum. Without tax reform the Australian economy is likely to underperform and blame be sheeted home to governments. With tax reform, there are bound to be some losers as well as winners and these losers will squawk loudly and once again cast blame upon governments.
A similar conundrum is presented to the community and its various components: business, retirees, welfare recipients, wage earners, home owners, parents and so on. Tax reform could make the economy more efficient and productive, thereby benefiting everyone if the fruits are spread equitably. However, the fruits can only come after some initial loss by some groups in the community. Which groups depends on how the reform is effected. Therefore various sections in the community have to decide whether to forsake their sectional interests in the hope that the overall long-term benefit of reform will be greater than the short-term detriment of losing some tax privilege or advantage.
The question is a major challenge to Australian political leadership — not just that of the Prime Minister and Leader of the Opposition, but also that of the myriad of special interest groups.
Tax reform is essential to the better well-being of Australians. It has been made the more urgent by the recent High Court judgment that invalidated about $5 billion worth of state franchise taxes.
The tax base is too narrow and individual taxes are therefore higher than they need be. It means human activity is artificially moved away from taxed areas towards less tax areas, creating inefficiencies and misallocation of resources. For example, payroll taxes present a disincentive to employ and stamp duties present a disincentive to move to more appropriate housing. Income taxes are a disincentive for work. The lack of tax on the growing services sector mean tourists and the wealthy escape a tax burden they should otherwise meet.
The task before all levels of government and the lobby groups that hover around them is to broaden the tax base so more transactions are taxed and to reduce the level of tax on the transactions that are taxed. The system must be simplified to reduce compliance costs. In doing that, there is a special duty upon government to ensure that the burden of tax does move down the wealth scale. If reform means a GST, it must come with adequate compensation for those on lower incomes who would cop a greater incidence of tax.
A governments must change the huge taxation disincentives for people getting off welfare and into paid work. At present benefits recipients face huge disincentives as means tests bite rapidly into the first few dollars earned.
It will not be an easy task.