Australia needs a national coronavirus taxation summit to set out a road map of reform for the tax system.
A summit that can clearly and publicly enunciate the costs of not reforming the tax system. A summit to set the ground rules for at least a generation to come on income, savings, consumption and land taxes. A summit that can mark out a realistic path for implementation.
Reform of the tax system is politically hard. It involves compromise. It involves bipartisanship. It involves federal and state governments. It has too long been kicked down the road.
It requires the balancing of competing virtues – efficiency, fairness, simplicity and sustainability. It demands accommodation of differing and diverse philosophies and values.
To turn the outcome of such a summit into policy requires a clearly articulated commitment from state and federal governments to neither set pre-conditions nor veto any of its recommendations. No small thing.
The outmoded and outdated tax system Australia relies on is not up to the job of bringing Australia’s economy out of the inevitable post-coronavirus depression. Reform of that system, already on life support, is more critical than ever to Australia’s wellbeing.
Since the 1980s one expert review after another has declared Australia’s tax system ill-equipped. Well before this pandemic imperiled the nation’s finances.
The Australian tax system is wrong three ways. It is inefficient. It is complex. It is unfair.
It will not generate sufficient revenue to sustain Australian livelihoods into the long term. Even less so as Australia comes to terms with the cost of managing the virus and an economy shrunken in its wake.
It taxes individual incomes heavily, a disincentive to work. Overbearing income taxes are an incentive to earn income passively. Australia needs lower income taxes to encourage people to work hard and succeed.
It taxes company profits heavily, a disincentive to invest actively in productive enterprise. Investment that will be necessary to get the economy up and running again post-virus.
It taxes savings inconsistently, nominally at the same rate of income but with myriad exemptions and deductions. Consequently the savings of older and richer Australians are taxed more lightly. In effect they are subsidised by younger, income-earning Australians. Young people whose earnings (and the taxation of them) will be hardest hit as the economy shrivels.
A broadening and deepening of the GST will simplify the collection of taxes and counter any loss of revenue from productivity enhancing reform of income and savings taxes.
The replacement of inefficient stamp duties with land tax is a no-brainer for anyone except those avoiding the payment of tax on their accumulated wealth. Land tax is fairer, helps more productive Australians get to work and provides better housing options for all Australians.
Too much social policy is managed through the tax system, creating a web of distortions, exemptions and inefficiencies that undermine the system’s nominal progressivity. A streamlined tax system will gather revenue that enables government to implement social policy through the transfer system, as it should.
Taken together, these inadequacies of the tax system tear at Australia’s social fabric. Untended, they will do so more violently as that fabric is stretched and weakened by disease. Australia will be down post-coronavirus. The current tax system will keep us down.
Australia must reposition the tax system to restart the post-pandemic economic engines. Australian governments have never had a better opportunity to make the tax system fairer, simpler and efficient.
Repositioning to a system that rewards the successful, supports a strong and productive economy, and enables support for the less fortunate, of whom there will be so many more, post-virus.
A system that insists our national wellbeing takes precedence over individual and group interests.
The pieces are sitting on the table. The time is right and the need is great. Never before has tax reform been so crucial to the wellbeing and sustainability of our way of life.
First published at the Australian Financial Review on Wednesday 22 April 2020.
Lets look a little more clearly at your above statements
1. “It will not generate sufficient revenue to sustain Australian livelihoods into the long term. Even less so as Australia comes to terms with the cost of managing the virus and an economy shrunken in its wake.”
Sovereign currency issuing governments can always spend before they tax. You only need to tax as a preventative against inflation when an economy is overheating or you want to redistribute income or stop certain activities that cause public negative externalities eg smoking, pollution etc.
2. “It taxes company profits heavily, a disincentive to invest actively in productive enterprise. Investment that will be necessary to get the economy up and running again post-virus.”
Where is the evidence that if you reduce corporate income tax businesses will automatically invest In
productive enterprise. In the USA large corps have taken tax cuts and used them for share buybacks and increased dividends to ensure they look for their CEO’s to get increases in their remuneration. Maybe small to medium enterprises would benefit from business tax cuts. So targeted tax cuts for SME would possibly be a good idea.
3. “A broadening and deepening of the GST will simplify the collection of taxes and counter any loss of revenue from productivity enhancing reform of income and savings taxes.”
GST’s are regressive taxes and Impact negatively on low income earners/ recipients. Without a wealth tax
and a tightening up of capital gains tax how would you compensate low income earners/recipients for increases in the costs of living? Certainly an improved land tax would help but would it generate enough revenue for more than one purpose.
4. ” It taxes individual incomes heavily, a disincentive to work. Overbearing income taxes are an incentive to earn income passively. Australia needs lower income taxes to encourage people to work hard and succeed.”
There is no conclusive evidence that if you reduce personal income tax on high income earners they will be more productive. What generally happens is that they put any savings into income earning assets. However for low income to middle income earners increased disposable income from tax cuts would help them retire increasing private household debt and increase their consumption, which would boost the economy. So reducing income tax for low to middle income earners only would be beneficial for our economy.
Currently, the taxation statistics is not sufficient enough for researchers to calculate the policy effect of income tax cut. I am current working on the Australia Narrative Time-Series Dataset and I tried to model the the output effect of personal and income tax cut using VAR, but the frequency of the data is very low as the taxation statistics was recorded on yearly basis. So I decide to use the narrative data set to workout the output effect of all tax changes, and then I’ll try to find the solution calculating the macroeconomic effect of income tax changes or sales tax changes. A lot of work needs to be done on empirical research at this stage.