The Australian Financial Review Tax Reform Summit evidenced that building consensus around key reform areas is a genuine possibility. Experts representing both major government parties, big-business, Australian workers and academia endorsed the idea that an efficient tax mix is important to facilitate long-term productivity gains and corresponding rises in our standards of living.
Australia’s corporate tax rate at 30% is currently below the weighted average of a benchmark group of prosperous nations (OECD), however a brewing global competition for capital is driving down tax rates across the rich and developing world. Partner at KPMG, David Linke advocated that Australia should not isolate itself from the rest of the world and it was along this line of thought that the first consensus of the summit was reached; Australian leaders would at varying points like to see a lowering of the corporate tax rate, ie: “25% is the new 30%”.
Put simply, in a globalized world, countries are able to compete for the brightest minds (human capital), technological advancement (the Google of the future), infrastructure and investment by successfully advocating their value proposition to those who allocate capital. Australia has a lot going for it but our corporate tax rate is not one of our competitive advantages. In the Chairman of the Commonwealth Grants Commission, Greg Smith’s words lowering our corporate tax rate to 15% in order to “chase footloose investment” is unsustainable, consequently we must ensure that the rest of the Australian taxation package is competitive with other OECD nations and Asian neighbours.
Michelle de Niese of the Corporate Tax Association and Stephen Healey of The Tax Institute offered a harsh criticism of the current complexity within the national tax code, another factor that makes Australia an unattractive place to set up shop. Australian tax laws are ranked 2nd in complexity (behind the U.S) and almost 3% of national income or $40bn a year is spent on compliance. The notion that one in thirty dollars that the average Australian spends goes towards helping them spend an additional one in three dollars in taxes seems laughable.
Restoring the simplicity of our tax laws and consequently freeing resources for saving, consumption or investment seems like a non-contentious provision. However, de Niese posited that there is a trade-off between simplicity and equity, that simplifying the code would result in a greater proportion of GDP flowing to society’s well off.
Good Taxes vs Bad Taxes
Economist, Saul Eslake, who refuted the idea that simplicity was synonymous with a reduction in equity, contributed the most comprehensive analysis of the AFR summit. Echoing Australia Chamber of Commerce and Industry CEO Kate Carnell’s comment that the primary purpose of superannuation is to fund a modest retirement for elderly workers, it appears a no-brainer that super contributions above some limit, say $1MM should incur tax. Mr Eslake posited that closing tax loopholes and reducing the divergence between the capital gains and income tax rates are reasonable improvements and necessary to make a raise in the GST to 15% politically palatable, as raising the GST is associated with taxing the poor. Moreover a broadening of the GST base is consistent with the elimination of loopholes and simplification of the tax system that Mr Eslake contends will make for greater efficiency and equity.
Lindsay Tanner, Ged Kearney and Michael Andrew all voiced a not well understood notion, that there are good taxes and that there are bad taxes. The first roundtable of the summit argued that a critical component of tax reform lies in the ability of the reformers to explain associated benefits and costs to the electorate. Explaining why corporate tax is bad but GST and payroll tax relatively good will be no easy feat however there was a palpable sense of optimism in the room that Malcolm Turnbull and his new look cabinet could explain this rationale.
Half way through the first day of the summit the Business Council of Australia’s chief economist Lisa Gropp announced the “elephant in the room… remember we have a budget deficit”. The pro-business delegates proceeded to laud the opportunity for efficiency dividends, the idea that we can be getting the same, if not more value from our welfare, education and health system with lesser expenditure. Rightly so, this argument won’t be taken without skepticism.
Several delegates endorsed the idea of a permanent independent tax advisory unit, which means that Australians won’t be subject to “policy on the run” and that we will constantly iterate our policies to suit a dynamic global economy. The commonwealth of Australia has over one hundred and thirty separate taxes, ten of which raise 90% of the revenue – even by Pareto’s standards that is an egregious anomaly.
The most notable omission from the AFR Tax Reform Summit was any discussion of Thomas Piketty, the author of much acclaimed Capital in the twenty-first century. The text around the world is influencing the tax and inequality debate, however failed to receive one single reference at our Australian summit. Phil Edmands of BHP stated that if you “redistribute wealth, you kill the desire to create it”, a nonsense argument in light of Australia’s progressive income tax system. In his book, Piketty describes the tendency for wealth to accumulate and concentrate, a trend that has the capacity to undermine democratic and social ideals.
Saul Eslake alluded to the opportunity for removing inefficient taxes such as Stamp duty and conveyance taxes and introducing an ACT style property tax in its stead. He further queried why property should be treated differently to other types of assets, notably financial assets such as stocks and fixed income securities. This was an allusion to Piketty’s wealth tax. The wealth tax could be applied minimally (.1%) with negligible distributive effects and still provide a valuable set of data pertaining inequality trends in Australia. The issue of inequality is paramount to Australia’s younger generations and experts would do well to explicitly address the subject, as opposed to intuiting it through arguments about efficiency and sustainability.
I was doubly surprised by the lack of discussion on negative gearing, the process of utilizing leverage or a loan to acquire an asset. Commonly used by real-estate investors, this practice has been a driving force in the property boom that has pulsed through the country. Many Australians have observed family and friends priced out of markets and suburbs by the ballooning cost of housing.
The Economist ran an article last year reiterating that maintaining tax deductibility of interest payments costs world governments $500bn a year. Applying Australia’s share of global GDP as a proxy, we might presume that these deductions cost the national purse $8bn a year, not to mention additional unconstructive distortions that leverage can induce. Putting negative gearing and affordable housing at the forefront of the debate is another measure that would engage households and persuade them to grant further consideration to the less appealing yet necessary reforms, such as corporate tax cuts.
Shadow Treasurer Chris Bowen has repeatedly mused that a rise in GST is not tax reform, merely a tax heist. I do believe that the government of the day will be bold in its tax reforms and put most options on the table. Whilst a wealth tax or progressive consumption tax (another possibility that has not yet been mentioned) will unfortunately get no air-time, the government’s main conversation over the coming year will revolve around closing tax loopholes, raising and broadening the GST, lowering the corporate tax rate and simplifying our code. Importantly, I think that any Australian citizen would have been largely optimistic after attending the AFR Tax Reform Summit. In collaboration was a cross-section of government, business and industry experts who between them should propose beneficial reforms.
Moshe was a guest of Informa Australia and attended the summit as our guest.