All roads lead to the urgent need for greater tax reform

The standout message from a week in which the business community and government set their sights on the future is that tax reform is an urgent priority to safeguard national prosperity. Lower tax rates are needed both for companies and individuals. Australia’s tax system is skewed towards punishing hard work and investment because governments have been too weak to address the structural issues we have known about for decades. Left unchecked, personal income tax will make up almost 60 per cent of total receipts by 2063. And as the population ages the burden will fall most heavily on the younger generation. By 2061 there will be only 2.7 workers for every person over 65, compared with 3.8 today and 6.6 40 years ago. Across that period existing revenue streams, including fuel and tobacco excise, will fall but spending on the National Disability Insurance Scheme, defence, health, aged care and debt repayments will grow from one-third of all government revenues to half.

Jim Chalmers may be focused on building a care economy of government services but former Treasury secretary Ken Henry is closer to the mark when he says without tax reform we are heading for an intergenerational tragedy. Without cuts to company tax rates Australia will continue to struggle to attract foreign investment. This is because a higher company tax rate relative to our competitors acts as a tariff on imported capital. As Dr Henry points out, capital inflow has been declining as other countries have cut their company tax rate.

Tax reform was at the centre of the Business Council of Australia’s blueprint for national action released on Monday. It says the impact of our suboptimal tax mix is that it will not raise enough revenue for the goods and services the community needs and expects. But speaking after the release of the BCA blueprint and the government’s own Intergenerational Report, the federal Treasurer ruled out sweeping tax reform, saying the Albanese government was focused on comparatively modest changes to taxes on multinationals, high-value superannuation accounts and petroleum extraction. Opposition Treasury spokesman Angus Taylor said the government’s plan was for increased taxes, increased spending and budget deficits as far as the eye could see. In truth, a four-decade horizon of underlying cash balance deficit was a feature of the Josh Frydenberg Intergenerational Report in 2021 as well. Fixing the tax system needs to be a bipartisan project. The Albanese government must acknowledge that delivering its aspirations for the care economy and other spending measures will be dictated by its ability to pay. The current approach of Labor governments to demand a greater share of resource profits through windfall taxes and price caps is not a long-term option. It is likelier to result in lower future investment that pushes an even greater burden on to individual taxpayers, with the biggest impact to be felt again by today’s younger generation.

There may well be an argument for tax arrangements for commodity exporters that are different to the rest of the economy to allow a lower corporate tax rate and greater incentive to invest in other parts of the business sector. Changes to the rate and application of the GST also must be open for discussion. A 2020 review found broadening the base of the GST to include fresh food, childcare, health, education, water and sewerage would raise about $21bn. Lifting the rate on the existing base from 10 to 12 per cent would raise $14.5bn. The current GST rate of 10 per cent compares with an average of 19.3 per cent among OECD nations. The politics of GST will always be difficult, but the alignment of Labor governments across the states and commonwealth could make the challenge possible. Any deal should be revenue-neutral and not an excuse to lift the government take. It also should revisit the original aim of the GST to remove the imposts of state governments to further simplify the tax system.

Political courage is needed to tackle the findings outlined in the Intergenerational Report. Without action the outlook is for four decades of deficits out to 2063, fuelled by an ageing population, lower economic growth and ballooning government spending on the NDIS, health and aged care, defence and debt repayments. The answer does not lie in hitting workers harder for more tax. It comes from cutting taxes to grow the economic pie, something former governments including Hawke, Keating and Howard understood and Anthony Albanese must be brave enough to embrace.