Exploring the benefits of tax reform

The report sets out the usual arguments in favour of consumption taxes and presents data to show how low they are in Australia compared to other countries. The report also highlights the usual critiques about the exemptions from GST particularly for spending on health care, education, fresh food, childcare, water, and sewerage. The report briefly discusses some options for ’designing compensation arrangements for equity’ and ‘what would compensation look like’, but the discussion is limited. Any changes to the base and rate of GST must be as part of a broader package of reform that safeguards the interests of low income households.

Conny Lenneberg Executive Director, Brotherhood of St Laurence

An excellent paper highlighting the case for, and political challenges ahead, for medium term tax reform and the role GST reform can play.

Some observations:

• The CTA's recent member survey showed GST reform was the second only to a corporate rate reduction as the preferred tax reform option if wider reform is found not to be possible. The GST reform options canvassed in our survey produced the following results:
  • Changing the rate on the existing base - 24%
  • Broadening the base to fresh food - 21%
  • Broadening to education - 19%
  • Broadening to health - 17%.
• PwC’s analysis of the impact on equity of various changes (which indicated none of the proposed GST changes produced significant increases in inequity - before compensation) is compelling and worth exploring further with other stakeholders.

Although not part of the analysis, the equity argument and impact of a tax mix switch needs to consider where the increased revenue raised is spent (i.e. on low or high income groups, education, health, paying down public debt). While spending priorities are matters for government, the expenditure side of the equation needs to be part of the conversation.

Paul Suppree Assistant Director, Corporate Tax Association

The GST is a regressive tax and any move to broaden its base or increase its rate will have implications for low income households, especially those with children or who are on welfare. That is why Catholic Social Services Australia has long held the view that determining the level of welfare payments such as JobSeeker, Pensions and Family Tax Benefits should be done by an independent body. The value of one-off adjustments to welfare payments, as occurred during the introduction of the GST, tends to diminish over time. The idea of an independent body or process to determine the appropriate level of welfare support has an application beyond changes to GST or other tax measures. However, this may be a helpful mechanism as part of any implementation strategy, to provide transparency to the public about the implications of any tax changes and how that might be addressed by government through increased support payments.

Joe Zabar Deputy CEO, Catholic Social Services Australia

The St Vincent de Paul Society National Council is concerned that the GST is a regressive tax that adversely affects low income households who spend a higher proportion of their income on consumption. For this reason, we hold concerns about any proposal to increase the rate of the GST.

Either broadening the base, increasing the rate or both will affect low income households more than higher income households. We note that the impact on low-income households is greatest where the GST base is broadened in conjunction with a rate increase, compared to simply raising the rate or broadening the base in isolation.

We agree that any changes to the GST whether by raising the rate, broadening the base or both must include measures that compensate for the impact of the changes on low-income households; and that it would be necessary to consider the appropriate scale of compensation measures, the mechanism by which they are delivered, and how they can be kept in place over the long term.

For all households, we would be concerned about broadening the base to include fresh food, health, childcare and water and sewerage but less concerned about broadening the base to include financial services.

We believe that exemption of basic or essential goods should be retained for all and would support a tiered system of rates that includes a higher application of the GST on ‘luxury’ goods.

We support the principle that the burden of any tax change must not fall excessively on low-income households and that those most in need are protected and should receive full compensation for any increased GST payments.

Toby O'Connor CEO, St Vincent de Paul Society National Council

The global and Australian economies are entering severe downturns despite large scale fiscal and monetary policy stimulus. Financial conditions are being determined by policy action rather than private market forces and with that the cost of capital has collapsed. Conditions are unlikely to materially improve over the next 1-2 years, even if substantial gains emerge in medical responses to the pandemic.

In this setting, adjusting tax provisions is of relatively little value and far greater economic leverage comes from using fiscal room for direct public expenditures and assistance to those in greatest need (who have low savings propensities). This is not the time for implementing tax reform. It can be, however, a time for developing future tax reform ideas for implementation when organic demand growth is well established. Future reform should address long term structural, not cyclical, needs. For this we need, in particular, a tax-transfer system far less adversely impacting on the allocation of national savings and investment. It must also be cast within a broader policy strategy that will produce a more robust, equitable and creative society.

Greg Smith Former Member, Future Tax System Review

This new series on tax reform and the role it can play in Australia’s recovery from the novel coronavirus pandemic is a welcome development. This first piece presents many of the problems that tax reform will have to address.

Quick and ill-considered changes to the tax system would be a poor response to the pandemic. Tinkering is what has put us in the current untenable position with our tax system. However, now is the time to start a reform process. One that might take several years, one that would be well thought-out and one that would consider all aspects of the tax and transfer system. Nothing should be ruled out.

When thinking about tax reform, it is important to consider both the tax and the transfer sides of the system. Our highly targeted, heavily means-tested welfare system works well to get money to the most disadvantaged while keeping a lid on costs. But the downside is that it generates high marginal effective tax rates for some individuals. These trade-offs need to be considered and there is no obvious perfect answer.

Efficiency is another important consideration. Evaluating taxes based upon their excess burden and the economic cost in terms of deadweight loss is important in evaluating which taxes to increase, which to decrease, which to eliminate and which to add.

Finally, a big issue in our system is the arbitrage opportunities created by the wildly varying effective tax rates on very similar types of income. Simple tax theory suggests broad bases and low rates and the current Australian system deviates from this basic principle in a dazzling number of respects. Fixing this must be a major focus of reform.

Robert Breunig Director, Tax and Transfer Policy Institute, Crawford School of Public Policy

Australia faces significant economic challenges because of COVID-19, as do many of our key trading partners. A historic period of almost 30 years of economic growth has abruptly ended and seen a significant increase in unemployment and lost economic output. The key challenge for the Australian economy is reinvigorating business investment and creating new jobs.

The PwC report highlights important issues about the sustainability of Australia’s tax system. These issues will need to be addressed as Australia moves out of this crisis period and works towards putting the economy on a sustainable growth trajectory.

Australia needs to move to a more modern, competitive mix of taxes that will best promote the wellbeing of the Australian community and support job creation. It is not about one tax, but the combination of taxes, and setting an overall tax mix that is most able to achieve the goal of growing the economy and creating jobs while funding vital government services across the federation.

Jennifer Westacott Chief Executive, Business Council of Australia

Australia faces challenges related to demographic, environmental, technological and geopolitical changes – all of which affect the future of work and taxation. This report highlights the need for tax reform in Australia. Its concern about intergenerational equity issues is narrow in scope. In the current context, the paper places too much emphasis on deficits. As many commentators have observed, deficits are an important mechanism to fund social infrastructure and economic stimulus. Indeed, Stephanie Kelton, in her book - The Deficit Myth: Modern Monetary Theory and the Birth of the People’s Economy - argues that public deficits can foster growth. Social equity and environmental sustainability should be central considerations of current or future tax reform.

Conny Lenneberg Executive Director, Brotherhood of St Laurence

The PwC report is a useful reminder of the limitations of our tax system. Whether you think we collect too much tax, or not enough, the economic cost from collecting those taxes is higher than it needs to be. Improving the tax mix – replacing taxes with high economic costs with those with lower costs – could boost productivity.

Governments have more pressing agendas in the next year in dealing with the immediate fallout from COVID-19. But tax reform should be part of the conversation about rebuilding after COVID-19.

The more difficult question the report raises is: who pays for the fiscal costs of COVID over time?

As PwC points out, the young have already paid a high economic price for COVID-19. Younger workers are more than twice as likely to have lost their jobs during the shutdowns.

The costs of COVID-19 should be shared broadly across all Australians. As governments consolidate budgets, we should not rely on bracket creep to do the heavy lifting. If we do, the young will pay twice. Winding back some of the generous tax breaks for older Australians, as PwC suggests, should be part of the solution.

But governments also need to future-proof the economy. Tax reform is part of this story. Better policies around workforce participation, energy and climate policy, land-use planning, competition and innovation will also be needed to create the preconditions for strong sustained increases in living standards.

Danielle Wood CEO, Grattan Institute

I would like to congratulate PwC for producing these reports as they are a welcome contribution to the much needed discussion on tax reform.

ACCI is strongly advocating for both sides of government and both tiers of government to come together to resolve the problems with our current tax and transfer system.

Ross Lambie Australian Chamber of Commerce and Industry

Reform of Australia's tax and transfer system is long overdue. Reform during this current crisis is problematic but that should not stop us from exploring how Australia's tax and transfer system might better deliver economic growth and full employment. Like any reform agenda, reform to our tax and transfer system should be phased. We should give priority to measures which grow our economy and support the creation of new industries and employment. That should take precedence over paying down debt. We should not allow debt to green light austerity measures which will only serve to harm those most impacted by the COVID-19 pandemic. Many governments have embarked on tax reform, yet few have successfully carried these to fruition. All too often sectional interests use discussions of reform as an opportunity to further their interests ahead of the common good. If we regard taxation as the contribution we willingly make to improve our society, then reform will come. I commend PwC for this paper.

Joe Zabar Deputy CEO, Catholic Social Services Australia

We agree with PwC that now is the right time to lay the groundwork for significant tax reform in Australia, with implementation to follow in time. The ‘shock’ and ‘management’ stages of the COVID-19 crisis will provide some sobering insights into the known weaknesses in our tax system, including its over-reliance on personal, corporate and distortionary State taxes and its under-reliance on more efficient consumption and land taxes.

Taking this ‘recovery’ time to lay the foundations for tax reform will provide stakeholders with an opportunity to better understand each other’s concerns, where the differences in view lie, and how we can best move forward towards our shared goal of a tax system that encourages growth and supports all Australians. As PwC notes, reform involves change and change requires trust. We must all focus on building trust in each other to support change that benefits all, not just a few.

While we shouldn’t hinder our economic recovery by aggressively paying down new government debt, the fact that the loss of wealth from the COVID-19 crisis will primarily be borne by young and working age Australians to protect the health of those over 60 should be a consideration when devising the reform agenda. Tax reform unquestionably has a role to play in boosting productivity and boosting productivity is necessary if Australia is to thrive following this crisis. Agreement amongst all stakeholders on this point will be crucial if we are to move forward together.

Michelle de Niese Executive Director, Corporate Tax Association

The St Vincent de Paul Society National Council agrees that Australia should be planning comprehensive tax reform now, but the implementation of this reform should wait. However, some action should be taken now such as not proceeding with the third tranche of the seven year plan of income tax cuts announced in the 2018 and 2019 Budgets.

We note the numerous tax reviews previously conducted but not implemented by government and suggest that any future review commence with an analysis of these reports, particularly the 2008 Henry Review which recommends broad ranging reform, not just to GST but all consumer taxes in Australia. Henry believes that this approach would be simpler to administer and, in designing the cash flow tax, the base and rate of the consumption tax could be reconsidered. ⁽¹⁾

We believe that any tax reform must address the widening inequality gap and increasing poverty rates as outlined in the UNSW’s Poverty in Australia 2020 report. ⁽²⁾

Numerous reviews on Australia’s approach to taxing savings (including bank accounts, superannuation, shares and investment properties) have found it to be inconsistent and a serious driver of intergenerational inequality. Some taxes are progressive, others regressive and some favour the old but disadvantage the young. ⁽³⁾

Recent research recommends a dual tax system, with income taxed progressively and no difference in tax rates between savings measures.

The four key principles proposed are:

• Savings should be taxed at a lower rate than labour income.
• Most types of savings should be taxed at the same rate.
• Savings income should be taxed independent of the tax rate on income from other sources.
• Taxation of savings should focus on income generated from savings and not the total stock of assets.

We believe that it is possible to build a robust economy into the future and address inequality and poverty at the same time. Tax exemptions that benefit the wealthy and leave those living in poverty behind must be reviewed such as the capital gains tax, dividend imputation, negative gearing and superannuation tax concessions. Superannuation tax concessions alone are growing rapidly and, with a projected cost of $52.5 billion in 2022-23, are set to rival aged pension costs. ⁽⁴⁾

Research by the Grattan Institute ⁽⁵⁾ has found that our retirement system is failing poorer Australians, especially low-income women and retirees who rent. Instead of increasing compulsory superannuation, Commonwealth Rent Assistance should be increased by 40%. The pension assets test is too harsh because it excessively penalises people who save more for their retirement. Superannuation tax breaks are problematic as the budgetary cost is unsustainable and half the benefits flow to the wealthiest 20% of households.

Three reforms are proposed to keep superannuation tax breaks in check:

• Voluntary contributions from pre-tax income should be limited to $11,000 a year (saving the budget about $1.7 billion a year).
• Contributions from post-tax income should be limited to $250,000 over a lifetime, or to $50,000 a year (this will fill the gap in the tax system over the longer term).
• Earnings in retirement are currently untaxed for people with superannuation balances of less than $1.6 million but should be taxed at 15%, the same as super earnings before retirement (saving about $2 billion a year at first, and much more in future).

Considerable research and reviews have been conducted, with many different approaches proposed. However, all future taxation reform must be underpinned by the premise that a strong Australia is one where inequality is significantly reduced.

Toby O'Connor CEO, St Vincent de Paul Society National Council

_{(1) Henry, K. 29 April 2020. In times of economic crisis, what can we learn from the past? ABC Radio National Accessed at: https://www.abc.net.au/radionational/programs/breakfast/in-times-of-economic-crisis,-what-can-we-learn/12195996
(2) Davidson, P., Saunders, P., Bradbury, B. and Wong, M. (2020), Poverty in Australia 2020: Part 1, Overview. ACOSS/UNSW Poverty and Inequality Partnership Report No. 3, Sydney: ACOSS. Accessed at: http://povertyandinequality.acoss.org.au/wp-content/uploads/2020/02/Poverty-in-Australia-2020_Part-1_Overview.pdf
(3) Varela, P., Breunig, R., and Sobeck, K. (2020), The taxation of savings in Australia: Theory, current practice and future policy directions, Tax and Transfer Policy Institute (TTPI) Policy Report No. 01-2020, Canberra, Australia. Accessed at: https://taxpolicy.crawford.anu.edu.au/sites/default/files/uploads/taxstudies_crawford_anu_edu_au/2020-07/20271_anu_-_ttpi_policy_report-ff2.pdf
(4) The Australia Institute. February 2020. New Analysis: Superannuation Tax Concessions Big, Getting Bigger and Unfair. Accessed at: https://www.tai.org.au/content/new-analysis-superannuation-tax-concessions-big-getting-bigger-and-unfair
(5) Coates, B. Nolan,J. 2 March 2020. Our retirement system is failing poorer Australians. Grattan Institute. Accessed at: https://grattan.edu.au/news/super-fees-remain-far-too-high/}