PwC has released a report analysing the possible next steps for Australia’s taxation system, noting that comprehensive tax changes could potentially “reboot” the economy.
According to the report, PwC has estimated leaving the tax system as it is will prevent the federal budget from returning to surplus for an additional 19 years, and will take until the 2056–57 financial year to reach zero net debt.
However, despite the obvious need for tax reform, PwC has still cautioned against any changes until Australia has returned to some level of stability.
“Tax reform in the middle of an economic shock will pose another level of disruption to businesses that are already being asked to change in so many ways, and may give rise to reforms that will need to be recalibrated once some stability returns,” the report said.
“That does not mean, however, that Australia shouldn’t act; now is the time to plan for reforms as the nation emerges from the immediate crisis.
“Rather, Australia needs to triage and stabilise the economy. Only then will there be capacity to consider imposing change.”
The case for reform
While Australia was on the verge of returning to budget surplus before the economic downturn, PwC highlighted that Australia has been needing tax reform for some time.
PwC said in its report that the pandemic has exacerbated the existing problems in the Australian system.
“Despite the gently improving economic picture at the beginning of 2020, before the economic shock to the system imposed by COVID-19, the Australian tax system was struggling to meet the needs of the Australian community,” it said.
Australia’s over-reliance on personal and corporate taxes, for example, could potentially hinder growth in returning to pre-COVID-19 levels — which PwC said will be very similar to recovery from the GFC.
“The relatively high tax rate associated with company tax can hinder growth, with the effects from this largely being borne by workers,” the report said.
“There has been considerable discussion about the potential reduction of the company tax rate, though it is acknowledged that Australia’s company income tax regime is partly acting as a tax on economic rent, in lieu of alternative tax arrangements.
“Australia’s experience from the GFC suggests that it will take a long time for corporate taxes to recover from the COVID-19 downturn… This puts additional pressure on personal income taxes to carry the load.”
PwC also noted a reliance on “questionable tax bases” where the government would heavily tax activities it was trying to encourage people to avoid, such as smoking cigarettes.
Additionally, it highlighted a reliance on “inefficient” distortionary taxes among the state and territory governments which have undesirable side effects.
“Due to limited revenue-raising options, Australia’s states and territories continue to levy a number of highly inefficient transaction taxes, such as stamp duties and insurance levies,” the report said.
“It is well established that both stamp duties and insurance levies are inefficient and can deter otherwise beneficial transactions from occurring.”
Reform should not be to repay stimulus packages
PwC believes that tax reform should not be implemented purely to pay back the expected $140 billion deficit directly incurred as a result of the government’s fiscal response to the COVID-19 crisis.
It said reform for that objective would be unnecessary as government spending is unlikely to “crowd out” the private sector given lowered demand, low-to-negative inflation and low interest rates.
“The potential cost of increased government spending is limited given that the interest rate the Australian government pays on new debt is at a historic low (i.e. just 0.8 [of a percentage point] for money borrowed for 10 years),” PwC said.
“As a result, if the Australian economy resumed its long-run average growth rate after the current crisis, any increase in debt as a percentage of GDP will halve within 20 years.
“Even with the stimulus provided by the Australian government, the nation will continue to have low levels of government net debt relative to comparable countries and will continue to be seen as a safe haven by financial markets.”
Reform should instead look to address inequities brought about by the economic shutdown which aims to protect existing wealth in older populations and exposed working-age people to higher losses, PwC said.
PwC also said reform should be enacted with the aim of economic growth by increasing productivity levels and addressing businesses’ incentive to invest in new capital.