As the nation’s population ages, Australia must rework its tax mix to rely less on income tax and other taxes that are harmful to economic growth, and consider better utilisation of the GST and land taxes, according to a new report published by The Tax Institute.
Broken tax system impeding the economy: The Tax Institute
The 287-page report by The Tax Institute, titled the Case for Change, examines key areas of the tax system that are ripe for reform, in a bid to kickstart a discussion over the best way to rework Australia’s tax mix that has remained largely unchanged for 60 years.
The report highlights that the taxes Australia relies on to capture some 60 per cent of its revenue are among the most harmful for economic growth. Among them are corporate tax, which is the fourth-most relied upon tax globally, and personal income taxes, which are the equal second-most relied upon tax globally.
Andrew Mills, director of tax policy and advocacy at The Tax Institute, said that Australia’s over-reliance on income tax is unsustainable, as Australia’s population ages and an entire generation prepares to retire.
“With a warranted focus on productivity and jobs, it makes no sense to rely so heavily on taxing personal income,” Mr Mills said. “Australia’s ageing population also means that, as an entire generation prepares to retire, a huge gap will be left in our tax revenue.
“There are simply not enough younger workers contributing income tax into the system to support the number of retirees in a sustainable way, unless we look at other revenue streams.”
More than two-thirds of Australia’s tax receipts, according to the report, come through personal and corporate income taxes — approximately twice that of the OECD average. In the 2017–18 financial year alone, 51.3 per cent of tax collected in Australia was from personal income tax.
Mr Mills said that by relying so heavily on such a small number of taxes, Australia is raising its economic risk, and that a large proportion of those taxes are paid for by a small number of companies, presenting a “concentration risk”.
“A tendency towards backing what is — wrongly — perceived as a politically safe policy has had a damaging effect on Australia’s ability to develop sound tax policy and law,” Mr Mills said.
“While that may seem easier in the short term, avoiding the real conversation of what tax reform needs to happen, and avoiding necessary, but perhaps harder to sell, changes hurts all Australians.”
Lower income tax, raise GST
The report adds to a groundswell of calls to repurpose the goods and services tax (GST) to usher in meaningful Australian tax reform. Mr Mills said that, if more people understood the potential role the GST could play in spurring economic growth, Australia could be better placed to legislate workable reform.
“How do we achieve a shift away from harmful taxes? It would be invaluable for everyone to better understand the purpose of taxes like the GST,” Mr Mills said. “Because the GST is already included in most of our purchases, many people don’t even think about what it is, or how it works.”
According to the Australian Bureau of Statistics, the GST accounted for just 11.6 per cent of total taxation revenue for the 2018–19 income year, compared with profits and capital gains at 60.5 per cent.
However, both the Henry and Thodey reviews, in step with an OECD assessment, found that consumption is “one of the most efficient and sustainable tax bases available to governments”, and that “empirical evidence indicates that a broad-based tax on consumption is one of the least damaging taxes to economic growth”.
“Treasury’s recent Intergenerational Report shows that reliance on personal income tax is only set to grow, from 11.1 per cent of GDP in 2020–21 to 12.7 per cent of GDP by 2035–36,” Mr Mills said.
“By broadening the base, increasing the rate to at least 12.5 per cent, or doing both, we can shift away from Australia’s problematic reliance on personal and corporate income taxes, both of which have been identified as particularly harmful for economic growth.”
The paper also makes the case for better leveraging land taxes as opposed to “more harmful” stamp duties, to diversify and improve Australia’s tax mix. The report suggests that the stamp duty hike and increase in the tax-free threshold for land tax announced as part of Tim Pallas’ Victorian state budget this year are “the opposite of what we would hope to see”.
“One major goal of land and property taxes should always be to make housing affordable for everyone,” Mr Mills said. “Land is a tangible asset, unlike, say, income. That makes it difficult for Australian residents and foreign investors alike to evade or manipulate a well-designed land tax, putting everyone on equal footing.”
The report suggests that the “overarching issue” with both stamp duties and land taxes is inefficiency. Stamp duties are reportedly unfair in that the burden is borne disproportionately by those who transact in real estate, and land taxes are inefficient due to broad exemptions.
Mr Mills said that existing land tax regimes are made complicated by concessions and exceptions, which in many cases can see renters and business owners shoulder the burden.
“Reform would ideally not only introduce a shift away from stamp duties and towards property tax, but examine how we apply that property tax,” Mr Mills said. “Charities and farmers, for example, are special circumstances and may warrant certain concession to an otherwise widely applied property tax.
“That is a conversation policymakers would need to have.”