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7 May 2015

'We can't give up on tax reform'



Nothing says more about the shrinking horizons of the Abbott government than the course of the tax reform debate over the past six months. As revealed in Jennifer Hewett's column in The Australian Financial Review yesterday, the Business Council of Australia has pared back its tax reform ambitions to incremental change. Trying to manage bite-sized change is better than having the tax debate alarmingly career off into a raw grab for budget revenue rather than genuine reform that would better reward enterprise and productivity.

In his Sir Henry Parkes oration last November, Prime Minister Tony Abbott took one of his favourite political subjects – the dysfunctioning of the federation – to talk expansively on the need to reform how governments tax and spend. In December, Treasurer Joe Hockey predicted that the intergenerational report and the rising burden of ageing on government revenues would make tax reform the big talking point of 2015.

Then came the government's new year political meltdown. By February, Mr Abbott was making it plain that one obvious centrepiece of any serious tax reform package – extracting more revenue from the GST in order reduce the burden of taxing income – was off the table. When the Treasurer fronts the media to talk tax these days, it is about new ad hoc revenue grabs like a Google tax or GST on Netflix, rather than a bolder systemic reform. Even as it published a 200 page tax discussion paper in March, ahead of a white paper, the government has been lowering expectations. Given that the Howard government's tax reform process took two years, and the mostly impotent Henry tax review took 18 months, the chances of any significant tax reform going into an election in the second half of 2016 look slim.

The lost grip on reform has been the price of the stalled 2014 budget. As the Financial Review has warned previously, losing the plot on budget repair leaves an unstable foundation for tax reform. Now, Mr Abbott has neither the political capital to push for controversial change nor the budget surplus with which to compensate the losers.

The dilemma is that, for a government that is now living beyond its means to the potential tune of a $150 billion in deficits over the next four years, making the tax system work more effectively is more pressing than ever.

Compared to comparable economies, Australia's tax system relies too heavily on direct taxation of individuals and companies. Our top marginal personal income tax rate of 49 per cent compares with 33 per cent in New Zealand. Our 30 per cent corporate tax rate is one of the highest in the world. Next week's budget will again rely on wage inflation pushing workers into higher bands of taxation. That's a stealthy tax hike for the average worker of 5 percentage points over the next 10 years, blunting incentives to work. And, each dollar of company tax that the government takes costs 50¢ in elsewhere in the economy, ultimately in lost investment and jobs.

Shifting more of the tax burden to consumption, which Australia taxes relatively lightly, would make the tax system less of a burden on the economy.

Ironically, voters seem to be understanding this, with last month's Ipsos/Fairfax poll showing 37 per cent support for an increase in the GST, a big jump since the question was first asked in 2012. Support is there if the political will can be found. Governments can pay a price for timidness too. If the Abbott government lets defining projects like the budget and tax reform languish, it will remain behind the curve, with little to show and vulnerable to attack from within and without. It will depend too heavily on monetary policy and the Reserve Bank to prop up the economy, increasing the threat of boil-overs in the housing and share markets and raising the risks of being hit by a genuine crisis.

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