Hewson's View | June 30

In the recent budget the Turnbull Government finally admitted that budget repair is both a spending and a taxing problem. While they remain committed to expenditure restraint, they now admit that some taxes must be raised if they can hope to return the budget to surplus by early next decade, although they remain committed to large cuts in corporate tax. 

However, rather than contemplate broad-based tax reform, they are heading down the path of smaller, ad hoc, increases in a myriad of taxes and charges. This budget saw an increase in the Medicare levy (notionally ‘hypothecated’ to funding the NDIS), a tax on foreign workers (notionally ‘hypothecated’ to training programs), and the bank levy on the top five banks.

MORE TO COME: Our tax system is complicated, inefficient, uncompetitive, and unfair, and further ad hocery will only compound these failings. Photo: file.

MORE TO COME: Our tax system is complicated, inefficient, uncompetitive, and unfair, and further ad hocery will only compound these failings. Photo: file.

Given their very optimistic assumptions on growth, wages and inflation – and therefore on tax revenues – to achieve a small surplus by 2020/21, the need for additional tax will be greater than admitted presently, as these forecasts are not validated. 

Moreover, there are very real questions about how long they can continue to tap workers via bracket creep when wages are so flat and living costs are rising; about how sustainable the corporate tax base will prove to be, especially with multinationals increasingly able to shift their profits to tax havens, and profits generally likely to flatten in a weak economy; and about the shrinking base of the GST, now levied on less that 50 percent of consumption.

There are also questions about the hugely expensive and rapidly growing concessions in housing and superannuation; about the pressure among the states concerning the distribution of GST revenue; about the inefficiency, and downside, of many state taxes; and about the ineffective taxation of petroleum and other resources.

There is also the risk that the states will start to piggyback on, say, taxes on the banks, as the South Australian Government has announced recently. 

Overall, our tax system is complicated, inefficient, uncompetitive, and unfair, especially when linked to the welfare and transfer system. Further ad hocery will only compound these failings.

The key to broad-based reform is the GST. Levied at a rate of 10 percent, it presently raises a little over $60 billion. To provide some orders of magnitude, if it was broadened to all consumption, and the rate increased to say 15 percent (still less than the global average), it could produce additional revenues of some $90+ billion. It would cost about one third of that to compensate the bottom 40 percent of income earners, leaving a significant sum to restructure the whole tax system (including abolishing some of the more inefficient taxes, such as stamp and insurance duties).

Beyond this, consideration could be given to reforming state payroll and land taxes.

When Turnbull seized the leadership from Abbott, he did so with the expectation that he believed in, and would deliver, genuine tax reform. He got off to a good start by announcing that ‘all options were on the table’, and thereby encouraging proposals and public debate. This was seen, initially, to build on the Tax Review that Abbott had commissioned.

Unfortunately, as soon as he called for options ‘on the table’, Turnbull soon removed them, running away completely from any tax reform agenda. Turnbull’s standing in the polls has since collapsed.

Voters are looking for leadership and genuine policy outcomes. Like it, or not, tax reform is inevitable.

 – John Hewson

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