Why Australia needs tax reform

5 November 2007

The recently released tax policies of both John Howard and Kevin Rudd fail to address the underlying structural problems of Australia’s taxation system. The tax rules are unfair and complicated, and are costly to comply with. The system inhibits economic activity and its workings are not easily transparent.

Both major parties fail to recognise the need for structural reform. Where was the discussion about tax reform during the Treasurers’ Debate on Monday, 29 October? Instead, all we got was the usual discussion of generously giving people back their bracket creep.

The difficulty that scholars and politicians have in eliminating the higher marginal tax rates is simply a product of in-grained socialist ideology, an inability to understand numbers, along with contempt for the electorate that they are paid to serve. The people who designed the current system are all dead, so let’s move on.

Currently personal taxation accounts for only 48% of the $250 billion revenue, or $120 billion. Even if the top 12% of earners contribute as much as 36% of revenue ($43.2 billion) had their top marginal rate reduced to 30% then the loss to revenue would then be in the order of $10.8 to $12 billion. This is at the lower end of expert opinion as to revenue lost through tax minimisation.

On the other hand, currently the 40% and 45% rates typically become 30% and 15% rates through time honoured tax minimisation strategies. Uniform taxation will make such tactics unnecessary, while providing a simpler system that is fair to all.

Australia badly needs to remove the distortions (less than 5% of revenue) in the tax system that drive poor investment decisions, resulting in a negative impact on the entire Australian economy, ultimately impacting on the livelihood of ordinary Australians.

The economy suffers lost productivity as business and individual taxpayers are saddled with the costs of compliance.

Many investments supported by taxation rebates and deductions are notorious for their inefficiency. Compare the performance of the top 10 superannuation funds with the top 10 non-superannuation managed funds for evidence.

Tax revenue raised in a manner that distorts or inhibits employment, business or investment activity should be taxed differently. For example, the current levels of revenue from capital gains tax can easily be achieved through a non-intrusive capital exit tax applied to the sale of all shares and property.

At the other end of the spectrum, social welfare recipients are inhibited from earning extra money to support themselves and their families. Government support for families is badly designed and bureaucratic and is often derived from political opportunism.

The welfare and tax systems have evolved separately, with little coherent thought about how they should interact. The tax system as it now operates penalises hard working people as well as frustrating attempts by the under-employed from seeking financial self-reliance.

At various levels the effective marginal rate of 'tax' on welfare beneficiaries acts as a huge disincentive on them trying to get back into the workforce and becoming financially independent. Social security recipients should retain 60% of their earnings after tax and withdrawals.

Australia’s families and workers need to operate within a tax system that encourages hard work and initiative, and should not need to pay for expensive advice from accountants and solicitors to comply with the tax laws. The average person should not need the assistance of professionals in order to pay the correct amount.

The government of the day also should be obliged to tell the taxpayers of Australia how it spends the revenue it gains from each type of taxation.

For example, if money is collected under a special tax such as fuel excise, the government should spend it on improving the nation's roads and on road safety education.

Australian motorists pay billions of dollars a year in fuel excise but only a small percentage of that is actually spent on road building and maintenance, public transport infrastructure and road safety education. Instead, governments keep that money for other purposes and let private companies build toll roads, which motorists have to pay to use.

Ultimately, the current tax system has evolved from unbalanced policy priorities that occur when politicians cave in to the loudest lobbyist, the largest community group, and marginal electorates.

All Australians should pay their fair share of tax to provide the government services that we all need. However, to achieve this, the party which wins the election on 24 November must undertake sweeping reform of the tax system.

Richard Hackett-Jones is a candidate for the Senate and founder of Revenue Review, which advocates for tax reform.