Taxation and post-COVID-19 Australia

Major changes to taxation arrangements are central to our emerging from the COVID 19 crisis with a stronger, more resilient and better economy and society.

To achieve this, we should set our sails for a higher productivity economy and a more inclusive economy and society. And we should set ourselves on the path to net zero emissions by 2050.

The setting

This will involve a lot more than just taxation of course and we need to lift our game in education and training; in energy policy; in aged care; in the supply of affordable housing; in broadening and deepening our business capabilities; in generating greater public sector efficiency; in improving our approaches to regulation; in managing industrial transformation and development; and in our workplace relations arrangements.

Most of these are not new areas that suddenly need improving. In many of them we have not been as good as we should have been for a while.

There are new priorities too: many more clearly highlighted by the COVID-19 experience. We need to ask whether we have been valuing all our health workers as highly as we should and whether we have the best management and institutional arrangements in place. The same goes for education and child care.

We will need once again to grapple with reducing unemployment and building new businesses to replace the many that have been or will be forced to shut.  With unemployment, and particularly youth unemployment, we should ensure a much more rapid recovery of lost ground than has followed previous downturns.

We need to find new ways to manage the risk of disruptions to inbound and outbound supply chains. We need to diversify our international trade and investment flows and our sources of national income. We need to think long and hard about the risks of more constrained immigration. And we will need better taxation arrangements.

In all of this we have the good fortune of starting with distinct advantages. In responding to COVID-19, the quality of the expertise and the dedication to duty in our state, territory and federal public sector agencies has been exemplary and has reinforced further the qualities demonstrated during the summer’s horrendous bushfire season.  The best of cooperative federalism has been on show. Long may it reign!

Our economy, while wounded and in need of a steadying hand, is faring much better than many others. It has kept supplying our hospitals and health workers while adjusting its own health and safety practices to unforeseen requirements. It has kept our shops stocked; the home delivery business in full swing; and it has maintained momentum for an impressive range of our exports. While not without its difficulties, across both the public and private sectors we have pivoted swiftly to working from home.

There are also strengths in our tax systems upon which can be built an approach much more fit for purpose.

There are also considerable weaknesses and they will be shown up more starkly as we move towards the economy and the society that meets our ambitions.

Budgetary policy

Australia is still reaping the benefits of a multi-decade period of fiscal responsibility. We have had our excesses and missteps and we have had our share of over-corrections, but we managed to gradually rebuild the fiscal capacity that was considerably depleted by our successful response to the GFC. This sometimes painful rebuilding put us in a position where our governments have been able to deploy an even larger amount of fiscal ammunition in response to the current crisis.

When the time comes to do the sums for our 2020-21 Budgets, the Commonwealth, the states and the territories will face a sea of red ink. Revenue has tanked and spending has skyrocketed. Debt has ballooned and we will be adding to it for a while yet.

At the same time, building the stronger, more resilient and better economy and society that will pull the country together seems likely to involve additional public spending. On health; on aged care; on training and education; on income support for the jobless; on public housing if we go down that route; on public support of child care if we make that choice; and, on a fair few of the ingredients required to build a high productivity and low emissions economy such as research, development and early stage financing. There will be no shortage of ideas and proposals. Some of these will be better met with private sector involvement.  But not all.

Money is sure to stay cheap for a while yet although continuing low inflation will mean the real level of public sector debt will not erode at the same pace as it did in the second half of the last century and the years leading to the GFC. Low inflation also slows down fiscal drag – the other tried and true restorative elixir of budgetary positions.

Thankfully, young Australians have been spared from the most debilitating health effects of COVID-19. They are also sharing in the insulating effects of household and business fiscal support. But they should not be left to pick up the bill. Nor, if the need were to arise again to deploy public funds to ward off a devastating downturn, should they find the cupboard bare.

In short, we need to move once again to restore the strength of our public finances.

More taxation is not the only answer. We also need to build greater productivity not only in the private sector but also in the public sector and in the provision of health, aged care and education services. Right across the board. And the more we can achieve on this front: cutting waste; making sensible cost-reducing investments; developing new practices; and accelerating our use of digital technologies, the less reliant we will be on the revenue side of the budget.

Taxation

Inevitably though taxation has a role to play. We cannot however afford to stifle private initiative and ingenuity. Geese, golden eggs and all of that. We need instead an approach to taxation that is pro-revenue and pro-growth.

Our current approach to taxation falls well short of what we need.

  • Our major consumption tax – the GST – is eroding before our eyes as expenditure on consumption that is not taxed grows more rapidly than taxed consumption.
  • Fuel excise is also in decline and the electrification of transport is going to make this worse. Much worse.
  • Our transfer taxes on commercial and residential property are almost entirely without virtue and, bizarrely, we overtax insurance.
  • There is a gaping hole in our land tax base.
  • Our payroll taxes apply discriminately and have built-in barriers to business growth.
  • We have been extraordinarily slow to patch up the Petroleum Resource Rent Tax.
  • Other resource rents are untaxed while in comparison the plethora of royalties with different bases and rates do much more harm to the resources industry, the states and territories and the country.
  • Our taxation of household saving is all over the shop with different arrangements applying to superannuation, owner-occupied residential property, investment properties, bank accounts, dividends and capital gains.
  • Our very heavy reliance on income taxation leaves us poorly positioned to attract mobile capital and labour; it imposes comparatively heavy tax burdens at moderate levels of personal income; and in combination with our tightly-targeted approach to income support, it creates debilitating effective marginal tax rates at critical areas of social disadvantage.
  • We still have a substantial black economy that is unfair on honest individuals and businesses and undermines confidence in and compliance with tax laws.
  • Similar undermining of confidence occurs at the corporate level. While in aggregate our company tax regime is clearly very robust, there is the ever-present threat of misuse and avoidance and a need for constant evolution to match changing business models and technologies.
  • Compared with their spending responsibilities, the federal government raises too much revenue and the states and territories don’t raise enough. Too often this results in a confusion of responsibilities and accountabilities and all the problems of decision-making from afar.

While this is a much longer list than we should be comfortable with, there are also virtues in our tax system.  It has after all and for a very long time meant that our different levels of government have been able to provide a myriad of highly valued services.  We have a lot to be proud of in Australia and a good proportion of that is provided publicly.

Our taxation arrangements play no small part in the very significant redistribution of income that occurs in Australia with very little by way of either dissent or recognition.

So, what should we do? 

A very sound starting point would be to cast aside timidity and plot a course towards a better end point.  In imagining the destination, we could do a lot worse than dusting off the Henry Review of Taxation.  What follows is largely in line with that Review.  Of course, not every suggestion should be pursued and there are sure to be others not included below that have considerable merit.

Like the Henry Review we should be mindful of the need to take an integrated approach to the tax and income support systems.  While we should commit to at least the existing degree of poverty alleviation and redistribution, we need to put aside entrenched attachments to familiar measures and proposals and look more broadly at measures that, while contributing to equity, are less damaging than high effective rates of tax on work and saving.

We should reduce the burden of tax on the returns necessary to attract investment.  We should be less wary of taxes on economic rents whether they be resource rents or rents arising from industry concentration or the impacts of regulatory arrangements.

We should level the savings playing field but retain incentive for the self-provision of retirement incomes, contingency funds and the accumulation of investment capital.

We should wean ourselves off fuel excise and replace this with more direct road user charges.

Where it makes sense to impose “sin taxes” like those we have on alcohol and tobacco, we should do so in ways that are properly reflective of the social harm while rigorously clamping down on any evasion that would undermine their effectiveness.

We should tax consumption a bit more and as evenly as we can.  We should be open to whether that is best achieved by the convoluted GST, a more direct tax on business cash flow, or some combination of these.  The Henry Review also came up with an ingenious approach to payroll tax in its approach to a business cash flow tax that is well worth throwing into the mix.

We should at least preserve the proportion of revenue we raise from property taxes but concentrate our efforts on the unimproved value of land.  The broader the use of this base (which we currently use for local government rates and state and territory land taxes) the better.  It should certainly be broad enough to finance phasing out the transfer duties that are currently levied on the full market value of residential and commercial property transfers.

There is strong scope for carving out a special regime for smaller businesses that don’t have the added complication of foreign investors.  We already have moved towards this and with a few additional steps we could invigorate this important and time-poor sector by removing most if not all of the complexities associated with the timing of deductions and income.  At least as much assistance could be delivered through this separate regime as the relief from compliance and tax burdens that we currently provide in the form of payroll tax exemptions for smaller businesses.

In any recasting of tax arrangements, we need to build them around the federation.  We should assign areas of service provision to the jurisdictions best able to administer them. We should reduce intergovernmental grants to the extent necessary to help meet appropriate harmonisation objectives and to fund the interjurisdictional redistribution requirements that are not met by the general redistribution of income and in kind support across the country.  We should limit our recourse to grants that go beyond these areas.

When should we start?

All this is much easier said than done of course. And it would require a lot of talking, listening and codesign before we were ready commit to the journey.  Even the most daunting journey begins with small steps.

I cannot see any good reason for delaying taking these initial steps.

It will take leadership and open-minded participation. We can start by being positive; refraining from rushing to the exits; avoiding ruling stuff out at media conferences and in the bear pits of party rooms; and leaving behind the slogans deployed last time (and the times before that).

And of those who will think it’s not worth the trouble we should ask ‘what is the alternative’?

Building a stronger, more resilient and better post-COVID-19 economy and society will be much, much harder and more costly if we are saddled with our current tax system. There is a high likelihood we wouldn’t get to the destination.

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Peter Burn
Head of Influence and Policy at Ai Group, Peter is responsible for policy development on a wide range of issues relevant to Ai Group members and works closely with our National Workplace Relations Policy and Education and Training Policy teams. Previously Director – Policy at the Business Council of Australia, Peter also held academic positions in Economics Departments at the University of Queensland and the University of Newcastle after starting his professional career at the Commonwealth Treasury. He has extensive experience in taxation policy including in the Tax Policy Division of Treasury at the time of the Draft While Paper and the Reform of Australia’s Tax System; as a lecturer in Public Finance; as Secretary to the Business Coalition for Tax Reform between 1997 and 2002 during the time of the development and implementation of A New Tax System and the Ralph Review of Business Taxation. Peter was also a member of the Business Tax Working Group that advised Treasurer Swan on changes to business taxation and has led taxation policy development while at Ai Group.

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