As part of the president’s role and as part of The Tax Institute’s advocacy, I have met with a number of politicians and their advisers on various tax changes. On every occasion, I have used the opportunity to raise the issue of "tax reform".
These must be the dirtiest words in politics. I can understand why. They mean that someone has to give up "something" on the promise of a theoretical "something else". This involves a feeling of impending loss and grief, maybe even triggering the memory of a previous change that failed to meet expectations.
It’s time to remember that our political leaders are there to represent the community, their shareholders, and to put the interest of the shareholders ahead of their own.
Tax reform is not new. Ken Henry delivered his report officially to government on 23 December 2009. The 138 recommendations are now covered in dust.
The introduction to the report outlined the need for tax reform:
“… Australia is now facing a different set of economic, social and environmental circumstances to those that have shaped tax and transfer policy since federation. Emerging demographic, health and other pressures on budgets at all levels of government, and expected challenges to our economic circumstances, call into question the durability of the tax and transfer system.”
These issues are as real today as they were in 2009.
The Intergenerational Report 2010 provided some startling numbers. It referred to GDP being a function of the three Ps: Population, Productivity and Participation. It stated that Australia’s population is to increase to 35.9 million by the year 2050. Those aged over 65 are to increase from 13.4% to 25% of the population. And those aged over 85 are to grow to 5% of the population (1.6 million people). These numbers will have a dramatic impact on the government spending requirements necessary to maintain and deliver social and health services to this segment of the community.
It is estimated that government spending will need to increase by 4.7% of GDP (from 22.4% in 2015-16 to 27.1% in 2049-50) to provide these services. Our current tax revenues for 2015-16 are estimated at 25% of GDP. At this rate, our expenditure on health and aged care will exceed our revenue collections based on our current tax profile.
If we also consider the percentage of our population participating in the workforce (those aged between 15 and 65), we see this segment of the population decreasing by 7%. That is, from 5 workers supporting 1 person who is over 65 to 2.6 workers supporting 1 person over 65. To round out the discussion, we add the third dimension: productivity. There has been considerable discussion, following the federal Budget, on our need to move our economy away from being dependent on the mining sector to other sectors.
Our current reliance on the collection of personal tax cannot support projected government spending. Likewise, the prospect of increasing company tax does not lead to positive outcomes for businesses operating in a global environment when overseas locations provide both reduced labour costs and lower corporate tax outcomes.
For state governments, the issues are wider. Rightly or wrongly, state governments have increased spending instead of eliminating the inefficient taxes that were promised as part of the introduction of GST. This spending level has grown disproportionally to actual GST revenue shared between the states (GST revenue is increasing but not as much as was expected). The effect of this is that the states are running deficit budgets, and they have decreased credit ratings and increasingly rely on inefficient taxes. The argument then becomes multi-dimensional — not only with the federal government to increase state funding, but then, between states, as to how the pie is sliced.
The federal and state governments need to consider the impacts of an ageing population on our economy, the effect on tax receipts from our working population as the age mix changes, and the mix of these tax receipts. They need to work collectively to improve the efficiency of our tax system. This is called “tax reform”.
There is no white knight on the horizon that will put dollars on the table to fund a redistribution of tax revenues. It will only come through debate, consultation and policy change. Time continues to run down, our population is ageing, and businesses continue to decide where they will locate their business in the 21st century.
It’s not for me to say whether broadening the GST base and increasing the rate are the solution. It’s not for me to say broaden the land tax base and abolish stamp duty. It is up to each of us to consider these issues and put forward our views. We are the leaders in our profession, tax. We should show leadership and start conversations. The more conversations, the more people will listen, and maybe this will lead to research and debate. Then we may have reform.
By the way, did you have a beer or a glass of wine to celebrate our 70th anniversary on 16 July 2013?
Till next time...
The Tax Institute is Australia's leading professional association in tax. Its 13,000 members include tax agents, accountants and lawyers as well as tax practitioners in corporations, government and academia.