Reflections on the Australian tax system
I take the opportunity of the September President’s report to offer some reflections on the current state of the Australian tax system. To set the scene, however, I start with an adaptation of material recently penned by Canadian Tax Foundation Executive Director and CEO, Heather Evans (even though, obviously, her concern and audience is Canada): (1)
“The tax system is crucially important to economic growth in [Australia]. It supports the development of an equitable society and the redistribution of income to help provide for [Australians] who need assistance. It is entirely appropriate for our government to expect all taxpayers to be compliant with the law and to pay, on a timely basis, the amount of tax that they owe [or at least their fair share]. However, it is equally appropriate for all taxpayers to expect fair treatment under our tax laws, regardless of their income or level of wealth. Targeting certain segments of the taxpayer population on the basis of factors unconnected to their compliance is harmful and does little to enhance confidence in the system.”
So where are we now with the Australian tax system? In submissions I have signed off during my tenure as president, and in numerous submissions of past presidents before that, The Tax Institute has called on the government of the day to take every possible opportunity to improve Australia’s tax system so that it is simpler, fairer and more transparent.
It ought not to be lost on members that the Institute’s continual effort in this regard is prima facie evidence that the optimal levels of simplicity, fairness and transparency are yet to be achieved. In fact, I expect this is a reasonably common view held across the profession, even outside our own membership base.
It is clearly a policy issue, and not so much an administration issue. Therefore, it is the responsibility of the government to address, as opposed to the administrative function of the ATO. In any event, the Institute will need to continue with this advocacy agenda into the foreseeable future.
One anomaly that continues in the Australian tax system was recently highlighted in an opinion piece by our Senior Tax Counsel, Bob Deutsch. He highlighted that, while it is well and good for the government to pursue an agenda to reduce the company tax rate to 25%, that objective is entirely incongruous with the very high personal income tax rates that exist. Noting this “great distortion”, Bob observed that “individual tax rates are disproportionately and absurdly high relative to the company tax rate and certain types of passively derived income” (2), creating, counterintuitively, what amounts to a penalty against the earning capacity of individuals.
In my view, it follows that the government would be more likely to “acquire” increased political goodwill by addressing the disproportionately high personal income tax levels, leaving the company tax rate alone for the time being, but still achieving similar revenue outcomes. That said, I reiterate the Institute’s position that a reduction in company tax rates should be pursued to improve our international competitiveness and for the good of the economy at all levels. We will continue to support that course of action but, as Bob argues, that should not be done at the complete exclusion of attention to lowering personal income tax levels.
As Heather Evans contends, the tax system is an important lever that can encourage economic growth. Increasingly, however, politicians are using it to target certain segments for political purposes. For example, the government’s recently announced banking levy against one very profitable sector and, for Labor’s part, the policy to raise the top marginal tax rate to 49%.
In my view, the real issue lies in the clear unwillingness, purely on political grounds, of the government to take much needed structural reform to deal with the “big issues”. The only tax reform that we have seen in the past few years has involved tinkering around the edges. The effective shelving of the government’s tax white paper by subsuming it into the 2016-17 Budget was effectively a declaration that substantive tax reform was off the immediate agenda. I do not think that is a position we should willingly accept, especially where we can plainly see so many deficiencies.
Given Labor’s policy position on issues like capital gains tax reform and negative gearing, the debate will inevitably continue, but that is entirely moot if no meaningful reform arises from it. In those circumstances, the advocacy work of The Tax Institute has never been more important than it is right now. We need to continue the call for the reform necessary to deliver a simpler, fairer and more transparent system for all taxpayers.
References1 H Evans, Message from the executive director, Canadian Tax Foundation online newsletter, July 2017.
2 R Deutsch, “Taxing earnings – the great distortion”, TaxVine, The Tax Institute, 11 August 2017.
* Matthew Pawson is The Tax Institute’s President. This article was first published in the September issue of the Institute’s member-only Taxation in Australia journal.