Five ideas to help fix Australia’s tax system

Source: AAP/Lukas Coch.

By Miranda Stewart, Australian National University

Our tax reform debate seems to be stuck. Our federal fiscal system is skewed. What kind of a fiscal bargain can we strike to build a better tax system for the future?

A new federal bargain: share income tax and GST equally

The federal fiscal bargain will always be a dynamic process. But we can re-set parts of our institutional framework to improve it.

Here’s an idea: share income tax and GST revenues equally between the federal government and the states, replacing all other grants from the Commonwealth government. A new Intergovernmental Agreement would be needed and both state and federal governments would have a stake in future tax reforms for both income tax and GST.

This would provide a clear budget constraint for the states, plus some more revenue. The revenues would be equalised across the country.

Fix state land tax and payroll tax

Before we sign up, let’s fix up those tax bases. States and territories need to commit to reforming stamp duty and payroll tax. First, replace stamp duty with land tax. Second, expand payroll tax to cover all wages while lowering the rate.

Stamp duties are the most inefficient tax. A broad-based land tax with a low flat rate is the least distorting and it can raise stable and substantial revenues to fund state services. Stamp duties are a barrier to the transfer of commercial and residential property and the most volatile of state revenue sources. The exemption of the owner-occupied home from land tax distorts housing supply, making housing less affordable.

To make life simpler, state governments could put land tax and rates on the same return – and to fund transition, the extra revenue from Commonwealth income tax would help.

Current payroll taxes exempt about half of all wages. A broad-based payroll tax with a low rate would remove distortions in business organisation and end the arbitrary thresholds that keep growing businesses small, as well simplifying national business activity. A tax rate of about 3% on a broad base could raise as much revenue as the current payroll tax. In future, the payroll tax could be collected through the Pay As You Go income tax system.

States would keep all the revenue and could levy different rates if they chose, but crucially a single rate would have to apply to the harmonised base for each of payroll and land tax.

Fix income tax and transfers for workers and families

Australia’s progressive income tax rates and transfer system is mostly fair and stable – and should stay under control of the federal government.

Most importantly, the government should fix the high effective tax rates caused by interactions between income tax, family benefits and childcare payments. These contribute to keeping many women with young children out of the workforce or in part-time work. That in turn reduces their economic independence, retirement savings and lifetime well-being – as well as income tax revenues.

The best solution is to provide for universal paid parental leave of at least six months for infants, and universal childcare for parents who are working or studying. This is also an investment in our children, for the future. It would largely replace existing family or child payments – at least after the very early childhood years. We must make sure that those who cannot find work, and single parents and their children, get adequate income support and are not left behind in poverty.

And, yes, workers need an income tax cut. Our income tax thresholds need adjustment from time to time because of bracket creep as nominal wages rise with inflation. We should leave the tax-free threshold where it is, but the federal government can deliver an income tax cut focused on median and average wage earners – e.g. by adjusting the 19% or 32.5% tax rates down, or increasing the $80,000 threshold.

Tax savings and retirement income more fairly

Our superannuation and retirement pension system has served us well but provides perverse incentives now: excessively generous superannuation tax concessions for contributions, earnings and pay-outs, benefiting rich people the most, and steep effective tax rates for age pensioners on savings and earned income.

It would be better to tax contributions at the worker’s marginal tax rate and to exempt earnings and pay-outs. But in transitioning to a new system, we need some tax on existing super savings which have benefited from generous concessions. For most workers, who will need at least a part age pension, we should apply a lower effective tax to earned income and to deemed income from assets, smoothing the tax scale.

For other savings, we need a more coherent approach. Top income earners derive most capital gains and get the most benefit from negative gearing. We should limit deductibility of investment expenses to investment gains and income, and make the capital gains tax discount less generous.

Fix the GST and company tax

Finally, two proposals that are not so fashionable but are important for budget sustainability and prosperity.

First, fix the GST by expanding the base. Its main purpose as our second-largest tax is to raise revenue. The GST is an essential element in our tax system and it has lots of holes.

As well as covering digital downloads and e-commerce, we should apply GST to health, education, water and financial services. In the longer term we may need to increase the rate, say to 12.5%. Compensation is needed for welfare recipients and revenue should be used to help fund state tax reform, while also supporting cuts in personal income tax for moderate wage earners.

Second, Australia needs to set a clear path on company tax in future. This issue is not going to go away. It is plausible that we should aim for a company tax rate of 25% in the next few years. This costs revenue and it must be accompanied by broadening the company tax base and tightening enforcement co-operatively with other countries.

A shared stake in fairer and more efficient taxes

The Commonwealth government has an obligation to Australians to lead in shaping taxes for the national good. We can ensure budget sustainability by taxing a broader base – income, consumption and assets – more equally across the whole system. And we can re-set federal institutions with a new Intergovernmental Agreement to equally share income tax and GST, so that all governments in our federation are properly funded and accountable.

The Conversation

Miranda Stewart is a professor and director of the Tax and Transfer Policy Institute at the Crawford School of Public Policy, at Australian National University

This article was originally published on The Conversation. Read the original article.


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5 years ago

The answer is to expand the GST to cover EVERYTHING. Keep the GST at 10%. Abolish state stamp duty (which was meant to go in 2000 anyway) and charge GST on all property transactions, school fees, uni fees, etc. There will be enormous pressure for property prices to come down when people realise they will have to pay an extra 10% to the government!

My Accountants
My Accountants
5 years ago

Spoken like a true academic with no real world experience. Suggesting to increase things like payroll tax is ridiculous. A tax on employing people is so counter-productive and so reviled by employers is stupid beyond words.
Before anyone starts talking about raising more taxes and broadening the tax base they need to do what ever business does – stop excessive and wasteful spending. Australian gov’ts think there is a bottomless pit to through away money for every stupid election promise they make. There are too many people on a free ride. While we’re at it get rid of State Gov’ts and that will rid us of any need to impose stamp duties and payroll taxes.
Look after the pennies and the pounds take care of themselves.

Hamish Blair
Hamish Blair
5 years ago

Allow families to file jointly like they do in the USA. Legalised income splitting.

5 years ago

How about something radically different from a non-academic? The ATO has said about 1/3 of large private companies earning more than $200m in revenue pay no tax whatsoever. So, let’s get rid of paying tax on profits and start charging a low, say 2% turnover or revenue tax. Any money that goes into a bank account is automatically taxed at 2%. Because it’s charged on total cost and not profit, the amount collected will be much higher but from every company. That will stop those minimising rather than those avoiding tax and it’ll be fairer for all as it will improve efficiency and only have a few tax collectors (the banks). We then get rid of GST which will further improve efficiency or if we must, have a very low rate of GST (less than 5%) applied to all goods and services like they do in NZ. Forget applying State based taxes. Agree with My Accountants. Payroll tax just impedes business growth and land taxes are just a euphemism for stamp duties. Both should be banned completely. We then need to reduce public service wastage. Not hard is it….

5 years ago

Was this supposed to be published on April 1st?
Payroll tax at 3% on small/medium businesses would just drive the
nail into the coffin. Why make employing people harder and more
expensive? Who could possibly think that was a good idea? Certainly no
one I would vote for. And how the heck would implementing land tax on
owner occupied homes make housing more affordable? It certainly will
make it more difficult for people who own homes to stay in them once
they are either unemployed or retired. Before you start tinkering with
tax, fix the problems that raise the need for more and more
revenue. (1) Come up with a realistic plan to HALVE the federal
government bureaucracy within two years. We don’t need this many minders
or mindless programs. (2) Peg politician and government worker
superannuation to the same rate as everyone else. (3) Cease paying any
non super benefits/expenses for former politicians. They are not
’employed’ any more. (4) Abolish paid parental leave entirely – the
country can’t afford it at this point in time. If companies want to
instigate it because it helps them attract and retain great employees,
then that is what should happen. It should be a private sector
decision. We can bring it back when the country can afford it. (5) Cap
family tax benefit payments at 2 children maximum. Give anyone with more
than two children currently receiving the payments a two year time
frame of scaling back the payment to the allowed 2 children level. It is
a lifetime per person maximum of payments for up to two children, not 2
every time someone changes partners. You can have 10 children, but the
taxpayer isn’t going to underwrite more than 2. (6) Effective
immediately, start collecting outstanding education loans. When someone
graduates from TAFE or Uni or fails to finish a course, within 6 months
they start making payments back to the taxpayer. If they don’t have a
job, they can pay $10 per week. Something, anything to make the point it
was a LOAN and not an entitlement and it needs to be paid back. Do not
renew passports of people overseas who have outstanding loans unless
they up to date in their education loan repayments and income tax
obligations. (7) No one is entitled to an education loan for more than 5
years of study. That gives them an extra year if they change their
course major. (8) Stop selling off the Ord River Project area to the
Chinese. Forget the Idea Boom. The one thing the world will always need
more of is FOOD and the Ord could green the center of Australia and turn
Australia into the food basket of the world. But you have to keep the
profits in Australia and jobs for Australians, not Chinese. This would
have been a much wiser investment in the future than the NBN which just
makes for faster downloading of porn in urban areas at incredible
expense to the taxpayer. (9) Improve our defense without spending more
by leasing land to the USA for more bases along the northern coast.
Strategic for them, good for us so we don’t have to buy all the latest
gear ourselves. (10) Implement mandatory national service. The new ‘gap
year’ activity. And later if someone is unemployed for more than 6
months they will have the skills to be utilised part time by the Army
Reserve in return for their dole. (11) No welfare to anyone under 25.
You don’t have a job? You had a child? Live with your parents. They had
you, they should support you until you manage to support yourself.
(12) Employ the unemployed in maintaining and building new
infrastructure projects [think supply and distribution networks for the
Ord FOOD project]. (13) Bring down childcare costs by training single
mothers to care for 2 or 3 children in their homes. They will do this in
return for receiving their single parent pension. They will make a
nominal amount above that which will come from the parents of the
children they care for.

There is so much more…. it isn’t the tax system. It’s a country
spending like it has the funds to do so (e.g. 50 BILLION dollar NBN)
when it is really making cash withdrawals on its credit card at the
highest interest rate. The answer isn’t to raise more tax from the
fewer and fewer number of people who still have jobs and assets; at some
point you can’t squeeze blood from a stone. Spending must be curtailed
or capped. EVERY dollar must be scrutinised.