Tax reform is not all about hiking taxes

This was an exercise in finding common ground. There were a range of views around the table – as there are across Australian society – on the overall level of taxation that we need to fund the infrastructure, services and supports that government is responsible for.

But whatever your views on whether today’s tax take is too low, too high or just right, there are shared realities.

These include that there are simpler, more efficient and fairer ways of raising the amount of tax Australia currently does. This isn’t a matter of taxing more but, rather, taxing better than we do right now.

In my address to the roundtable, I outlined four broad ways we could improve our tax structure. The first is fixing the personal tax system. As it stands, wages and salaries from work are what we lean on most heavily in our tax system, and alongside that we have created very generous concessions for making your income in other, “passive” ways.

While there are good reasons to tax income from savings differently, the system is overly generous to passive income rather than making your money from an old-fashioned job.

This inequity in our tax system has had real consequences in terms of the disposable income available to working-age Australians compared with retired Australians that we’ve seen play out in stark terms in recent years as, on average, younger Australians have had to cut back on their spending while older Australians have not.

It has incentivised investment in housing driven by tax minimisation rather than because this is a productive place to invest. It has created unnecessary inconsistency in how different types of savings are treated by the tax system.

There is a broad consensus across experts that our income tax system is out of kilter. Rebalancing our personal income tax system away from its reliance on wages and salaries would give us better options for the future than the do-nothing default of letting taxes on employees gradually creep up, while allowing a small group of wealthy Australians to minimise their tax bill.

The second opportunity is improving taxation of businesses. We will need a substantial volume of business investment to realise the opportunities to reshape Australia’s economy and make it more resilient in the decades ahead.

Australia’s headline corporate tax rate is one of the highest in the OECD. But simply cutting the rate is eye-wateringly expensive, and the evidence isn’t convincing that the benefit in terms of additional business investment would outweigh the cost to the budget.

The evidence is that past investment allowances in Australia have likewise had only limited impact. While there is broad agreement that our corporate tax system needs a renovation, how to do it is a genuinely tricky design question, and the business community has yet to reach a consensus on a fix that doesn’t blow a hole in the budget.

The third opportunity is making better use of pricing signals, to improve the efficiency of how we use our assets, such as roads, and to put us on the least-cost path to decarbonising our economy and adapting to extreme weather.

There is a high cost to adapting to climate change – and an even higher cost of failing to – and neither is captured in the budget forward spending estimates right now. If not a carbon tax that raises revenue, or a greater share of the tremendous profits being made now on fossil fuels, then this mounting bill will need to be paid in other ways: by taxpayers or by households and businesses.

The fourth big opportunity is tackling the federal imbalance in our system. If we want a tax mix that is more efficient, less volatile and more likely to keep pace with Australia’s future needs, then we need to talk about broadening and raising the GST.

The GST is one of our most efficient, underused taxes, so if we can raise more revenue through the GST – and less through more damaging taxes, such as stamp duties – then this would be a big opportunity to boost productivity.

Increasing the GST hurts poorer households more, but it is possible to compensate people for these regressive effects and still raise revenue.

In a world where it is increasingly harder for governments to drive productivity growth, changing the tax mix towards less damaging taxes is one of the most powerful policy levers.

But the second reality is that tax reform is hard, not least because of the wall of noise that confronts any attempt to improve the system. The more economically efficient taxes are more noticeable, and the worse taxes are just politically easier. As a result, we have ended up stuck – unable to reform a system that isn’t fit for the future we face, with an ageing population and an imperative for productive investment.

Claiming that tax reform is all about hiking taxes, rather than seizing the opportunity to have a tax system that better supports growth, makes that common ground only harder to find.