We need to talk about tax. I say that with some trepidation, because mentioning tax has become akin to bringing up religion or medical issues: not to be done in polite company. On Friday, I’ll join several other experts to dive into these fraught waters at a tax reform summit hosted by teal independent Allegra Spender.

Why go there? Because our tax system matters.

It matters because we need to raise revenue to provide the services the community expects. Over the next decade we will spend significantly more on government services including the NDIS, defence, health and aged care. Federal government spending is expected to average more than 27 per cent of GDP over this period, compared to less than 25 per cent over the three decades before COVID. Most state governments, including NSW and Victoria, have also increased their spending as a share of the economy.

But we haven’t yet had a conversation about how we are going to pay for it.

Right now, the answer is we aren’t. Future structural budget deficits are projected to be about 2 per cent of GDP, or about $50 billion, a year in today’s dollars. And that estimate is probably optimistic. To stabilise debt at current levels, we would need to more than halve that each year over the next decade.

Given the scale of the challenge, governments will need to grow revenue, cut spending, and boost growth. The good news is that improving the tax system can help with two out of three of those challenges.

A better tax system can help us boost revenue and increase the size of the pie. But delivering more revenue and a growth dividend requires changing our tax mix in a way that boosts overall revenue collections.

There are three big prizes for governments.

First, is collecting more from relatively efficient tax bases that we don’t currently use or use to the extent we could. This would include broad-based taxes on land, higher taxes on certain profits from Australia’s resources (resource rents), road-user charges that vary with mass, distance, location and time of day, the GST, and carbon taxes. A recent Economic Society of Australia poll of the country’s leading economists overwhelmingly favoured land and resource rent taxes as the most efficient ways to collect additional revenue.

Some of these would need to be coupled with a reduction in less efficient taxes – land taxes to replace stamp duties, road-user charges in place of fuel excise, and a higher and/or broader GST could support some reduction in income taxes.

Second, is improving how we tax savings. Tax rates on savings don’t affect overall savings much, but they do affect where we save. Currently, different savings vehicles have very different effective tax rates. More than 60 per cent of Australia’s household savings are concentrated in owner-occupied housing and superannuation, where the returns on savings are taxed lightly or not at all. At the other end of the spectrum, interest payments on term deposits attract the full marginal rate of income taxes. Overall, our approach to providing highly concessional tax treatment for savings has contributed to growing wealth inequality.

A big bang tax reform would be to tax savings vehicles consistently through a dual income tax – one that applies a single flat tax rate to all savings returns. A single flat tax rate on savings could actually be fairer than how we tax savings today.

But there are ways we could also get closer to a fairer and more consistent tax treatment of savings through better targeting of superannuation tax concessions, reducing the Capital Gains Tax discount, and winding back negative gearing. These measures were widely supported by the poll of leading economists on both efficiency and equity grounds.

Third is reform of business taxation. Australia’s investment performance was weak in the years leading up to COVID. Cutting business tax would attract more foreign investment but would involve a sizeable budget hit and reduced national income for years. Alternative company tax models such as accelerated depreciation or a cash flow tax can make investment more attractive but would cost the budget even more in the early years. In a budget-constrained environment, these changes could only be supported if coupled with other changes like better taxation of resource rents.

The political degree of difficulty of these type of changes goes without saying. It seems doubly daunting when we remember that other tax reforms in recent memory – including the GST and the carbon tax – came at significant cost to the budget. “Buying” reform in that way just isn’t going to be possible this time round when we must collect more revenue.

So, here we are. The need for reform is clear: Australia faces both a productivity and a revenue challenge. But the over-the-top reaction each time even modest tax changes are proposed – of which the $3 million superannuation earnings tax proposal is just the latest example – strikes fear into the hearts of would-be reformers. Perhaps talking about tax can overcome this. I look forward to starting the conversation at the summit.

While you’re here…

Grattan Institute is an independent not-for-profit think tank. We don’t take money from political parties or vested interests. Yet we believe in free access to information. All our research is available online, so that more people can benefit from our work.

Which is why we rely on donations from readers like you, so that we can continue our nation-changing research without fear or favour. Your support enables Grattan to improve the lives of all Australians.

Donate now.

Danielle Wood – CEO