Australia: Tax system stuck in the ’50s: Treasury
03 December 2014
Posted by: Author: Patrick Durkin
Author: Patrick Durkin (The Australian Financial Review)
Outgoing Treasury Secretary Martin Parkinson has issued an urgent call for corporate and personal tax cuts, warning that our tax system is stuck in the 1950s and that Australians’ standard of living will collapse without reform.
Dr Parkinson’s comments come ahead of a government paper next week canvassing options for tax reform where "nothing is ruled out”, and follow the release of national account figures on Wednesday which reveal that national income has fallen for the second quarter in a row.
"This should be understood for what it is,” Dr Parkinson told a PwC tax reform lunch in Melbourne on Wednesday. "A serious warning to us as a nation that unless we tackle structural reform, including fixing our fundamental budget problem, we will not be able to guarantee rising income and living standards for Australians.”
Dr Parkinson warned that Australia’s tax system remained fundamentally unchanged from the 1950s, which made it impossible for us to remain internationally competitive.
"We wouldn’t be driving a 1950s car today and thinking that would allow us to go out and compete with the rest of the world,” he told The Australian Financial Review after the lunch.
High corporate and personal tax rates are the key priorities for reform, he said, as inflation pulls the average wage earner into Australia’s second-highest tax bracket over the next decade and corporate tax rates fall globally.
CORPORATE TAX CUT IN LIMBO
"The UK has reduced its main corporate tax rate . . . to 20 per cent from April next year. New Zealand has reduced its personal and corporate tax rate and shifted its tax base to more efficient tax bases such as the GST, but the structure of Australia’s tax system is essentially unchanged since the 1950s.”
The Abbott government had promised to cut the corporate tax rate by 1.5 per cent to 28.5 per cent for 750,000 companies from July 1, 2015, but the change is in limbo because it is tied to the stalled paid parental leave scheme.
Dr Parkinson acknowledged the difficulty in winning the "hearts and minds” of Australians in arguing for corporate tax cuts, but said that work done by Treasury showed "about half of all the benefit of a corporate income tax cut flow back relatively seamlessly towards employees . . . If you cut core income tax, you actually improve the rate of return for business that will actually flow through to shareholders, so shareholders would in many cases be Australian superannuation funds or Australian direct investors, but there are also a lot of foreigners,” he said.
"People will think, ‘well, why cut the corporate income tax because the benefits will go to the foreigners?’ Actually, what you are doing is lowering the hurdle rate of return on future investment and, if you lower the hurdle rate of return in a competitive world, you will get more investment coming in and – depending on the income and price elasticity of the product and how competitive the markets are – the benefits of that will show up in lower prices for the consumers and . . . in higher wages and more jobs for workers.”
Leading businessman Tony Shepherd, who headed the government’s commission of audit, told the same PwC lunch that the GST was an obvious target for reform, but would require the difficult challenge of working with the states. "It’s one that New Zealand has bitten the bullet on and, as a result, has been able to reduce some of their income taxes and remain competitive with Australia, and the community has been taken and sold on the total package and the government hasn’t suffered any loss of popularity as a result.”
Dr Parkinson and Mr Shepherd were joined on the tax panel by PwC chief executive Luke Sayers, who also emphasised the need to sell the case for reform to the broader community.
"We need to engage across the country in a peacemaking, deal-making way,” he said. "If this is done by big business, the government, the unions, or ACOSS or any one individual group, my belief is that we are going to be spectacularly unsuccessful.”
This article first appeared on afr.com.