Australia’s tax laws are costing the nation about $50 billion in compliance costs, while inefficient taxes are costing even more in lost economic growth, the Tax Institute has warned.
- The Tax Institute report argues Australia is over-reliant on personal and company income taxes
- It argues for a higher rate and/or broader base for the GST, which may include taxing education, health and fresh food
- The report says Australia’s super system is too complex and the tax breaks remain far too generous
One of Australia’s leading membership groups for taxation experts, the institute systematically attacked Australia’s more than 10,000 pages of tax laws with a 287-page paper called The Case for Change.
Launching the report, the institute’s director of tax policy Andrew Mills said previous estimates had put tax law compliance costs at $40 billion, but that was from the Henry tax review more than a decade ago, and the cost was likely more than $50 billion now.
“A huge part of that cost is avoidable if we address the systemic issues of our system instead of continuing to tweak around the edges,” he said.
“You can put as many bandaids as you like on a broken limb, but it doesn’t change the fact that it’s broken.”
A prime target for reform, according to the paper, is Australia’s increasingly complex superannuation system.
The report argued that it is almost impossible for non-experts to navigate the labyrinth of caps and other rules.
Yet, despite these efforts to rein in the largest excesses of tax breaks going to higher income earners, Mr Mills said most tax experts and practitioners consulted as part of the report agreed “that the current design of the taxation of superannuation is far too generous”.
“The fact that the taxation is levied at concessional rates on contributions and income of the funds during the accumulation phase for members, yet fund income and benefits during the retirement phase are exempt, means that concessions are significant and their affordability in the context of the whole system is questionable,” he said.
The report suggests a total overhaul of superannuation taxation, so that contributions and earnings on those are tax free, while the withdrawals made in retirement would be taxable.
Modest inheritance tax considered
It also highlighted the role that superannuation, as well as property holdings, are likely to play in transferring wealth inequality across generations.
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“It is estimated that over the next two decades, Australians over 60 years of age will transfer $3.5 trillion in wealth,” the report noted.
“Notably, around 78 per cent of the estimated wealth transferred will go to roughly 20 per cent of recipients.”
While noting that Australia is relatively rare among developed countries in no longer having any form of inheritance tax, it did not advocate strongly for introducing one, noting that they generally raise relatively little revenue.
“If consideration was given to a wealth transfer tax in Australia, it is our opinion that any rate set should be relatively low as compared to other taxes, for example, 5 per cent above a certain threshold of, say, $2.5 million or another reasonable amount.”
Tax experts support negative gearing and CGT reform
Despite Labor’s defeat at the May 2019 election, when it campaigned on changes to limit negative gearing and the capital gains tax (CGT) discount, the Tax Institute’s report found some similar sort of reform should remain on the agenda.
“”The operation of the negative gearing regime in conjunction with the CGT rules creates the perception of a potential tax advantage and encourages investment behaviour based on CGT discount gains upon sale or disposal,” the report noted.
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Negative gearing favours property investors over aspiring home owners, does little to reduce rents and costs the federal budget billions. But there’s a easier way to address those problems than getting rid of it.
That conclusion concurs with many housing experts who argue the current policies have encouraged speculative investment and push up real estate prices.
The institute recommends limiting both tax breaks.
“There is a strong case for principle-based reform such that losses on investments should not be deducted from salary and wage income,” it argued around negative gearing.
“The introduction of rules to quarantine losses so they are unable to be written off against salary and wage income would reduce the tax-driven incentive towards such investments.”
The report also observed that the capital gains tax discount of 50 per cent for assets sold after being held for more than a year has become far more generous in the lower inflation world since the tax was introduced.
“In simple mathematical terms that would suggest that the discount should be around 11 per cent.
“Clearly, such a discount rate would be politically unpalatable but the point of the comparison is that the current rate no longer reflects the policy it was originally designed to replace.
“Moreover, it is inconsistent with the tax treatment of other unearned income, such as rents and interest.”
Lower income taxes, cheaper childcare but a higher GST
One of the main observations of the Tax Institute report is that Australia raises too much revenue from income taxes, both personal and corporate.
“More than two-thirds of Australia’s tax receipts come through personal and corporate income taxes — which is approximately twice the OECD average,” the report noted, although many other developed countries have additional social security levies on individuals or businesses.
“Most other advanced economies have placed a considerably higher reliance on the taxation of consumption (or value-added) taxes.”
Not that this means Australians are over-taxed compared to similar nations, the report observed.
“Australia has relatively low tax revenue as a percentage of GDP compared to other OECD countries.
“In 2018, Australia had a tax revenue as a percentage of GDP of 26.7 per cent, while the OECD average was 33.9 per cent and common comparative countries such as New Zealand and the UK were both 32.9 per cent, and Canada was 33.2 per cent.”
Henry tax review gathers dust
A decade after his comprehensive tax review was handed to the Rudd government, Dr Ken Henry laments the lack of action and warns it is costing Australia “big time”.
Rather than reducing Australia’s tax take further, the institute argued that an increase in the GST could be one way to cut the corporate tax rate to a maximum level of 25 per cent (it is currently 30 per cent for big businesses and 25 per cent fall small and medium ones) and further lower income taxes.
“Without increasing the GST rate from 10 per cent, broadening the base to include some of the main items currently exempt from GST could increase revenue by $21 billion,” the report noted.
“Alternatively, an increase of only 2.5 per cent (equalling a GST rate of 12.5 per cent) applied to the existing base would increase revenue by $14 billion.
“If the base is broadened to include some of the main items currently exempt from GST and those items are taxed at a lower rate of 5 per cent with the existing base being taxed at 12.5 per cent, the revenue potential is $25 billion.
“Where all items attracting GST, including those currently exempt items, are taxed at 12.5 per cent, the revenue increase is $40 billion.”
Although the institute added, “there will need to be appropriate compensation through the transfer system and a reduction in income tax rates to compensate low- and middle-income earners”.
One group of income earners that the report strongly argued is in need of a tax break is working parents who are the primary carer for their children, overwhelmingly women.
Women victims of tax and transfer
Partnered women with children, who are typically the main carers, can lose almost all their income from doing more work because of the way taxes and childcare subsidies interact.
“Primary carers can face a net cost of working an additional day once effective marginal tax rates are added to the cost of childcare itself,” it observed.
“This should be regarded as one of the most fundamental failures of our system.”
Suggested options for reform include “either expansion of the childcare subsidy or providing universal free childcare”.