Taxation is on the agenda of the Economic Reform Roundtable and, despite Albanese’s reluctance to consider tax changes, it will be impossible to achieve Labor’s goals without reform to raise more revenue.

Budget sustainability and tax reform are listed to be the focus of discussion on the third day of the government’s Economic Reform Roundtable. We should, therefore, not be surprised, as Paul Keating famously put it that, every galah in the pet shop has their own ideas about tax reform. So here’s mine as well.

Revenue needs

My starting point is that Australia needs to raise more tax revenue. Treasury forecasts that the budget will continue to be in deficit over the next few years by an average of 1.2% of GDP. This is a structural deficit which is a major risk to economic sustainability.

This deficit needs to corrected and sooner rather than later. Either taxation has to rise or expenditures need to be cut. The Opposition has declared that the Albanese Government is a tax and spend government, so we can presume that the Coalition would cut expenditures, although they never tell us where and how.

Frankly, I think the evidence strongly supports that during the nine years of the previous Coalition Governments too many services were underfunded. This underfunding was the inevitable result as the Coalition tried to get the budget back into the black, but without removing any services or reducing eligibility for those services.

Since being elected, Labor has made some effort to restore some services, but they are still underfunded, and this will remain the case unless more revenue can be raised to pay for them.

For instance, university funding is still less in real terms than it was more than a decade ago, and unfortunately they are now curtailing courses and laying off staff. This is bound to reduce Australia’s longer-term growth prospects. Similarly, the projected time to achieve equitable needs-based funding for all schools is too far out.

Health is generally underfunded, with waiting times too long, and too often the gap payments for the individual are too big, so that they postpone the care that they need, while most people agree the JobSeeker allowance for unemployed people should be increased.

In addition, there is general agreement that in our uncertain world, defence expenditure will have to increase relative to GDP.

We cannot be sure about how much extra revenue will be needed to balance the budget and restore services, but my rough estimate is that we need to raise extra revenue equivalent to about 4% of GDP. That would still leave Australia with a tax share smaller than the OECD average, and no bigger than the UK and smaller than Canada today.

In my view, the best way forward would be to establish an independent expert committee to review all expenditures to establish how much is needed for each service to properly fund them all. That total would then tell us how much revenue we need to raise, and thus, hopefully, gain public support for the extra taxation needed.

There is no reason why raising this extra revenue should damage Australia’s economic growth, but that depends significantly on how that extra revenue is raised, and I expect that reform of different types of taxation will be the principal preoccupation of that session of the Economic Reform Roundtable.

Tax concessions

The obvious place to start when considering how to raise additional revenue is the present tax concessions.

According to Treasury data, the three biggest tax concessions are superannuation contribution concessions, superannuation earnings concessions and capital gains tax concessions.

However, in the case of superannuation, the size of each concession is debatable. Treasury measure the size of these superannuation concessions using a benchmark which is the contributor’s current income. But logically it would have been better to tax superannuation as it is drawn down, and not when it is accumulating in the fund. In that case, modelling has shown that most people’s superannuation is not concessionally taxed. The top 20% of superannuants are still concessionally taxed but the government has now put a $3 million limit on the amount of superannuation that will be concessionally taxed. That limit could be reduced a bit, but not a lot more would be raised.

On the other hand, the concessional tax treatment of capital gains with only 50% being subject to tax should be reformed. There is no case for taxing capital gains any differently from other forms of income, and the government should return to taxing the total real capital gain at the same rate as all other income.

In this context, it is also worth mentioning negative gearing. Both negative gearing and capital gains are often alleged to be making home ownership more expensive. However, economists are generally agreed that the main reason for the rise in house prices relative to peoples’ incomes reflects supply-side constraints. In that case, changing the taxation of capital gains and negative gearing will not do much to fix the difficulties facing new and would-be homeowners, while in principle, interest payments should be deductible when determining a taxpayer’s taxable income.

Indirect taxes

Australia is relatively reliant on direct taxes of incomes, and Treasury projections suggest that reliance will increase further over the next 40 years. In particular, the revenue from excise taxes will fall as we shift away from petrol driven cars.

Not surprisingly, therefore, some of the tax proposals put forward to the Roundtable involve increasing the coverage and the rate of the GST. This is thought to have a damaging impact on lower income groups, but one proposal is that $3000 of the extra revenue should be handed back as a cash lump sum to ensure that equity is maintained.

While increasing GST revenue in this way makes a lot of sense, there would be one problem. At present, all the GST revenue is passed to the states, so increasing the GST does not help the Australian Government budget at all. In principle, the Australian Government could retain some of the extra GST revenue, or alternatively it could reduce some of the specific purpose funding of different state government programs. But either of these alternatives would require difficult Commonwealth-state negotiations and would represent a backward step for many people.

Interestingly, there does not seem to be much support for a carbon tax, which economists agree would be the best way to reduce carbon emissions. And a carbon tax would also reduce the need for the present subsidies for green energy alternatives, thus saving some money.

Direct taxes

There are two main forms of direct taxation – personal income tax and company tax. No one seems to want to increase personal income tax, and the government plans to deliver two more income tax cuts to every Australian taxpayer in 2026 and 2027.

Turning to company tax, Australia is often considered to have a relatively high rate of company tax at 25% for companies that earn below $50 million, and 30% for companies that earn above that threshold. However, that international comparison fails to take account of the fact that Australia is almost the only country to offer dividend imputation credits. For Australian shareholders, therefore, Australian company tax is not high.

Of course, that still leaves foreign shareholders who are not eligible for Australian dividend imputation. Thus, in principle the relatively high Australian company tax could act as a disincentive to foreign investment. But in practice, multinational companies have more opportunities to avoid Australian taxes, and often pay very little, so it is doubtful if company tax is too high.

Indeed, the economist Ross Garnaut, has argued that the competitive position of Australian companies has declined compared to multinational corporations, due to their more limited opportunities for tax avoidance and evasion.

This has led the Productivity Commission to put forward a revenue neutral proposal to the Roundtable to cut company tax by up to 10 percentage points for businesses with revenue under $1 billion (the vast majority), coupled with a new 5% net cashflow tax. This would allow companies’ capital expenditures to be immediately written off, leading to an estimated increase of $8 billion in investment which should assist productivity growth.

Wealth taxes

Wealth taxes are a relatively easy way to raise money, with few disincentive negatives. Australia used to have inheritance taxes — a type of wealth tax — but unfortunately the different state governments successively got rid of them.

Given the need to raise more revenue, arguably a good way to start would be to introduce a wealth tax. Further, Australian wealth is much more unequally spread than incomes and such a tax could help reduce the increase in inequality that has occurred over the last few decades.

This wealth tax could well be acceptable if its threshold was set quite high – say at $3 million. But in that case, it should also include the value of the family home which is a huge part of most people’s wealth.

Conclusion

Raising more revenue will not be easy, but it is necessary if we want to preserve the sort of cohesive and egalitarian society that has been a hallmark of how Australians like to think of themselves. And it can be done, without damage to the economy. Australia is, after all, a very low tax country compared to almost all the other advanced economies.

The views expressed in this article may or may not reflect those of Pearls and Irritations.