Some in the political media would have us believe Tax Reform 2016 is dead before it starts, and that because Australia currently faces a failure of political leadership – meaningful tax reform is difficult at the best of times, but at present, there simply is not the depth of character, or belief, in Canberra or the state capitals to push through the necessary changes.
This round of tax reform, framed against a background of uncertain tax revenues, recurring budget deficits, escalating social spending, an aging population and an anaemic economy, rules out a win-win scenario. Interest groups are fighting to secure a least worst result. And the matrix of pugilist groups has created a sense of policy reform gridlock.
But the need for reform is self-evident and, ironically, agreed by all sides. It’s simply agreement on the means to achieve the end that is proving elusive.
In all of this noise, where is the public voice – silent to date, and quite possibly bemused by the claims and counter-claims advanced by the competing vested interest groups.
And Australian taxpayers could be forgiven for this apparent disengagement – ‘tax reform’ has become a fixed agenda item for recent successive governments, and taxpayers may well ask whether they receive value for money from these exercises, or whether ‘tax reform’ is simply a euphemism for (yet another round of) ‘tax increases’. Fatigue, cynicism or simply lethargy seem reasonable public responses in the circumstances.
The Hawke/Keating reforms of the mid/late 1980’s were significant. So were the Howard/Costello reforms at the millennium. But the Henry Report, and the other summiteering exercises since 2007 seem to have achieved little, other than adding to the list of tax based talk fests.
The government’s twin white papers
The Abbott Government’s first term agenda provided for a twin white paper process – tax reform, and the reform of Federal/State relations. The two white papers are separate, but closely interrelated.
The white paper tax reform process was always aimed at informing a policy framework to take to the next federal election (expected to be held sometime between August 2016 and January 2017). Given that window, there remains time for detailed debate and community consultation, ahead of the release of a detailed tax policy by say October 2016. But with only 12 months or so to go, the process does appear to be under some pressure.
The federalism review white paper, has managed a lower public profile to date. A number of discussion papers have been released, canvassing fundamental changes to the status quo, and these have gone broadly unremarked in the media. This invisibility perhaps reflects the relative ‘accessibility’ of tax reform to the general public compared to the arcane nature of federal/state relations.
But the invisibility is unfortunate in another sense as some very serious savings have been potentially identified through this reform; not just in terms of public expenditure, but through increased efficiency and regulatory transparency as duplicate (or triplicate) levels of government oversight are rationalised.
Ruled in/ruled out – what is still on the table?
Returning to the tax reform white paper, the ‘conversation’ started in early March 2015 with the release of the fourth Intergenerational Report (IGR 4). This was followed in late March 2015, with the release of the ‘Re:Think – tax discussion paper’.
The reaction to both documents, from certain media, set the scene for what has followed. Rather than facilitating a discussion across the community, attempts were made to discredit the IGR 4, and Re:Think. From the lofty ideal of starting the tax review process with everything ‘on the table’, it did not take the vested interest groups long to hijack the process. Through extreme statements, warnings and threats, all delivered (allegedly) from the security of the economic or the moral high ground, the process spiralled downwards; self-interest and partisan politics on parade.
There is actually a bit of common ground amongst the different groups. Economically, Australia is stagnating, or going backwards and the national standard of living will deteriorate in the absence of significant change.
The future looks challenging: fewer working age Australians to support our increasing number of older Australians.
Increased population growth, higher workforce participation and increased productivity were highlighted by the IGR 4 as necessary achievements to the maintenance of Australia’s living standards.
The continuing annual budget deficits, and the increasing quantum of accumulated foreign debt, mortgage government’s future policy flexibility. Following generations will be subsidising current generations if budget cycles cannot be restored.
Above these matters sits the ‘expectation gap’ - the gap between the level of social welfare some groups assert as an entitlement, and that level which governments can afford to deliver on a sustainable basis within the constraints of a given taxation framework.
It is in the context of the expectation gap that most of the fighting has occurred. The social welfare lobby would resolve the crisis, broadly, by leaving in place the ever growing raft of social programmes and increasing taxes on those who pay tax.
On the other side are those groups representing various sectoral interest groups (but all taxpayers) who would resolve the crisis by reducing the generosity of social programmes (tighter ‘targeting’ of benefits), or raising taxes from other interest groups as long as their special interest is protected.
The potential battlelines are clearly drawn, and the various interest groups well entrenched. In these circumstances it is not surprising the public has ‘switched off’, and the politicians are fearful.
This vacuum will be challenged shortly. On Wednesday 26 August 2015, two newspapers – the Australian and the Australian Financial Review – have convened a ‘national reform summit’ (note – politicians not invited, with the exception of Messrs Hockey and Shorten). The objective is to try and identify priorities and/or common ground, so that the tax reform process might have a chance to achieve something for the country (and it will be fascinating to see how the rival newspapers report the proceedings.)
The AFR will then run a two day tax reform summit in later September 2015, as a commercial exercise.
Sometime in September/October 2015, the government is expected to issue its green paper – outline of options drawn from the responses to Re:Think.
What might taxpayers expect?
There is no doubt that Australia is currently living beyond its means.
The issue is – what is the right mix of remedial action? What programs can be scaled back? What taxes increased and/or what changes made to the tax mix? How best can we come back to living within our means, without stalling the economy?
In economic terms, finding the right remedial balance and the least distortionary tax mix, will encourage economic growth. In political terms, the right remedial balance will satisfy M. Colbert’s direction ‘…to so pluck the goose as to get the most feathers with the least hissing’.
Along with death and taxes, there is another certainty.
The objective of tax reform is unequivocally for governments to collect more tax overall, not less, and in the most economically efficient manner. And that increased tax burden will be borne by Australian individual taxpayers, with the open question being how that tax increase will be shared amongst the taxpaying population.
The reality of marginal tax rates is that an increase in rates at the upper income range will make civil society feel good, but raise very little revenue. To raise significant revenue, the middle income brackets must be taxed, and/or the cost of social programmes reduced. Individual taxpayer responses to tax reform will be largely influenced by how they are affected by the tax/transfer system.
The battle between capital and labour is over - capital has won. With decreasing global tax rates on company profits, the tax burden can only move to individuals. This could occur through the imposition of higher marginal tax rates (which kills productivity and participation and drives the entrepreneurial class offshore), or through an increase in indirect taxation, and/or increased recourse to other consumer related taxing bases, such as fuel taxes or land taxes.
This warrants special mention. The states’ tax was meant to give the states a growth tax i.e. one which increased with the growth in economic activity. That did not last long – and now (some of) the states are back at the well for another drink – just 15 years later.
Whether there will be an increase in the GST rate, or a broadening of the domestic GST base, remains to be seen; based on current settings, it will need the support of every Australian government before such changes will be included in the reform process.
Such consensus remains elusive, although all governments did agree to extend the GST base to tax foreign sourced digital supplies (through the so called ‘Netflix’ tax) and reduce the Low Value Threshold for imported goods from $1,000 to nil.
Perhaps this could point a way forward? Maybe, but civil society would need to ‘sign off’ as a likely prerequisite, and that will depend upon an acceptable compensation package.
Tax reform without compensation?
The interaction between the tax system and the welfare system is now well understood, with the two being approached as one – the tax/transfer system. It is generally accepted that an increase in individual tax rates requires compensation for the lower tax brackets, on equity grounds.
This was demonstrated when GST was introduced in 2000. But in the present fiscally straightened circumstances, it is not clear where the revenue will come from to fund the compensation package. (Modelling by the Victorian Government suggested that a 5% increase in the GST rate would largely be eaten up by compensation.) And with resource prices continuing to drop; with more Australian companies expanding overseas and paying tax on foreign profits to foreign governments rather than to the ATO; and with low wage growth across the domestic economy; direct income tax revenues are under pressure.
In a significant change of message, Treasurer Hockey has raised the possibility of ‘early’ income tax cuts to reverse the pernicious effect of ‘bracket creep’ – although he has carefully avoided any indication of when those tax cuts may be introduced. IGR 4 indicated tax cuts would not be possible before 2020-21, and the revenue anticipated to be raised by bracket creep between now and then is in the vicinity of $25 BN. How tax cuts will compete with budget repair, and funding a compensation package for GST changes, will be watched with interest.
Taxation of multinational corporations
The international G20/OECD base erosion and profit shifting (BEPS) project is drawing to a close. The majority of the remaining action plan reports are due to be released at the upcoming G20 Finance Ministers meeting in Ankara, on 4-5 September 2015. These reports will not immediately generate new tax revenues, but will allow member states to progress the development of domestic legislation which will be necessary to complement the international BEPS recommendations.
With greater certainty around the new international tax framework becoming available before the end of this year, those changes can be absorbed into the tax reform white paper process in an efficient manner.
Is significant tax reform possible?
The call that the 2016 round of tax reform is dead before it starts, is much exaggerated. But meaningful reform will be extremely difficult to achieve, given the current economic environment, and the present political landscape.
If vested interests do stymie substantive reform measures, then the next Federal election will be a farce, and is likely to be fought around another pork barrel of unsustainable giveaways – when the bill for the existing social programmes cannot be funded sustainably, never mind budget repair, and any new growth initiatives that government may propose.
Below this article is a summary of the possible tax reform measures currently under consideration, written in a neutral manner, and incorporating a little more background and context than is generally available. The 2016 tax reform process will be difficult, but a working knowledge of the issues is a good starting point, and supports a more informed approach to the 'BBQ and pub' discussions likely to take place during the next 12 months.