Why we need tax reform in the next term of Parliament

Talking about tax reform won’t win you too many friends at a party, but it is something we need to do more often.

Tax affects where we live, when and how often we move house, how much and in what we invest, and what goods and services we buy. 

It affects how we operate a business, how many people we employ, and whether we upgrade that tired piece of shop equipment.  

So, talking about major economic challenges without mentioning tax ignores a giant elephant in the room. And we have no shortage of challenges right now.

Australians like to imagine this country as the land of the “fair go”; where aspiration and hard work are all that’s required to build a prosperous life. But it feels like we’re miles away from this right now.  

A recent survey by Redbridge found that only 15 per cent of Australians think the next generation will have a better quality of life than before.

While cost of living is front of mind right now, I see this as symptomatic of three broader issues that have been brewing for decades. These are:

1. Younger Australians are unable to meet the same milestones and build wealth in the same way their parents did;
2. Australia’s future economic growth and prosperity is uncertain, especially with such low productivity; and
3. Australia is attempting to navigate a difficult and uncertain energy transition.

Let’s take each of these in turn.

A household headed by someone aged 30-34 on an income of $100,000 is paying approximately twice the amount of tax as a household headed by a retiree on the same income, despite likely holding substantially less wealth.

Sydney holds the ignominious title of the second most unaffordable city in the world and homeownership for 30-34 year olds has fallen from 70 per cent in 1981 to 50 per cent now. Of these lucky first-home buyers, about half can only do so with help from Mum and Dad.

This is not only unfair, it’s unsustainable. Personal income tax accounts for 41.5 per cent of all government revenue, but by 2035, it will rise to a record 46 per cent as our population ages, unless we reform the system.

Forty years ago, there were more than six working-age Australians per retiree, but in another 40 years there will be 2.6.

Previously, we might have waved away these concerns thanks to our healthy economic growth. A rising tide lifts all boats, so to speak. But since the end of the mining boom our economic indicators are flashing red.

Productivity – the ability to do more with less – is what drives wages and increases our living standards. Ominously, Australia has just had its worst decade for productivity in the last 60 years. Finding ways to innovate, adopt and diffuse technology is critical to boosting productivity, but business investment has fallen off a cliff. Non-mining investment used to be 9 per cent of GDP in the early 1990s, now it’s about 4 per cent.

At the same time, Australia is attempting to navigate a costly and uncertain energy transition. This could represent an enormous opportunity to harness a distinct competitive advantage, but we need to have all cogs moving in the same direction.

Tax relics like the diesel fuel rebate, which costs the budget about $8 billion a year, disincentivises some of our largest polluters from transitioning away from fossil fuels, making the transition more expensive, difficult and slow than it otherwise would be.   

That’s why, for the past 18 months, I have been consulting experts and the community about how we can overcome these urgent challenges and see meaningful tax reform for the first time in nearly 25 years. The culmination of this work is my Tax Green Paper.

The paper makes a point not to endorse specific changes. Instead, it invites discussion, debate and feedback on tax levers that can help to address these challenges in an approximately budget neutral way. While I’d personally love to see overall taxes lowered, this is a separate discussion to how we collect it.

My paper concludes that based on these three challenges we need to:

1. Lower income taxes on working Australians so they can earn and get ahead;
2. Rebalance tax settings in favour of home ownership, rather than investing in existing dwellings;
3. Incentivise innovation and business investment to increase productivity and economic growth;
4. Rebalance tax settings so that the revenue base remains stable with changes to demographics and consumption patterns;
5. Adjust tax settings to support our energy transition, rather than work against it; and
6. Implement institutional reform, including a Tax Reform Commission, so we can better manage future challenges as they develop.

Tax reform is notoriously difficult. The temptation to wedge opponents is always present and there is never a shortage of squeaky wheels when proposals start to surface. But if we can’t have these conversions in a considered and rational way we will surely be poorer for it.