Download Reform of Australia`s taxation system: priorities and directions

Reform of Australia’s taxation system: priorities and directions
Talk to CEDA seminar on taxation reform, 6 November 1996,
commenting on Dr Vince Fitzgerald’s paper
Don Siemon, Brotherhood of St Laurence
Thank you for the opportunity to present a perspective on taxation reform today.
I would like to start by explaining why the Brotherhood of St Laurence, and the nongovernment welfare sector more generally, particularly through the national peak
organisation, the Australian Council of Social Service (ACOSS), has been long interested in
tax reform.
The reasons are fairly straightforward.

First, there is the simple sense of social responsibility that says that groups which have
tended to favour additional government spending have some obligation to say where the
money is going to come from.

Then there is the matter of equity. Organisations such as the Brotherhood—that focus on
the living standards of the least well-off Australians—are well aware of how government
fiscal policies can directly contribute to ameliorating or exacerbating poverty and
disadvantage.

Finally there is the matter of economic wellbeing. Perhaps it is because the Brotherhood
has a strong focus on the material wellbeing of the poorest Australians; perhaps it is
because we see employment as such an important way for families and individuals to
avoid poverty; but we take at least some of the claims of economics very seriously. And it
seems pretty clear that some of the ways our tax system works have significant economic
implications.
Because we are driven to listen carefully to economics, I was very heartened at the strength of
economic expertise at the recent Tax Summit. Dr Fitzgerald’s paper was of a number which
provided some solid intellectual basis for the discussions. The disappointing thing was that
the reflections of these experts received relatively little attention.
Perhaps that was inevitable in a two-day conference, but I do feel that if tax reform is
important, then it is equally important that we get it right—that we do not spend all our
efforts and our goodwill in pursuit of a holy grail, as the idea of a GST has become for some
business organisations.
For this reason we need not only more pressure for reform, but more discussion to test the real
strengths of the arguments for change. And it is in this context that I believe Dr Fitzgerald’s
paper is very valuable. Not only does it advance proposals, but it relates these to the longterm problems which the author sees Australia facing in our efforts to be economically
successful.
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The Brotherhood’s principles for reform
Before commenting just a little on this paper, I would like to just sketch where the
Brotherhood’s interest in tax reform is leading us.
We believe that Australia’s efforts to improve the tax system should have three major
objectives. They are not just abstract design principles, but real and urgent tasks which
continue to demand action from us as a nation:
1. Changes should aim to provide us with adequate and secure sources of revenue—this
seems axiomatic, but persistent deficits remind us that it is not so, as Dr Fitzgerald has
pointed out many times. Even if governments become more efficient, as business
organisations often argue, our assessment is that we will tend to need more revenue to fund
the government activities which stimulate employment growth, improve living standards
and reduce poverty and inequality.
2. Changes should assist employment growth—through encouraging productive private
investment and providing sufficient revenue to fund improvement of Australia’s physical
and social infrastructure. We need a sense of priorities: unemployment is a far more
urgent, and much wider, economic problem than the flaws in our tax system. And there are
no simple answers, either: a low tax regime does not necessarily mean a high-growth
economy and certainly not a full employment economy. But while tax reform as such can
probably only provide a modest long-term boost to jobs, we nevertheless should do what
we can to improve employment in this way.
3. Changes should reduce poverty and inequality and improve living standards. This does not
just mean through expanding employment (to the extent that this happens) but more
directly, through the way in which the tax burden is distributed—increasingly less
equally—and of course through funding transfer payments and government services.
The changes which we need to meet these objectives are often necessary to serve economic as
well as equity ends.
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The directions for tax reform
The major directions advanced by the Brotherhood over recent years are:

tax capital gains in ways more in line to the ways we tax other income: options include to
end exemptions on pre-1985 assets, reduce indexation benefits, include at least luxury
homes, and tax gains at death;

a more neutral treatment of savings: reduce subsidies to super (the last budget was
significant here), redirect some to other forms of saving more attuned to life cycle needs;

quarantining negative gearing for passive investment;

reduce opportunities for avoidance: limits on artificial income-splitting, trusts;

reform income tax scale: increase the tax free threshold;

change Federal-state financial arrangements: give states more secure and less regressive
revenue sources;

reintroduce an inheritance tax, gift duties or a wealth tax: opinion is divided but surely
this is not beyond us;

introduce new taxes on services: a GST is one way, but it should not be oversold, and
particularly should not be seen as a replacement for income tax (and its progressivity);

remove distortions from company tax system: reducing concessions, and simplify FBT.
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Some areas of agreement and of difference
Within this list and Dr Fitzgerald’s paper are some areas of agreement, at least on the need for
and place of change.
Possible changes in Federal-state revenue arrangements, particularly the idea of trading off
some of the patchwork of state quasi-consumption taxes for a broadly-based consumption tax,
is one of the themes to flow from the Tax Summit which will require much serious thought
over the coming months.
We would agree on the importance of broadening the direct tax base; one of the interesting
debates at the tax summit was over the possibility of an inheritance tax. We would like to
agree with Dr Fitzgerald, but we will certainly bear in mind Professor John Neville’s warning
that such a tax could turn out to be paid only by people who dislike their children. There
seems little doubt of the equity and efficiency case of this sort of broadening; what is in
dispute is whether it would be avoided.
On one aspect of Dr Fitzgerald’s approach to saving we would also agree—the need for some
greater uniformity in the approach taken to different forms of saving. However, while the
expenditure tax approach is appealing, I suspect we would need to be convinced that the risks
of revenue erosion are not substantial. And I gather from debate at the Tax Summit that at
least some academics remain fairly cautious as to the benefits to national saving and
investment which might flow from removing saving from the income tax system and taxing
these on an expenditure basis.
There are other areas of divergence.

I remain unconvinced of the urgency for or desirability of a tax mix change—from taxing
income to taxing consumption—in order to improve our competitiveness.

We would place a lower priority on simplification than we would on equity—note that we
take the same attitude to the social security system.

To be honest, we are probably a little wary of special pleading over FBT and compliance
costs, although we are happy to be convinced. We would certainly support efforts to
reduce such government-imposed waste and complexity—provided the aim of a fair tax
system is not compromised and the tax burden simply shifted to lower-income tax payers.
But as you can see, this paper is already achieving its objective. It will cause us to think
further and more carefully about what is really in the long-term interests of the people we
work with—Australians living on low incomes or otherwise disadvantaged.
For that I thank Dr Fitzgerald and thank CEDA for commissioning it.
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