Tax Reform for Economic and Social Impact

1. INTRODUCTION - 1 Some general principles • economic and social impacts • adequate and sustainable revenue • realities and externalities • moderation and diversity • tax expenditures and invisible hands • public attitudes • political hypothecation • the search for simplicity

2. INTRODUCTION – 2 Australia as an outlier • household debt • housing costs • government debt • distribution of population • greenhouse gas emission

3. INTRODUCTION - 3 Adequacy of revenue • very low by OECD standards • the lower countries have huge debt or low development • impacts on efficiency and transparency • higher than average needs for investment ?

4. TABLE 1: APPROXIMATE CHANGES INAUSTRALIAN TAX REVENUE TO EQUALLEVELS IN OTHER COUNTRIES (as % of GDP), 2010

5. INTRODUCTION - 3 The importance of asset taxation • includes asset ownership, transfer and income • rife with distortions which damage economic development and social justice • light taxation discriminates against labour income and encourages passive ownership of assets • globalisation makes taxation of immobile assets especially important • major tax differences from most other countries • inequality is much greater in assets than in income

6. WHAT’S WRONG ? - 1 Some hot issues for tax reform • Housing and land • Older people • Transport

7. WHAT’S WRONG - 2 Housing and land Problems • inflates prices and rents (including cost of housing assistance) • encourages inefficient usage of housing • targets housing assistance inefficiently, unfairly and covertly • damages labour mobility and inflates wage pressures • damages the broader economy Responses • cap land tax exemption for principal residences (with some deferred liability); remove stamp duty from lower-value dwellings • restrict negative gearing (eg discount gains and deductions by10%; or introduce passive loss quarantining) • cap exemption of principal residence from pension means test • disaggregate NRAS dwellings for land tax purposes • reduce capital gains tax discount on long-vacant residential land ?

8. WHAT’S WRONG - 3 Older people Problems • very high costs of aging population • very wasteful and inequitable tax benefits for superannuation • excessively generous personal income tax thresholds • complex and counter-productive impacts of pension income test Responses • tax superannuation in the same way as wages but provide flat- rate rebate, or co-contribution, on contributions up to a modest ceiling • greatly reduce availability of tax-free superannuation for over-60s • abolish or greatly reduce Senior Australians Tax Offset • relax the income test on age pensions (but deem income from high-value principal residences) • introduce bequest tax or deem disposition of assets on death

9. WHAT’S WRONG - 4 Transport Problems • encouragement of excessive car usage • discouragement of public transport • aggravation of vehicular pollution and congestion • substantial loss of revenue Responses • introduce carbon tax • reduce excessive generosity of FBT concessions on cars and parking • provide FBT exemption for benefits relating to public transport • introduce congestion charges

10. WHAT’S WRONG - 4 Some other issues • Lifelong Savings Accounts • trusts • Low-Income Tax Offset • Child Care Rebate and FBT treatment • religious and charitable organisations

11. WHAT’S NOT WRONG - 1 Tax rates on higher personal incomes and corporate incomes • rates are not high by international standards • especially when related taxes are taken into account • any reduction should be accompanied by closing of major loopholes in other aspects of personal and corporate tax • should avoid flow on to higher earners of any personal income tax cuts for lower-earners • high EMTRs are mainly due to means-testing not to tax rates • better to reduce payroll tax than corporate income tax

12. TABLE 2: APPROXIMATE RANKINGOF AUSTRALIAN TAX REVENUEAMONGST OECD COUNTRIES, 2009

13. TABLE 3: TRENDS IN MARGINAL AND AVERAGE TAX RATES ON WORK INCOME IN AUSTRALIA

14. WHAT’S NOT WRONG - 2 Current GST rate and food exemption • increased rate, and removal of food exemption, could not be adequately compensated for many disadvantaged people • increased revenue would reduce pressure for much more important changes • increased rate would boost inflation • would also aggravate problems of tax evasion and the distorting impacts of excessive exemptions in areas such as education, health, religion and charities • compensation would increase criticism of “churning” and {increased welfare spending”

15. A TAXATION SCORECARD - 1 Overall tax levels • Total tax revenue is in the lowest-fifth of33 OECD countries (c$80bn below the OECD average as a % of GDP, even if superannuation taken into account). • Revenue from taxes based on incomes and payrolls (whether paid by individuals or companies) is below most OECD countries. • Overall level of taxes on business is not high by OECD standards. Personal income tax • Top rate and threshold are more generous to taxpayers than in most comparable OECD countries. • Total income tax per $ earned fell about 20% for high-earners over the last 20 years but little, if at all, for lower-earners. Gift, death and wealth taxes • Australia is one of only seven OECD countries without such a tax.

16. A TAXATION SCORECARD - 2 Corporate income tax • The current 30% rate is around or only slightly above the mid-range of comparable OECD countries. • The proportion of corporate profit paid as income tax is less than it was a decade ago and two decades ago. • Only Australia and NZ refund all corporate income tax payments to shareholders. Capital gains tax • The level of tax is high on some types of gains by OECD standards and low on others Goods and services tax • The rate is comparatively low by OECD standards.

17. SOME TRICKS OF THE TRADE - 1 TRICK 1:Comparing the levels of revenue from a particular type of tax without explaining that the comparison relates to the proportion of total revenue which comes from that tax rather than to the overall amount which comes from it. Eg, this omission falsely makes our income taxes look high, because (a) Australia’s overall revenue is low, and (b) most other countries raise a lot of revenue from other types of tax. TRICK 2:Comparing the levels of revenue from "personal income tax“ without taking account of all major taxes based on personal incomes, especially compulsory social security contributions. Eg, our personal income taxes are falsely made to look high by ignoring the very large taxes levied on incomes in most OECD countries through the imposition of "employee social security contributions"*. TRICK 3: Comparing the levels of "personal income tax rates" without taking account of the level of income at which they take effect. Eg, if the top marginal rate starts at a high income level (as in Australia) it may be less onerous than if the rate is lower but starts at a lower level.

18. SOME TRICKS OF THE TRADE - 2 TRICK 4:Comparing "corporate income tax" rates without taking account of whether the tax is refunded to shareholders. Eg, the extent to which we tax corporate income is greatly reduced by the fact that, unlike almost all other OECD countries, we effectively refund all of the tax to shareholders through dividend imputation. TRICK 5:Comparing the levels of revenue from "corporate tax" or "business tax“ by considering only taxes on corporate income. Eg, our corporate taxes are made to look falsely high by ignoring the very large taxes levied on businesses in most OECD countries through the imposition of "employer social security contributions"*. TRICK 6:Comparing the level of "taxes on assets" without taking account of all taxes on assets and without properly explaining the impact of the gift and inheritance taxes which exist in almost all other OECD countries. Eg, a general statement about "taxes on assets" should take account of taxes not only on ownership of assets but also on transfers of assets and on income generated by assets. It also should take account of the fact that the impact of gift and death taxes cannot be assessed merely by looking at the revenue they raise (due to deterrent effects, tougher taxes may raise less revenue).

19. APPROXIMATE RANKING OF REVENUE FROM TAXES ON INCOMESAND PAYROLLS (as % of GDP)*, 2009 * I.e, personal income tax, corporate income tax, social security contributions and payroll tax. Figures in brackets are revenue from the first two categories. ** Inclusion of 50% of compulsory superannuation contributions would increase this total by about 1.5% (see para 12).

20. APPROXIMATE RANKING OF IMPACTSON INDIVIDUALS OF TAXES BASED ON INCOMES AND ON PAYROLLS (revenue as % of GDP)

21. APPROXIMATE RANKING OF IMPACTS ON COMPANIES OF TAXES BASED ON THEIR INCOMES AND PAYROLLS (REVENUE AS % OF GDP)

22. REVENUE FROM TAXES ON ASSET OWNERSHIP AND TRANSFER (as % of GDP)