There’s a reason why there hasn’t been much in the electronic media so far about the taxation review discussion paper released at 10.30 this morning. It’s 340 pages of dense detail about Australia’s taxation and transfer systems, and there’s no clear guide to exactly where the inquiry by Ken Henry and his team is heading. As a discussion paper, it’s not entirely clear to non-tax specialists exactly what we’re supposed to be discussing.
For the tax gurus, though, this is indeed a root and branch review. The discussion paper goes to very basics of taxation and transfer principles and explains how the Australian systems match up to economic orthodoxy – where it exists. It also offers pretty much a one-stop shop on every tax and payment in Australia. Look no further for Jane’s Australian Taxes and Transfers.
For the rest of us, there are a few pointers as to where the review might be heading. A key one is contained in one of the very first figures offered in a paper absolutely chockers with numbers, tables, graphs and equations. The review has found 125 taxes in Australia across all jurisdictions – apparently simply enumerating them was difficult given the state of data available – but 90% of revenue is earned from just 10 of them. The remaining 115 taxes – and many of them are Commonwealth, not State taxes – yield only 10% of revenue. There appears to be a strong case for further simplification of the number of taxes, given the cost of administration and the efficiency costs arising from distortions generated by taxes.
The paper also has a crack at the rugged individualists – I include myself in that group – who think the size of government in Australia is too big. We’re the eighth-lowest taxing country in the OECD – and, despite the best efforts of Peter Costello and John Howard, the third-lowest spender, although the OECD includes the if-it-moves-tax-it socialist nirvanas of northern Europe, and doesn’t include most of our regional trading partners, so the comparison is rather skewed.
But judging by the paper, the review panel is likely to emphasise better integration of the taxation and transfer systems, which currently operate separately and in some cases inconsistently – most obviously in the area of effective marginal tax rates. The level of unnecessary complexity has been increased, the paper says, by incremental tax and transfer reforms that are considered outside the broader context of ensuring efficiency – a subtle but clear reference to the Howard Government’s remorseless increase in handouts and taxation expenditures, which increased massively in the last term of the previous Government and in total doubled in the last twelve years to more than $50b a year.
This is no idle exercise for the review panel. It repeatedly emphasises that current taxation and transfer arrangements will become problematic as the population ages, and that the Government’s emissions trading scheme and associated compensation will also have significant efficiency consequences – although the resources boom provides a strong base for pursuing reform now. According to commonly-accepted estimates, the paper says, the efficiency costs of taxation can be up to 6% of GDP, and offer a strong case not for reducing tax so much as ensuring both the taxation and transfer systems – preferably as part of a single system – operate in a way that minimises distortionary effects.
This suggests the review’s ultimate recommendations might lack the sex appeal of big tax cuts or major shifts between taxation bases, but try to pick up long-term but significant gains from reforming taxation arrangements to achieve what it calls a “socially-optimal level of complexity.” Businesses pushing for a shift from company tax to the GST and income tax might be advised to hire the best tax academics they can find – this is going to be a complex debate.