Peter Verwer |
Thursday, 12 February 2009 8:28 AM |
One Comment
Australians pay 125 different types of tax. 115 of these raise less than 10 percent of total government revenue.
By OECD standards, Australia's company tax rate is about average.
Our reliance on property taxes is far greater – almost twice the OECD average.
The tax take on labour and consumption (GST) is considerably lower than the international average.
And the tax burden on capital is very high - the fourth highest in the OECD.
These stats come from the consultation papers produced by treasury head Ken Henry as part of his “root and branch” tax review.
Henry says Australia is a low tax and low government expenditure country, compared to our international competitors.
The big problem is the number, design and mix of inefficient taxes that generate revenue across Australia’s nine governments (and 700 local councils).
An allied problem is the tax transfer system. That is, the revenue handed back to targeted groups in the economy.
There are around 40 different tax transfers paid to Australians.
As Henry notes:
”The Australian tax and transfer systems are separate systems that combine to affect the disposable income of individuals and families, and their incentives to work, save and invest (including in skills). There are different bases of assessment between and within the two systems, including the definition of income, the unit of assessment, the period of assessment and the basis of eligibility.”
Australia is noted for the churn between its tax and transfer systems. All of which creates complexity and reduces transparency, equity and efficiency.
Rationalising and simplifying our lopsided tax system is a high priority.
The Rudd government says it’s keen to champion landmark reforms. Meanwhile, Opposition leader Malcolm Turnbull has commissioned his own research into tax modernisation options.
A tax reform race is a good result for Australians in 2009.
For our part, the Property Council (in league with the Business Coalition for Tax Reform) has developed costed scenarios for redesigning the tax system, which will be released publicly in April this year.
Each scenario involves a radical reduction in inefficient property and business taxes (primarily at the state government level).
We show that a $10 billion cut in archaic taxes adds close to percent to annual economic growth.
Ultimately, the reforms pay dividends by helping forge a more competitive and productive economy.
Of course, the tax debate also unleashes hobby horses.
Negative gearing naysayers are having a field day and there are persistent rumours that the Henry review has negative gearing in its sights.
There is no shortage of negative gearing critics. They argue that negative gearing is a gift to the wealthy, distorts investment decision-making and creates housing investment bubbles that reduce affordability.
Paul Keating’s two-year experiment with negative gearing should alert anyone to the dangers of tinkering. In 1985 Keating quarantined interest cost deductions for a specific asset to the income from that asset. Traditionally, Australia’s negative gearing system allows taxpayers to offset interest costs against any source of income.
The received wisdom is that carnage ensued and in 1987 the traditional system was re-instated.
However, there’s a growing school of revisionists that say Keating’s nobbling of negative gearing didn’t really impact on house prices or rents.
The revisionists miss several points.
Housing affordability is governed by a simple equation – the supply of housing (for ownership and rent) must match demand.
What happened to housing construction following the snarfing of negative gearing rights in 1985?
Housing construction fell to its lowest ever level of activity as a percentage of GDP since the advent of official statistics in the late 1950s.
Here’s another fact: the bulk of taxpayers who utilise negative gearing earn between $55,000 and $90,000 – it’s not the wealthy.
Negative gearing costs the government $2. billion each year. That’s a fraction of the $29 billion paid in property taxes annually.
In return, every negatively geared house is leased into a market desperately short of rented accommodation.
With housing finance down 27 percent, house development approvals down 37 percent and rental vacancies at record low levels, it doesn’t make sense to conduct another social experiment – especially when we already know the answer.
Ditching 115 legacy taxes and modernising the other ten is a smarter place to start.
Peter Verwer |
Thursday, 12 February 2009 8:28 AM |
One Comment
