Tax reform takes an unexpected turn

You don’t have to look too far to see that Australia’s tax system is – in the words of economist and former treasury secretary Dr Ken Henry – no longer fit for purpose.

You just have to look at a young person, trying to make it in a career but already incredibly burdened by a combination of harsh income taxes to help pay interest on a massive government debt plus HELP debt repayments, extremely high barriers to home ownership and skyrocketing rentals.

At the other end of the spectrum, you might see a retired person in their 70s, sitting in a $5 million house, collecting the age pension, paying almost no tax other than a trickle of GST and also getting a franking credit tax refund every year.

That is just one example of where the tax system has created winners and losers that bear no real relation to the situation we might want to create in our society.

Entrenched interests fight hard

Taxation choices made in a vastly different time have begun to produce some quite perverse and unintended outcomes.

However, tax reform is difficult and controversial when entrenched interests fight to keep what they have got, and governments are reluctant to spend too much political capital even if it will produce a better and more competitive economy.

The political kerfuffle and point scoring around the relatively simple change to increase the tax on superannuation funds containing more than $3 million showed what we could expect if some really radical and far-reaching tax reforms were introduced, like the introduction of the GST way back in 2000.

Climate change is also an issue that could be effectively tackled through taxation policy (remember the carbon tax?) along with Australia’s sluggish rate of productivity growth.

Is teal the colour of reform?

Somewhat bizarrely, the burden of tax reform has surprisingly been taken up by the independent teal MP Allegra Spender, who is in the process of preparing a taxation white paper to be released in 2024 and has already held a tax roundtable with many prominent figures in the tax reform debate.

Included in the debate are Dr Henry, Professor Robert Breunig from the Australian National University and Michelle de Niese from the Corporate Tax Association.

While the major parties are closely monitoring the white paper progress, it is very unusual for a crossbench MP to tackle such an issue without the usual resources and political incentives that accompany the white paper process.

That will include a series of meetings with businesses, trade unions, financial institutions and community groups in an effort to summarise the best of their ideas in a paper that contains a series of reforms designed to modernise the Australian tax system for the current challenges.

Tax policy strongly connected to climate change and other issues

Ms Spender said that many of the worries around opportunities and inequality for young people, job security, economic productivity, wage growth, housing affordability and climate and the environment were deeply connected to tax policies.

“It is not only tax that drives this — there are a variety of causes — but we cannot ignore the breadth of impacts that tax has on our lives,” she said.

Ms Spender added that tax was barely mentioned in the 2022 Federal Election despite being a vital ingredient in the economy.

In general terms, tax is useful in changing priorities as well as in collecting revenue.

That is why we have very large taxes on tobacco in an attempt to reduce the use of this product and lower taxes on some products that we want people to consume more, such as fresh fruit and vegetables.

Dr Henry wants generational inequity addressed

Dr Henry, who authored the last major review of the Australian tax system in 2010 which apart from a controversial and ultimately dumped mining tax was mostly ignored, said that it was important to address the problem of generational inequity.

In a major speech to the Tax Institute, he said the current tax system is working against younger Australians.

“This generation of young workers, weighed down with HECS (HELP) debt, burdened with the responsibility of repaying a mountain of public debt and dealing with the costs of climate change, is finding it increasingly difficult to buy a home,” Dr Henry said.

Young workers had been priced out of the market “by those who have already retired, or are now moving into retirement, those who are sitting on tax-free capital gains in houses that are exempt from the pension assets test, those who are receiving refundable franking credits on share portfolios and a blend of publicly funded and tax-free private pensions from assets accumulated in lightly taxed, self-managed superannuation funds”.

That would eventually cause the intergenerational social compact to fracture.

Time to tax land, carbon and resources

To reform the system, Dr Henry said Australians had to stop relying so heavily on personal income tax, company tax and transaction taxes like stamp duty.

Instead, more revenue should come from taxes on economic rents, land, other natural resources and environmental externalities, including carbon emissions.

“The guiding principle should be to reduce the rate of tax applying to the normal return on capital while increasing the rate of tax applying to economic rents, including rents derived from the exploitation of our non-renewable resources, coal and gas,” he said.

All of which leaves a great opportunity – and risk – in the hands of Ms Spender who will eventually hand a blueprint for tax reform to the current Labor Government.

It will be interesting to see if Prime Minister Anthony Albanese and his team have any appetite for tax reform – either major or minor – or if like the original Henry report, some sound recommendations end up gathering dust on a library shelf.