Last week saw the tax reform debate take a new turn when the state governments of Victoria and Western Australia openly canvassed the need for Australia to have a good look at the base and rate of our existing GST system.
As our members will know, the Institute has been a long-time advocate of the case for a broader based GST with a potentially higher rate than 10%. Dr Ken Henry was not given the opportunity by the federal government to review the scope of the GST as part of his landmark review of our future tax system. The exclusion of the GST was viewed by many in the business community, including the Institute, as a missed opportunity to tackle the big issues confronting our future tax system.
But things appear to be moving on. The fact that two influential state governments have now begun to openly speak about the need for a GST system that generates more revenues than is currently the case, is promising.
Why?
The answer lies in the fact that any serious overhaul of inefficient and market-distorting state taxes (like stamp duties or payroll taxes) brings with it a need to replace the lost revenue with a new source. Given that GST revenues are already passed through to state governments under the deal struck back in 1998, and the fact that the GST is an inherently more efficient tax, it would make a lot of sense for us to look closely at the option of expanding the existing base of goods and services currently subject to the tax.
The two options essentially boil down to looking at whether or not more goods and services should be brought within scope, and if it is appropriate to increase the actual rate of the tax beyond 10%.
The expansion of the GST in this sort of way would undoubtedly have a big impact on low to middle income earners; as consumers, rather than businesses, generally suffer the final impacts of consumption taxes like the GST. Because of this, any change to the base and rate of the GST would need to be coupled with an appropriate reduction of personal income tax rates in order to offset the increased costs that would be borne by those least able to afford it in our community. This, incidentally, is precisely what our neighbours in New Zealand have recently decided to do.
Tell me what you think: is moving to a broader based GST, with a higher rate, a good idea if it means a dramatic reduction in some of the cumbersome state taxes?
Monday, November 29, 2010
Tuesday, November 16, 2010
Tax lessons from the OECD
Earlier this week, the Organisation for Economic Cooperation and Development (OECD) released its most recent economic survey of Australia. Many of its observations and recommendations closely reflected the Institute’s position in a number of areas.
The report said that ‘the proposed changes in resource taxation are welcome but should go further’. The OECD confirmed the economic merits of moving to a rent tax approach to non-renewable resources to replace the existing state-based royalties system.
Similar to the Institute’s position, the OECD recommended that ‘the resource rent tax [should] be extended to all commodities and all companies irrespective of their size’. Members will recall that our submission to the Policy Transition Group about the Minerals Resource Rent Tax (MRRT) included recommendations that the policy design of the new MRRT should be easily adapted to other commodities in the future as Australia’s reliance on coal and iron ore exports diminishes over time. While this recommendation has not been received well by some parts of the mining sector, I believe it represents a sensible approach to policy-making.
In other parts of the report, the OECD made observations about the need for Australia to drive down its corporate income tax rate. The report noted that at 30%, Australia’s tax rate is ‘well above the average’ of all small to medium-sized OECD countries. This message is consistent with the policy arguments we made during the Henry tax review. (Dr Henry ultimately recommended that Australia should move to a 25% corporate tax rate.)
The OECD also delivered a strong message to the government about the need to ‘increase the weight of the GST in total tax revenues’. This means Australia should broaden the base of its GST system and increase its rate. This reflects the Institute’s own policy thinking over recent years – increasing revenue collected from the GST would allow Australia to abolish a raft of inefficient and distortionary state-based taxes such as stamp duty and other levies.
It seems to me that international economic thinking and analysis all point to the same conclusions. All we need now is for the government to start thinking the same way!
The report said that ‘the proposed changes in resource taxation are welcome but should go further’. The OECD confirmed the economic merits of moving to a rent tax approach to non-renewable resources to replace the existing state-based royalties system.
Similar to the Institute’s position, the OECD recommended that ‘the resource rent tax [should] be extended to all commodities and all companies irrespective of their size’. Members will recall that our submission to the Policy Transition Group about the Minerals Resource Rent Tax (MRRT) included recommendations that the policy design of the new MRRT should be easily adapted to other commodities in the future as Australia’s reliance on coal and iron ore exports diminishes over time. While this recommendation has not been received well by some parts of the mining sector, I believe it represents a sensible approach to policy-making.
In other parts of the report, the OECD made observations about the need for Australia to drive down its corporate income tax rate. The report noted that at 30%, Australia’s tax rate is ‘well above the average’ of all small to medium-sized OECD countries. This message is consistent with the policy arguments we made during the Henry tax review. (Dr Henry ultimately recommended that Australia should move to a 25% corporate tax rate.)
The OECD also delivered a strong message to the government about the need to ‘increase the weight of the GST in total tax revenues’. This means Australia should broaden the base of its GST system and increase its rate. This reflects the Institute’s own policy thinking over recent years – increasing revenue collected from the GST would allow Australia to abolish a raft of inefficient and distortionary state-based taxes such as stamp duty and other levies.
It seems to me that international economic thinking and analysis all point to the same conclusions. All we need now is for the government to start thinking the same way!
Wednesday, November 10, 2010
All may not be what it seems…
As many of you are aware, the mining tax policy consultation group swept through Sydney late last week. Led by Australian business sector veteran Don Argus and Resources Minister Martin Ferguson, the Policy Transition Group (PTG) held several meetings with stakeholders during the two days they were in town.
The Institute participated in one of the stakeholder meetings alongside representatives of the Big 4 accounting firms and other professional associations. However, the meeting was not quite what I had been expecting.
Since I attended the meeting, a number of people have asked me what I thought about the process – the way in which the government and the PTG are going about putting the design of the new mining tax together. Unfortunately, my response to that question has typically been one of concern.
The major question to come out of this process for me is whether or not the PTG will be able to influence the government and its agencies in the final design of how the new Minerals Resource Rent Tax (MRRT) will operate, given it is mainly made up of external executives from the resources sector.
At the Sydney meeting, we were advised that the Treasury Department had already started drafting the legislation surrounding the new MRRT. In order to draft legislation, Treasury must have a pretty good idea of how the detailed policy design is going to work.
Does that mean that the government and Treasury have already pre-judged the outcomes from the PTG consultation process? If so, is that really the way we want to go about critically important reforms to our tax system in the future? You be the judge.
The Institute participated in one of the stakeholder meetings alongside representatives of the Big 4 accounting firms and other professional associations. However, the meeting was not quite what I had been expecting.
Since I attended the meeting, a number of people have asked me what I thought about the process – the way in which the government and the PTG are going about putting the design of the new mining tax together. Unfortunately, my response to that question has typically been one of concern.
The major question to come out of this process for me is whether or not the PTG will be able to influence the government and its agencies in the final design of how the new Minerals Resource Rent Tax (MRRT) will operate, given it is mainly made up of external executives from the resources sector.
At the Sydney meeting, we were advised that the Treasury Department had already started drafting the legislation surrounding the new MRRT. In order to draft legislation, Treasury must have a pretty good idea of how the detailed policy design is going to work.
Does that mean that the government and Treasury have already pre-judged the outcomes from the PTG consultation process? If so, is that really the way we want to go about critically important reforms to our tax system in the future? You be the judge.
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