Tame Senate could deliver tax reform

Through the introduction of significant reforms, the Howard Government has earned the trophy of good economic manager.

The deliverance of Senate control now raises the bar. The fourth Howard Government will be rightly judged on how it uses this once-in-a-generation opportunity to reform structural defects in Australia’s tax, welfare and labour market systems.

Tinkering at the edges in these policy areas is not an option. Reform is absolutely pivotal to making Australia a more competitive, fairer and wealthier society that creates more jobs and provides incentive for people to work while confronting some of the entrenched problems of welfare dependency.

Comprehensive reform undoubtedly involves a multi-pronged approach that delivers solutions to deep-seated problems in the architecture of these sectors.

The obvious first step is to pass the Government’s unfair dismissal reforms. The Melbourne Institute claims existing legislative provisions cost small and medium-sized enterprises at least $1.3 billion per annum in compliance and are responsible for the loss of 77,000 Australian jobs. No legislative measure in recent years has come to epitomise Australia’s hostile Senate than the unfair dismissal reforms. Rejected more than 40 times by Labor and the minor parties, the time has come to give employers more flexibility to create jobs and rid the labour market of this restrictive impediment.

The Australian editorialised in December 2003 that “comprehensive tax reform is long overdue, and should be tackled as a whole, not in bits: no one designing a simple and efficient tax system for Australia [in 2003] would come up with what we have now”.

No one can claim to have a comprehensive prescription to make our tax system simpler and fairer. A good starting point, however, would be the indexation of marginal tax rates so that they keep pace with real wages.

The rate at which real wages have increased under this government is five times the rate of increase under the previous Labor administration, and this has had the effect of accelerating bracket creep so that a worker only needs to earn 1.3 times the average wage to slip into the highest marginal tax rate.

If bracket creep is the automatic mechanism by which taxes are effectively raised, any reform to our taxation system must provide an automatic mechanism for the indexation of tax rates. This will ensure that tax windfalls to government are reduced, placing the responsibility on the government of the day to sell the need for additional taxes instead of having them slip through the back door of bracket creep.

It seems a cruel irony for a hard-working aspirational workforce to have a top tax rate of 47 per cent, where the business community is taxed at 30 per cent. While the income tax thresholds will change on July 1, Australia’s competitiveness demands that the top tax rate be reduced and the threshold be increased to beyond the 2005 level of $80,000.

An increase in the tax-free threshold - languishing at a bare $6000 and nowhere near the comparable annual benefit for a single person on welfare of $12,500 - also desperately requires reform. The reality is that the value of the tax-free threshold has steadily eroded when compared to the strong wages growth seen in recent times. Raising the tax-free threshold to a fairer level would ensure nobody paid tax before they earned, at the very least, the equivalent minimum benefits they would receive on welfare.

But reform can’t end with the labour market and the tax system. It is becoming generally acknowledged that Australia’s welfare system will simply become unsustainable if present trends continue.