Can Australia devise a fairer taxation system?

Truth is there are no easy taxation solutions based on recent trends.

Sure, we can promote greater taxation efficiency and fairer targeting, but further reform is unlikely to prevent a greater struggle to meet new and old policy needs, including for an ageing population, infrastructure and the environment. Just recently, government data revealed that the proportion of pensioners now getting the maximum rate of assistance had increased to 64 per cent in 2008-09, up from 56 per cent a year earlier. (“Financial crisis hits seniors”, Nine News, November 29, 2009).

We either keep supporting freer trade and accept further difficulties against competition from developing nations, or we become more protectionist and increase taxation levels, although the latter option will also have enormous consequences.

As Ken Henry indicated in his October 15 Treasury address to the Committee for Economic Development of Australia, one’s individual views are not immune from the dominant policy attitudes of the day. For instance, Henry noted that a consumption tax base “can quickly evaporate when it is concluded that compensation is required for certain groups”. And that more resources for public housing (rather than rent assistance) “can harm a person’s wellbeing” as “people have an incentive not to take on jobs that make their income exceed the eligibility threshold”.

Truth is that Australian governments since the early 1980s have committed to taxation reform (and lower income and company rates) to uphold the national interest because of much greater international economic pressure.

It is equally true that Australia would have been worse off if had not made such taxation reform: it helps explain why Australia still ranked 13th in the OECD in terms of FDI (foreign direct investment) inflows during 1996-2007, although just 18th in terms of FDI outflows.

And such reform helped generate many well-paid jobs in Australia’s service sector. The 2007 World Investment Report ranked Australia 6th in terms of hosting foreign affiliates to the top 50 global financial TNCs (trans national corporations), and 7th in regard to hosting foreign affiliates for the top 100 corporations from developing countries.

Taxation reform also allowed taxation revenue to remain similar (28.3 to 30.6 per cent of GDP between 1985 and 2006).

Australia’s recent taxation reforms are consistent with other developed societies. For example, the top income tax rate has been reduced in every OECD nation with the average declining from 68 to 42 per cent between 1980 and 2007: Australia from 62 to 45, Britain 83 to 40, Sweden 87 to 56, Norway 75 to 40 per cent in Norway, and 73 to 39 per cent in the US.

And though Australia’s company tax rate declined from 46 to 30 per cent between 1979 and 2001, typical of cuts by OECD nations, Australian corporate tax receipts as a proportion of GDP actually increased from less than 4 to more than 5 per cent of GDP between 1988 and 2005 after being relatively stable for the period 1965-1988.

In comparative terms, Australia’s overall tax burden has been amongst the bottom third of OECD countries since 1965. Australia’s 2006 level was 30.6 per cent of GDP, the 8th lowest in the OECD (average 35.9 per cent) with Denmark and Sweden the highest with 48.9 and 48.2 per cent respectively.

Though Australia’s individual income tax burden is relatively high compared to the OECD average, it has one of the lowest levels if social security contributions and payroll taxes are included. In 2007, Australia ranked 5th lowest in terms of taxes on average wages. Further, Australia’s average effective income tax rate on a range of household types is among the lowest eight OECD countries, notwithstanding the increase in the proportion of personal income tax paid by lower income quintiles (Report of the International Comparison of Australia’s Taxes 2006). For those families with higher tax rates, most benefit from Australia’s relatively highly targeted social security system.