Can Australia devise a fairer taxation system?

Australia’s indirect tax mix also differs with a lower reliance on value-added and sales taxes and a higher reliance on property and transaction taxes.

In 2007-08, 59.9 per cent of Australian’s total government taxation revenue came from income, 24.4 per cent from goods and services, 8.9 per cent from property, and 4.5 per cent from payroll taxes. The most obvious change in Australian taxation has been the increasing importance of consumption taxes (8 to 13.4 per cent of GDP between 1990 and 2005).

But assuming that policy trends will remain the same in terms of an ongoing commitment to freer trade, where can taxation reform come from if we decide to keep taxation receipts at a similar proportion of GDP?

Australia could make its income tax system more progressive by indexing income tax thresholds to inflation each year as is the case in Canada, the Netherlands and the US.

Australia could also increase its GST rate (10 per cent) on many goods and services to offset or eliminate other forms of taxation, given that it is well below the OECD average of 17.6 per cent (range 5-25 per cent). However, this possibility is not on Australia’s political agenda and an increase would have the greatest burden on lower income earners.

Excise tax, which is deemed efficient because it can be applied without creating undue distortions to consumption decisions and the production of such goods is concentrated at a few production points, does have potential to raise more revenue from petroleum, tobacco and alcohol consumption. But again, Australians can prove reluctant to embrace such an option with public pressure encouraging the Howard government to freeze Australia’s excise duty rate on unleaded petrol at 38.143 cents per litre, already the fourth lowest level in the OECD in 2005. The petrol example alone suggests some difficulty in regards to Australians supporting environmental taxes given that an emissions trading scheme will increase prices for a variety of products.

In terms of company taxation, there will be further calls for a lower rate to address the reality that Australia has one of the highest corporate tax burdens as a percentage of GDP. In 2008, Australia’s rate of 30 per cent was higher than 19 OECD nations (range 12.5-28 per cent), including Sweden (28), Finland (26), Austria (25), Denmark (25) and Switzerland (21).

Henry has also noted that a higher corporate tax rate would have little impact on foreign investment in some local resource companies, but would potentially cause suffering in manufacturing and “businesses wanting to attract foreign equity capital” (Liam Walsh, “Company tax rate matters, says Ken Henry”, The Courier-Mail, September 23, 2009).

However, the tax review is likely to retain Australia’s system of dividend imputation with companies still able to issue dividends to domestic shareholders to allow them to avoid paying a second round of company tax on them. This promotes a bias towards raising money from Australian shareholders (as opposed to overseas), but offers protection “against transfer pricing, or multinational companies siphoning profits back to foreign parents” (Jacob Saulwick, “Fundamental changes ahead in tax review”, Sydney Morning Herald, September 7, 2009).

One area where Henry may increase revenue could be a higher resource tax given that resource royalties as a share of the mining sector’s operating profits dropped from about 30 to 10 per cent between 2001-02 and 2006-07. With such a tax not kicking in until above-average profits in order to promote exploratory projects, it is argued that greater taxation from such a source makes sense given the current resources boom (Saulwick).

At the state level, there are also few possibilities for substantive reform, although the evidence indicates that state governments are struggling to meet their many policy needs with health services alone suffering.

While Henry suggested on August 19, 2009 that stamp duty (on conveyances, insurance premiums etcetera) should be abolished with the revenue loss of $20 billion a year offset by a broadening of land or payroll taxes (Quentin Dempster, “The Henry tax review: is this is end of states?”, ABC News August 21, 2009), competition between the states in regard to payroll tax may limit the scope of such a tax. In 2007-08, payroll tax accounted for 30 per cent of state government revenue, while property tax provided 39.4 per cent.