Can Australia devise a fairer taxation system?

Other options are suggested by international examples. For instance, some countries have an annual levy on net wealth in respect of movable and immovable property, net of any debt financing (Luxembourg and Switzerland), while Australia is among a minority of OECD countries that does not impose any estate, inheritance and gift duties. Australia also applies the GST to new houses and additional improvements yet the UK does not apply the VAT to new housing. Further, other nations tax family income rather than individual income, including Canada, Spain, Ireland, Switzerland and the US.

Reforms can also be made to existing taxation policies to encourage greater equity given that higher income earners benefitted most from the top tax threshold being increased from a wage of $50,000 in 1999-00 to $180,000 by 2008-09.

For instance, superannuation can be made fairer. With Spies-Butcher and Stebbing noting how those earning over $180,000 per annum can reduce their tax through contributions from 45 to 15 per cent while those earning $34,000 or less got no benefit, they propose a couple of solutions that are neutral in their budgetary impact. One option, after employers deducted tax from superannuation contributions in the same manner as other pay, would provide a flat rate rebate of 20 per cent support for those earning up to $80,000 per annum with the rebate reduced by 1 percentage point for each additional $1,000 of earnings until phased out completely for those earning over $100,000 per annum. If applied in 2005-06, 85 per cent of wage earners would be better off with minimum wage workers $509 better off per annum and full-time males on average weekly earnings (including overtime) receiving an extra $303 (Reforming Australia’s Hidden Welfare State, Centre for Independent Studies, February 2009).

But no solution is ever foolproof or likely to lead to full agreement. Robert Gottliebsen argues that Labor’s 2009 decision to limit those under 50 to just $25,000 for superannuation each year may have a further adverse impact upon home ownership opportunities. In addition to the likelihood that higher interest rates will slow the rate of building construction at a time when the population is rising dramatically, thus adding further to the long-term housing shortage, he suggests that the re-entry of high income earners into the housing market may lead to further price rises. While Gottliebsen notes that the government will curb the interest deductibility rules once it wakes up, this will create even greater housing shortages (“The end of the Australian dream”, Business Spectator, November 4, 2009).

Taxation reform, in this era of freer trade, is seldom a win-win situation despite any sincere effort seeking to reward effort and investment while compensating lower-income earners or meeting important needs.

Henry has suggested some good ideas, but there is always some resistance. For instance, Henry suggests that a tax on road use would help ease congestion (costing the economy about $9 billion a year), yet the Australian Automobile Association will only support such a tax if fuel excise is abolished (Ken Henry, October 15, 2009).

Australia will make ongoing taxation reform, but just who wins and who loses remains to be seen. It may well be that Australia taxes all food products in the future, a policy that will place a greater burden on low income earners.

It has even been suggested that Australia end its tradition of fiscal equalisation that ensures a very high level of fiscal equality between the states when compared with other federal systems, although one has only to look at the US to view the social consequences of a political system that does not provide a similar level of services.

I live in hope. I look forward to the Henry Report but I am not expecting any magical solutions. The competitive nature of the international economy will limit the impact of any taxation reform, unless of course support for freer trade ends. All we can do is make our taxation system fairer, although a greater struggle for resources is likely to occur in regard to addressing old and new policy needs.