With the Council of Australian Governments (COAG) meeting this week to debate tax reform, it is timely to step back and ask why we need tax reform. Is it to raise more revenue to pay for public infrastructure and community services? Is to provide tax cuts to businesses or individuals? Or is it to change the tax mix – either from taxes on income to taxes on consumption, or from so-called inefficient taxes to efficient taxes?
In the last 12 months all of these ideas have been put forward as a reason for reform, but we can’t do all of them.
The answer to the “why” question is important. It will determine not only what tax changes might be made, but also who is likely to benefit from and, indeed, will bear the cost of tax reform.
For instance, on whether we should be collecting more or less tax overall, there is plenty of analysis (from the Grattan Institute, the SA and NSW state governments and the Federal Government’s Intergenerational Report) that shows more revenue will be needed to meet projected demands for services, particularly health services, if current service expenditure patterns continue. This is not about mismanagement or inefficiency, but a result of structural social and economic changes in Australia, including an ageing population and increases in the services demanded and possible.
By contrast to this increased demand, a SACOSS report published this week found that over the last decade taxes have not increased in real terms per person or as a proportion of the economy.
The conclusion is pretty clear – if we want to freeze our tax at “revenue neutral”, or even cut taxes, then we will need to lower our expectations of what public goods and services will be provided. But if we want to maintain or increase services, we need to raise more revenue.
For SACOSS this is the crucial starting point for tax reform. If we are not trying to work out the best and fairest way to increase revenue from tax reform, what is tax reform about? And, if tax reform means swapping some types of taxes for other types – is it worth it?
This “tax swap” is usually justified in terms of efficiency and minimising negative economic impact, but it has crucial impacts for equality. For instance, by its very design GST impacts disproportionately more on low income households, while income taxes impact more on those on higher incomes due to our progressive income tax system.
So if the GST was increased in order to reduce company or personal income taxes, it would change the impact of taxation at the expense of the poor. Yes, there could be compensation, but that is difficult to target and can be eroded over time.
Similarly, if the goal is to raise more revenue, a fairer place to start is probably plugging holes in the income tax system; overly generous and poorly targeted superannuation and capital gains concessions could be removed, as well as negative gearing provisions.
There are many good tax reforms that are needed – to raise more revenue and to remove badly targeted taxes. We need our governments at federal and state levels to have better access to long-term revenue, and expanding and increasing a regressive tax like GST is the wrong place to start.
Of any agreement about tax reform at this week’s COAG meeting we will be asking whether there is enough revenue to pay for public infrastructure and vital services into the future, and whether that revenue will be collected fairly so that those who have the capacity to contribute more pay more and those who are struggling pay less.
Ross Womersley is Executive Director of the South Australian Council of Social Service.
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