Australia ‘Must Grasp Nettle of Tax Reform’

Australia’s government must introduce widespread tax reform or face a prolonged period of sluggish wage growth and poor productivity, according to outgoing Australian Treasury secretary Dr Martin Parkinson.

In an address to the Business Council of Australia (BCA), Dr Parkinson said that the Australian economy faces several challenges – primarily related to an ageing population and the end of the mining boom – which, in the absence of strong productivity growth, will weigh on economic and income growth.

“Genuine tax reform also requires more than an across the board cut in tax rates – it is about improving the structure of the tax system to reduce the cost that raising revenue imposes on the economy,” he said. “It is as much about how much revenue is raised, as how it is raised.”

Parkinson added that Australia would soon need to move beyond the government’s stated commitment to cut the corporate tax rate by 1.5 percentage points by July 2015. Other countries were cutting company tax, and global supply chains meant companies had a much greater choice about where they said they were located.

Australia’s current 30% company tax rate was ill-equipped to handle the digitisation and the rise in corporations that operate across borders, he suggested. Income tax rates would also need to fall. Without change, inflation would push more people into higher tax brackets, driving the average tax rate up from 23% to 28% over the next 10 years.

By international standards, Australia was over-reliant on so-called direct taxes, such as company and income tax, and far too little on indirect taxes, such as those on consumption.

“This is despite the introduction of the goods and service tax [GST] and the reduction in corporate and personal tax rates over the past decades,” Dr Parkinson said. The GST, a value added tax of 10% on most goods and service transactions, was introduced in Australia in 2000.

“Without conscious change, the economic cost of raising tax from our current tax mix will increase. Many studies, both in Australia and internationally, have suggested that reducing reliance on direct taxes would lead to higher incomes.”

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