Finding the right path in tax reform

 An animated exchange at the National Reform Summit between ACTU president Ged Kearney and former Treasury secretary Martin Parkinson demonstrated that reform-driven economic debate in Australia is still possible. While Kearney argued about the adverse effects of a GST rate increase and spoke in favour of a more efficient application of payroll tax, Parkinson drew economic parallels between the two. The protagonists were later seen quietly ensconced in a discussion on how they might take matters forward – the very kind that Australia needs if economic reform is to occur in this country.

Of course, these policy debates should be occurring in the federal Parliament, the supposed clearing house of ideas. But so toxic has the environment become in Canberra since Tony Abbott called for a kinder, gentler Parliament following the 2010 election, but delivered the opposite, that constructive policy engagement seems impossible. In any event, the government has already ruled out most of the reform options canvassed in its March 2015 tax discussion paper.

Next week's tax reform summit, hosted by The Australian Financial Review and sponsored by KPMG, is a good opportunity to build on the discussion at the National Reform Summit. Business, union and civil society groups agreed then that tax reform should be considered as a whole, rather than focusing on the effects of individual taxes, and that it should be backed by quantitative analysis of economic and social impacts.


Just as you can't judge a book by its cover, you can't judge a tax by its name. What matters is the incidence of the tax – who ends up paying it. To illustrate, an ice cream tax is not actually a tax on ice creams. While it is levied as a tax on each ice cream sold, it is borne by ice cream consumers in higher prices and by ice cream producers in lower profits. How much of the burden each bears depends on their responsiveness to the tax-induced change in the ice cream price – their elasticities of demand and supply.


In addition to the incidence of various taxes, they can differ in the extent to which they act as a drag on the economy. The greater these deadweight losses, the slower will be growth in national incomes and employment. Direct taxes on income reduce incentives to work, invest and take risks, but indirect taxes on consumption have disincentive effects too. Here's where quantitative analysis is useful. At a time when the world is awash with money looking for a place to invest, how much extra foreign investment would flow into Australia if our company tax rate was reduced to 25 per cent? And when the Australian economy is struggling with depressed consumer spending, do we really want to depress it further through an increase in the GST rate?

As the Grattan Institute's John Daley pointed out at the National Reform Summit, interest groups and political advocates tend to speak their own books when advocating changes to the tax system. Hence, progressives argue in favour of company taxes and against consumption taxes while corporate leaders do the opposite. Property developers support negative gearing and the 50 per cent capital gains tax discount and oppose land tax.

While the task of tax reform is a difficult one, singling out one tax as the reform messiah is foolish. Each extra dollar from a GST rate increase is expected to fund compensation for its regressive effects; extra state spending on health and education; the replacement of inefficient state taxes, such as stamp duties on insurance and conveyancing; the handing back of bracket creep through personal income tax cuts; and a cut in the company tax rate.


Within a tax system that is progressive overall, there can be a place for some regressive taxes such as the GST, and petrol and tobacco excise. But most Australians would accept that any changes in the tax system should not increase the burden on those least able to pay. By applying the principles agreed to at the National Reform Summit, the cause of tax reform can be advanced far from Canberra and later taken into the Parliament when the environment is more welcoming.

Craig Emerson is managing director of Craig Emerson Economics and is adjunct professor at Victoria University's College of Business.