Divining the ripples of tax overhaul

When an organisation like the Business Council of Australia issues a national economic rejuvenation plan that includes a 16.7 per cent reduction in the standard company tax rate, the easy thing to do is dismiss it as a rent-seeking exercise, but the report is better than that.

When an organisation like the Business Council of Australia issues a national economic rejuvenation plan that includes a 16.7 per cent reduction in the standard company tax rate, the easy thing to do is dismiss it as a rent-seeking exercise, but the report is better than that.

It's no blueprint. The impact of proposals such as the cut in company tax from 30 per cent to 25 per cent are not modelled, for example. It does, however, present a coherent plan for change, and offer an implementation timeline.

There are 93 actions proposed over 10 years in policy areas including fiscal policy, population growth, infrastructure, education and the labour force, trade, energy, and the environment.

The BCA wants stronger fiscal discipline and a more flexible industrial relations environment, of course. But it argues for many other things, including population growth and high immigration intakes, a tax system cleanout, a merger of energy and environmental policy, and an intensification of infrastructure investment including investment funded by government borrowing to lock in a doubling of infrastructure investment to 4 per cent of gross domestic product during the resources boom.

The proposed cut in the corporate tax rate from 30 per cent to 25 per cent would on its own create complex economic ripples that required examination.

Company tax is running at about $74 billion a year, so the cut would cost about $12 billion in today's dollars. The value of companies would rise, however, because valuations are a function of earnings strength, and capital gains tax would benefit as asset values increased. More generally, a lower tax rate would tend to boost investment activity, innovation and employment.

There would be a political dimension in the fact, for example, that dividend imputation credits would be less valuable to investors in a 25 per cent regime, and the general logic of a cut would be a debated.

Opponents would note, for example, that corporate profits rose from about 16.7 per cent of gross domestic product in 2003-04 to 19.7 per cent of GDP in 2011-12. Proponents might reply that corporate tax here supplies 18 per cent of all tax revenue, twice as much as the OECD average.

What the BCA is really after is a complete overhaul of a tax system that currently sees 115 taxes raise only 10 per cent of total tax revenue, and it wants it negotiated against a commitment to hold tax at a maximum of 23.7 per cent of GDP. It thinks indirect taxes including the GST would rise as states lost some of their taxes and federal-state finances were reformed - but in this the report shows that it understands two things: first, that it is pointless to propose sweeping reform to politicians without at least producing a rudimentary implementation road map and, second, we will only know definitively where we need to go if we work out where we are starting from.

It recommends therefore that a comprehensive intergenerational report be completed within 18 months, to replace a report released by the Commonwealth government in 2010. The 2010 report suggested that on current settings government spending would be exceeding revenue by 2.75 per cent of GDP by 2050 as the ageing baby boomer generation moved onto government stipends, for healthcare in particular. The BCA believes that a new report that looked at all levels of government would conclude that the total potential deficit is more than 5 per cent of GDP. That is unsustainably high. GST would need to rise to 25 per cent to fill it, for example.

The gap is created by both too much recurrent spending - the Labor government's legacy - and too little recurring revenue - the Howard's government's legacy. The report suggests therefore that a comprehensive audit on the size, scope and efficiency of government spending also be undertaken as soon as possible.

Tighter fiscal rules including the ceiling on tax revenue as a percentage of GDP would follow, and the first substantial changes in the tax mix would be implemented in years three and four of the decade-long plan.

Tax reform would continue for the rest of the decade as trivial taxes were axed by the Commonwealth and the states, some taxes including the GST were increased, Commonwealth-state financial relations were reformed and industry-specific tax measures were also rationalised.

On some things the BCA is in clear conflict with the Labor government. It wants the Fair Work Act liberalised as soon as possible, for example.

Overall, however, it has come up with a far more pragmatic document than ones it has produced in the past, and made itself more relevant in the process. Its tax reform timeline fits with the Coalition's own plan to deliver a white paper on tax reform after about two years in government, for example, and other reforms are on similar fast-start, slow-burn timetables that run for several years. If we need longer than that to get the job done we are in trouble.

mmaiden@fairfaxmedia.com.au

Related Articles