Elephant in the (tax summit) room
What if instead of considering the big problems about to smack us in the face, the tax summit instead concerned itself with embroidery?
What if instead of considering the big problems about to smack us in the face, the tax summit instead concerned itself with embroidery?It's a serious risk. The summit will start in less than a fortnight. The published submissions are not encouraging.The person to watch at the summit - the one who along with former Treasury head Ken Henry knows more about the tax system than anyone else - is Greg Smith, the architect of dividend imputation which he designed for Paul Keating in the mid-1980s also a designer of our fringe benefits and capital gains taxes, and later the man who gave birth to the GST when working for John Howard as head of Treasury's revenue group.And he was part of the Rudd government's Henry review.His big concern - as far as I can see unmentioned in the 60 or so submissions on the summit website - is that our income tax take is set to accelerate, slamming consumption, kneecapping the GST and depressing the entire economy.Smith reads budgets. The latest has personal income tax collections soaring, from $140 billion to $199 billion over four years. Much of it is due to bracket creep. What's unusual is that for the next four years no bracket creep will be handed back quite a change after eight successive personal income tax cuts.The government has to do it to regain a respectable surplus. "The thing that amazes me," Smith said recently, "is this dwarfs everything else we are debating."We're going to lift personal tax collections by at least $55 billion. This dwarfs the $8 billion minerals tax, the $8 billion carbon tax. A worker on $60,000 will go from paying 20 to 22 per cent of their income in tax."And while it's happening we are going to start ratcheting up the superannuation guarantee to take even more of household income."Will it depress the economy? No doubt. Will it hit GST collections? Smith says while income tax collections will grow by $55 billion, the GST will climb just $12 billion."The states need the money to run schools and hospitals. They'll be squealing."Will it kill the ability to sell tax changes? Absolutely. There has never been a significant tax change that hasn't been sold to the public by over-generous personal tax cuts.Which doesn't mean the summit shouldn't prepare the way for change when the time is right.The only problem is the government has made it harder.The increase in compulsory super - against the advice of Henry and his committee - makes it harder to fund the really big demands that are about to hit us."The super guarantee is about lifestyle for 60 to 80-year-olds," Smith says. "That's not the problem, the problem is super-late ageing the experience of people aged over 80 and people of any age who need care."The cost of aged and disability care will soar from just over 1 per cent of gross domestic product to 3 per cent within 20 years.The other big demand will be the need for a lower company tax rate.Smith is certain. "The evidence before the Henry review is that cutting the company tax rate is the most helpful thing we could do," he says. "We need to stay competitive to attract capital."But ... why would you do it tomorrow in Australia which has about the highest investment rate - foreign investment as a share of GDP - of any developed country? We've already got the investment, so why would we cut taxes when we are straining to manage a surge?"It's the wrong time now, but I would like a commitment to a 25 per cent company tax rate as a policy goal, with flexibility about the timeline."Smith dismisses many concerns mentioned in submission, even those he agrees with. Yes, stamp duties could be replaced with land tax, road use could be taxed and alcohol could be taxed more evenly. But they're not the main game.GST will have to increase and we will have to prepare ourselves for it.But the big problems - the squeeze on consumption, aged care costs and the need for lower company tax rates - they're staring us in the email@example.com