Tax reform is Australia's only option

Australia has relied on foreigners to buy its exports for too long -- and those days appear to be over.

Australia has just entered its 24th consecutive year of economic growth. But will we make it to 25?

National accounts released last week reveal our national income has been shrinking. But didn’t the economy grow 3.1 per cent last financial year -- about in line with its historic average?

Well, that’s true too.

Economists like to focus on our gross domestic product: the volume of goods and services we produce every year. But the price we get for those goods and services matters too. Our gross national income is a measure of how much we are actually paid for the goods and services we produce.

And that’s where things have taken a distinct turn for the worse.

It turns out there’s only two ways to get rich in this world: work smart or find a sugar daddy to pay your way. Australia has been relying on sugar daddy foreigners to pay us more for our exports. The mining boom boosted our living standards like never before.

But with iron ore prices back down to around $US80 a tonne, those days appear over. Sure, we’re producing more goods and services, but we can’t sell them for as much. Real wages for Aussie workers have stopped growing, with average increases not big enough to keep up with rising prices. Unemployment is rising. Tony Abbott and Joe Hockey may well feel aggrieved too -- there’ll be less tax revenue to fund the tax cuts they want to deliver.

Abbott used his first anniversary as Prime Minister to restate his ambition to deliver income tax cuts. Fixing the budget while also cutting taxes is a tough ask.

But now is the correct time to push ahead with reforms to lower tax rates on wages and profits to unleash economic growth.

If we don’t, our reliance on these 'direct' tax sources to fund public services will continue to climb. That’s bad for economic growth because those taxes discourage hard work and investment.

Australia’s tax system is like your typical backyard. Left untended, the relatively inefficient taxes grow out of control. They need constant pruning back. Left untended, personal income taxes in Australia will snare a growing proportion of workers in what is known as “bracket creep”. When tax thresholds stay the same, but wages rise, more workers are pushed up into higher tax brackets.

Companies too are bearing an increasing tax burden, contributing a growing share of total government revenue.

It’s true that Australia’s headline company tax rate has fallen from 49 per cent in the late 1980s to 30 per cent today. But companies today are chipping in a growing share of total government revenue, up from 10 per cent in the late 1980s -- where the OECD average remains today -- to more like 20 per cent.

People hate the idea of cutting company taxes, thinking it’s just for the fat cats. But lower taxes help companies hire new workers and reinvest in their businesses, as well as competing with firms in other countries with lower company tax rates.

Australia’s reliance on direct sources of taxes is already high. We need to find alternate sources. The main alternatives, called “indirect” taxes, are consumption taxes, like the GST, and excises on things like petrol and alcohol.

Most economists agree its time to increase our GST to fund lower income taxes and to abolish inefficient state taxes like royalties and stamp duty. Closing superannuation tax loopholes, which help high-income earners further feather their retirement nests -- when they’d probably be the 20 per cent who end up self-sufficient anyway -- should also be a priority.

It’s time for the Abbott government to put a difficult first year of government behind it and get cracking on making the case for tax reform.

It will require a level of communication skills this government has so far failed to demonstrate.

But a platform to reduce personal income taxes might just be the best way to get re-elected.

Better yet, it’s the right thing to do.

If Abbott and Hockey fail to craft a compelling narrative about the need for tax reform, the burden of Australia’s tax system will increasingly fall on wages and profits.

And with our once-in-a-century sugar daddy mining boom turning off the taps, there has never been a more compelling need to boost the financial returns from hard work.

This article was originally published in the Herald Sun. Reproduced with permission.