Australia's Future Tax System

Consultation Paper Summary

1. Challenges and opportunities for reform

The review will provide the Australian Government with a blueprint for a tax‑transfer system that will help position Australia to deal with the demographic, social, economic and environmental challenges of the 21st century. Submissions have taken these into account and have identified several other important challenges and opportunities. Bringing these perspectives together, the Panel has identified seven broad issues to frame consideration of Australia's future tax‑transfer system:

  • the type of society in which Australians might choose to live, including considerations about the role and size of government in Australia;
  • increasing globalisation and the changing pattern of world economic activity;
  • demographic change, including changing patterns of workforce participation;
  • climate change, the environment and sustainable economic growth;
  • intergovernmental relationships within the Australian federation;
  • the process of policy formation and administration; and
  • the role of technological progress.

What type of society do Australians want?

The tax‑transfer system is such a fundamental part of Australia's social and economic infrastructure. It will both shape, and be shaped by, the evolution of society. Several submissions explicitly consider the type of society in which Australians might aspire to live. One echoes the contributions of the 2020 Summit by setting an objective of Australia being the 'best place to live, work and do business, with GDP per capita in the top five countries by 2012.' In others, such considerations are implicit in the identified challenges and desired features of the tax‑transfer system.

Many see fostering improved living standards through stronger economic growth as the priority for reform of the tax‑transfer system. Others emphasise the redistributive role of the system, and regard a fairer and more equal society as the main priority for reform, with economic and market considerations supporting this central goal.

The size of government determines how much revenue the tax system needs to raise. Several community groups consider the existing level of tax revenue to be inadequate to fund Australia's social programs and economic infrastructure. Business submissions generally take the view that the tax burden is too high and that government spending should be reduced, noting all taxes impose costs to economic efficiency.

A number of submissions see a general need to shift to a more environmentally sustainable society, while others emphasise more specific environmental goals.

Increasing globalisation and changing world economic activity

Australia is a small, open economy operating in an increasingly globalised world with freer flows of ideas, investment and labour. The current crisis in financial markets has highlighted our dependence on the world economy, while e‑commerce provides an ongoing example of globalisation on a human scale. The pattern of world economic growth is also changing, with China and India accounting for a rapidly increasing share of world GDP. This presents Australia with structural adjustment challenges but also opportunities for enhanced trade and other economic interaction.

Many submissions, particularly those by business groups, identify global competition as a key challenge for Australia and a key influence on tax‑transfer design. In particular, they argue that because international capital can flow easily from country to country, Australia needs to reduce tax on capital income to attract investment. There are also concerns about the need to have personal taxes that competitively attract and retain skilled workers and promote entrepreneurial activity.

Key non‑business organisations contest these claims and express concern about their equity implications.

Demographic change in Australia

The 2007 Intergenerational Report (Australian Government 2007) highlights the profound demographic changes that Australia is likely to experience over the period to 2047. The projected ageing of Australia's population is of particular significance, with a quarter of the population expected to be aged 65 years or over by 2047, almost double that today.

Income adequacy in retirement and its potential implications for government spending is a key issue. A number of submissions express a view that current policy settings, particularly the 9 per cent superannuation guarantee, are insufficient to ensure adequate incomes in retirement. Some submissions are more confident about the adequacy of current arrangements.

Higher rates of workforce participation and economic productivity can help meet the challenges of population ageing. Some submissions argue the tax‑transfer system should do more to promote workforce participation and be better adapted to the greater diversity of working patterns. Changes in the structure of the Australian economy, following a long period of economic reform, and changing patterns of engagement in the workforce have resulted in structural changes to the labour market. In particular, there has been a fall in the predominance of male full‑time jobs, an increase in female participation, and an increase in the number of older workers in recent years. More young, single people have short‑term jobs.

Several submissions propose introducing tax‑advantaged saving accounts to provide for education and lifelong learning.

Environmental sustainability

Australians value the environment. It also provides natural resources that are essential inputs to Australia's productive capacity, and ecosystems that absorb and assimilate the waste generated by people and industry. While it may be possible to achieve higher levels of economic growth in the shorter term at the cost of environmental damage, over the longer term such choices may not be sustainable. Accordingly, given its central importance to economic decision making, many see the tax‑transfer system as needing to support sustainable economic growth.

More specifically, many submissions argue that tax‑transfer settings should be consistent with the objective of reducing carbon emissions. The potential costs of environmental protection are also a focus of attention, with some arguing tax settings relating to the Carbon Pollution Reduction Scheme should be designed to minimise the costs imposed on business.

Submissions also consider a range of tax concessions aimed at enhancing the development and adoption of carbon reducing technology.

Improving the Australian federation

A well functioning system of government can greatly enhance economic performance and the broader wellbeing of Australians. Government of the federation could be enhanced through improvements to the tax‑transfer system.

Submissions call for federal funding arrangements that adequately recognise the responsibilities of each level of government, including local government. The fiscal imbalances between levels of government should be addressed in a way that is simple and transparent and provides sufficient revenue certainty to each level of government.

While there is a range of views about the merits of specific state taxes, a common theme is many state taxes need to be either abolished or reformed. Some argue for incentives for states to improve efficiency in tax collection and service delivery. Others call for a single Australian government tax collection agency, in place of the nine existing tax administrations.

Some submissions also noted scope to rationalise Australian and state government taxes and transfers applying to the same activities or objects and trying to achieve much the same outcome.

Improving the process of policy formation and its administration

There is strong consensus that the level of complexity and operating costs in the tax‑transfer system is too high. This is highlighted by the number of taxes and transfers, the lack of coordination and harmonisation across jurisdictions of essentially similar taxes and transfers, and the complexity in the administration of the tax‑transfer system.

Many argue for the tax policy process to be more open and transparent, particularly around trade‑offs between efficiency, equity and simplicity. In expressing these views, submissions welcome the recent Australian Government announcement to engage with the private sector earlier in the policy and legislative design process.

Several submissions from peak organisations comment on a 'governance gap' in the tax system. While the concerns underlying these comments vary across submissions — competitiveness, tax minimisation, technological opportunities and policy consistency — there is a degree of consensus that a regular process of review, by an independent oversight body, would complement less frequent tax reform exercises.

Some submissions point to the need to build a stronger culture of tax compliance. A regular process of review and repair, aimed at addressing tax minimisation strategies that undermine the integrity of the tax system, is seen as an important step in this process.

Submissions from larger businesses express some concern about the negative impact on business decisions of changes in the interpretation of the law and delays in processing requests for rulings. Representatives of small business note that engagement with the Australian Taxation Office has improved over recent years.

The role of technology

Technological advances have had a profound impact on the way we live. Over the past 50 years, they have dramatically increased the productive capacity of our economy, in particular through the evolution of computer technology.

The pace of technological progress poses a number of challenges for the tax‑transfer system. New industries are being established more quickly than ever before and the system must be flexible enough to adapt. Technology can transfer information and financial assets across national borders instantly and at minimal cost creating new opportunities for tax avoidance and evasion. But technology also presents opportunities for the tax‑transfer system, enabling it to deliver quicker, more responsive and more customised services to Australians.

Consultation questions

Q1.1 In considering the community's aspirations for the type of society that Australia should become over the next two decades and beyond, which key features should inform or drive the future design of the Australian tax‑transfer system?

Q1.2 Assuming that the absolute size of government will not fall, should (and can) Australia nonetheless aim to reduce the burden of taxation over time by promoting faster economic growth than public spending growth? Can it be demonstrated that alternative tax policies could help deliver that outcome?