In a major address in Perth, Secretary to the Treasury, Dr Martin Parkinson, said “it is hard to overstate the need for reforming the tax system”. At the same time, he says that if Australia’s public finances are not placed on a sustainable footing, tax reform becomes more difficult as time passes.
The Government has committed to releasing white papers on reform of the tax system and of the Federation by the end of 2015, and has said that it will take any proposals for reform to the next election.
Dr Parkinson said Australia’s tax mix is heavily weighted toward direct taxes on income. “If we were to leave our tax rates and bases as they are, our reliance on income taxes would grow over time”, he said. We will move even further in this direction if, as we anticipate, the relative share of total indirect taxes continues its long-term decline, including the GST.
Fiscal drag will pull someone on average full-time earnings into the 37% tax bracket from 2015-16, and will increase the average tax rate faced by a taxpayer earning the projected average from 23 to 28% by 2024-25 – an increase in their tax burden of almost a quarter. If fiscal drag is not periodically returned in the form of personal income tax cuts, he said it can reduce incentives for workforce participation at low levels of income, and increase incentives for tax minimisation at higher levels of income.
One of the key issues of the reform debate will be the competitiveness of Australia’s corporate tax system and the country’s capacity to attract mobile global investment.
Dr Parkinson acknowledged that reform is difficult, “but we can learn from the past”. For the community to embrace change in this area, he said the case for reform has to be compelling and well-understood. In his view, it is therefore important that reforms to the tax system and the Federation be considered together, “so that the public debate can, as much as possible, be informed of the complementarities and the trade-offs that will inevitably arise from any proposed changes”.
[LTN 126, 3/7/14]