The only way is up for tax reform

‘Although some of these problems with the tax base may go away in time, it’s hard to see that time occurring in the next five to 10 years.’ONE OF Julia Gillard’s proudest claims is that the federal tax burden is much lower under Labor than it was when John Howard and Peter Costello were in charge. It’s true. But it’s not anything to boast about – the tax base has sprung a leak. Several leaks.
Nanjing Night Net

In the mid-noughties, federal tax receipts hit a record 24.2 per cent of gross domestic product. This year they’re expected to equal only 22.1 per cent, despite the introduction of the carbon tax and the mining tax.

The fact is, the global financial crisis hit tax revenue hard and it’s yet to fully recover. The budget’s forward estimates see it returning only to 22.9 per cent by 2015-16.

If you don’t enjoy paying tax you may be tempted to regard all this as good news, but as both the present Treasury secretary, Dr Martin Parkinson, and his predecessor, Dr Ken Henry, have warned in the past week or so, it’s quite worrying.

It means the budget won’t ”whirr back into surplus” the way it did after the recessions of the early 1980s and early ’90s. It will be a continuing struggle to keep the budget in surplus, meaning it will take a long time to pay off the net public debt incurred in the recession everyone says we didn’t have.

It means we’ll be struggling to keep up with the growth in existing spending programs – particularly health – with little scope to pay for the disability insurance scheme, the Gonski Report’s proposals for education, aged-care spending and any other improvements we’d like to see, without dropping some big programs or introducing new taxes.

So what exactly is the problem with the tax base? Why has it never been the same since the GFC?

The biggest problem is with company tax collections. For many years they averaged about 3 per cent of GDP, but in the long boom that preceded the crisis, they grew to an unprecedented 5.3 per cent. Last year they were 4 per cent.

Much of the trouble is the collapse of receipts from capital gains tax. The long boom of rising share and property prices saw many taxpayers building up capital gains, which were realised and taxable when the assets were sold. Capital gains tax receipts got to as much as about 1.5 per cent of GDP, most of which was paid by companies.

The financial crisis saw big falls in the sharemarket, wiping out unrealised gains and creating losses. Share prices on the Australian stock exchange haven’t recovered to their peak before the crisis, and it’s hard to see another boom starting any time soon.

At present, gains tax is raising only about 0.5 per cent of GDP.

The second big change in company tax revenue since the crisis concerns the mining companies. In the first phase of the resources boom before the crisis coal and iron ore prices shot up and miners’ profits with them. Pretty much 30 per cent of that increase would have been taxable.

The second phase following the crisis saw prices go even higher, but by then many of the miners had embarked on major expansion plans, so that the depreciation charges on their capital spending significantly reduced their taxable profits.

So the mining investment boom adds to GDP on one hand, but directly subtracts from company tax collections on the other.

The problem with personal income tax collections arises from the eight tax cuts in a row announced by Costello (with Labor delivering the last three). When you cut taxes that often, you do a lot more than give back the proceeds of bracket creep (known to economists as ”fiscal drag”).

So the real level of income tax was reduced. The width of the tax brackets was widened, with the threshold for the top tax rate raised from $60,000 to $180,000 a year, thereby greatly reducing the tax scale’s capacity to generate bracket creep.

Yet another tax with big problems is the goods and services tax. With households’ decade-long spending spree a thing of the past, consumption spending is now growing no faster than household incomes.

But not all consumer spending is subject to the GST, and some of the categories that aren’t – particularly private spending on education and health – are growing a lot faster than the categories that are, meaning GST collections are growing slower than consumption.

That’s not the states’ only revenue problem. They’re locked in a destructive competition to raise the threshold at which payroll tax becomes payable. And the weakness of the residential property market – including the lower number of sales – has hit another key state tax, conveyancing duty.

Although some of these many problems with the tax base may go away in time, it’s hard to see that time occurring in the next five to 10 years.

And by then the problems for the taxman created by globalisation and the greater mobility of capital and highly skilled labour (which I wrote about last Saturday) may be starting to bite.

To many people – particularly business people – the words

”tax reform” make them think of paying less tax. One day soon it will dawn on them that the reform we must bring about is new and higher taxes.

Twitter: @1RossGittins

This story Administrator ready to work first appeared on Nanjing Night Net.