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Malcolm Turnbull was a relatively new backbencher in 2005 when he told a conference that Australia's tax system was broken, and that the best way to fix it was to broaden it. A decade later he is still right.
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'Bedwetters' threaten tax reform
Some Liberal backbenchers are getting cold feet on the GST, posing problems for Malcolm Turnbull and Scott Morrison. Analysis with James Massola.
The prospect of a GST hike has dominated the tax debate this week. Treasurer Scott Morrison has declared it is a definite maybe. PM Turnbull has told his party room that nothing is being ruled out. NSW Premier Mike Baird has stepped up his call for a 15 per cent GST. Labor opposes a GST hike even as South Australian Premier Jay Weatherill says it has to be considered, as health and education funding costs rise.
Pundits are pouring in. Paul Keating says a GST rise of 1 or 2 percentage points to raise money dedicated to fund hospitals might fly, but that a 15 per cent GST would put "an absolute dead weight" on people's backs, and put Australia on path to joining "the highest taxed countries in the world".
Corporate tax, and tax avoidance by multinationals in particular, has been the other big tax topic in recent months.
Malcolm Turnbull was right in 2005 however, when he said Australia's tax system actually enabled tax avoidance for businesses, and for individuals with access to corporate structures.
"In the light of this, I have observed, in common with many others that our tax system would be a better one if rates were lower and the base broader," he said.
That's still a useful guide for debate that is ramping up now. Everything should be discussed, and the current tax mix and reform options all need to be modelled as part of that. KPMG's submission to the Tax Discussion Paper last year set out a blueprint for the process.
There is no single "Big Fix" for the tax system, however.
A crackdown on corporate tax avoidance is difficult to implement. Large companies and multinationals in particular are complicated, difficult to police from a single jurisdiction and consider they have a fiduciary duty to minimise their tax.
It could also actually be counterproductive. Companies are moving targets, and even if they pay their fair share of tax there are knock-on effects. They can often pass the tax cost on in the prices they charge for what they sell: if they cannot, their returns fall, pressuring investment and employment.
Treasury has calculated that the combined effect on companies (a dollar of lost income for every dollar of corporate tax paid) and those they employ (about $3 of income lost per dollar of corporate tax revenue raised) is an eye-watering decrease of $4 in real and nominal gross domestic product for every dollar of corporate tax raised.
Cutting corporate tax should work the other way, of course, and fans of a GST hike say that higher GST could fund corporate tax cuts, personal tax cuts as well as education and health funding increases.
Weatherill is the only Labor leader backing a big GST hike, however, and all the states would need to agree. A higher GST rate would also need to be accompanied by compensation payments for low-income households that would soak up about half of the $33 billion a year the tax hike would raise. There's not going to enough left after that to fund tax cuts as well as health and education spending increases.
Which brings us back to Turnbull's original proposition in 2005. The best fix is actually a series of fixes that broaden the income tax base.
Economist Saul Eslake referred to Turnbull's 2005 speech in September last year when he spoke to The Australian Financial Review's Tax Reform Summit. He and other economists including the Grattan Institute's John Daley have been talking about ways to widen the income tax base for years, and at the AFR Summit Eslake ran through the list.
Family trusts could be taxed like companies to prevent income shifting without affecting their role as family financial planning devices. Negative gearing on housing could be dropped, or if that is too hot politically, limited to new home purchases, with the probable support of Labor.
The over-generous 50 per cent capital gains tax discount John Howard introduced could be pruned, to cover inflation, but not give investors a freebie. Superannuation tax concessions could be pared and still underpin long-term super saving. Labor already has comprehensive policy out on that front.
There are many other big questions to answer of course. One of them is whether the tax take needs to be reorganised to boost productivity, or actually raised, to recognise that health and education spending must rise. Limiting Canberra's spending to 25 per cent of GDP is a "useful marker" as Treasury Secretary John Fraser said last week, but it is not an unbreakable rule.
I don't think there is much doubt however that successful reform would have many components, not just the ones that have been grabbing headlines in the past few months. With the government eyeing an election in August this year, one question is whether there is enough time to discuss them all, and then develop a package that works.