Hidden in this week's tax discussion paper and in the earlier intergenerational report is an inescapable reality – we need more tax.
Income tax and goods and services tax, and taxes on superannuation – the taxes that affect us – will have to climb in order to fund the things we are going to need. At the same time, company tax will have to fall, eventually plummeting towards zero in order to make sure we retain the investment we need.
The trick is to grab more of the money that's bolted down and unable to leave the country, and less of the money that's footloose. It's anything but fair, but tax is about raising revenue more than it is about fairness, and we can't raise revenue we frighten away.
Nowhere is this seen more clearly than in the discussion paper's approach to the fairness measure known as dividend imputation. Trumpeted as a great reform in the 1980s by the former treasurer Paul Keating, it gives Australian shareholders receiving dividends a refund of the tax the company paid on the profits used to create those dividends. Mum-and-dad investors love it. Roughly half of all the company tax paid in Australia is returned to them as credits.
It means that for many companies, those paying dividends to Australian shareholders, our tax take is more like 15 per cent than 30 per cent. But not for others. Those with overseas shareholders are asked to pay the full rate of 30 per cent. Which is exactly the wrong way around.
Most Australian shareholders are in effect effectively captive, as are Australian super funds. They'll buy local shares no matter what. If we are serious about raising money and serious about not frightening away foreign money, we would give a discount to overseas shareholders and charge our local ones the full quid, or at least put them on an even footing...
A few years back, the Business Council of Australia proposed just that, in a paper written by Nicholas Gruen of Lateral Economics. The gift to captive Australian shareholders cost $20 billion per a year at the time. Gruen reckoned that if if it was removed, the government could afford to cut the overall company tax rate to 19 per cent. Australia would become a much more attractive place to the foreign investors whose money it needs.
Gruen believes the a 19 per cent company tax would push up demand for Australian shares and push their prices high enough to compensate existing Australian shareholders for no longer having imputation. He says the government could use the extra tax it got from the investment surge to cut the company tax rate further, to 15 per cent.
Eventually we will have no choice but to cut it even further, ever closer to zero. As long as just one nation undercuts all the others with a low tax rate, businesses will choose to invest there over other countries. it to invest in over the others. It's why Google will sell you its products in Australia but routes you your money through Ireland, where its profits are taxed at 12.5 per cent.
The man who designed the dividend imputation scheme for Keating can see a zero corporate tax rate beyond the horizon. "The evidence before the Henry review is that cutting the company tax rate is the most helpful thing we could do," said Greg Smith shortly after the Henry Tax Review was released.
Smith served on Keating's staff throughout the tax reforms of the 1980s and later served on the Henry Tax Review. "I have thought seriously about a 15 per cent company tax rate partly funded by the abolition of imputation," he said. "There is an intellectual case for a zero rate. That's the way the world is going, that's the direction in which our competitors are moving."
Our competitors are certainly moving away from dividend imputation. Germany and France abolished it in the early 2000s and Britain wound its system back. That leaves just us, Malta and New Zealand.
Although the case for being harder on ourselves than we are on foreigners has nothing to do with fairness, it isn't as unfair as it seems. The Treasury discussion paper points to Treasury research that says roughly half of the benefit to foreign investors from a lower company tax cut will be captured by their Australian workers through the higher wages that will flow from greater investment.
The income tax and the goods and services tax that we charge ourselves will have to climb. The good thing about wages and consumer spending is that they are more or less locked down. Australians earn and spend pretty much regardless of how they are taxed. Overseas experience suggests our GST could double to 20 per cent without deterring spending. For every one high earner that might move overseas if he or she found our income tax rate too high, tens of thousands more would stay, and even more would willingly come if we upped our let more people in. Fortunately for the government, income tax will rise all by itself through the process of bracket creep as wage inflation pushes us into higher tax brackets. The government can even be seen to give back some of the bracket creep while still pocketing more tax.
The same logic applies to taxes on property. Stamp duty encourages people to stay put rather than move. It's its own worst enemy. But land taxes tax something immovable. The government can charge whatever it likes, knowing it can't be avoided. The ACTustralian Capital Territory is moving in that direction, cutting stamp duties year by year and lifting land taxes.
Tax concessions for compulsory super contributions are in the gun tooas well – not only because they provide the most benefit to the most well off, but also because they give a tax concession to what's already tied down. Compulsory contributions are compulsory. If we need more revenue, and the government says we do, these are the places from where we will need to take the money. they are things we will have to soak.In The Age and Sydney Morning Herald