Wednesday, September 21, 2011

What'll it be at the tax summit... big issues, or housekeeping?

Wednesday column

What if instead of considering the big problems about to smack us in the face, the tax summit instead concerned itself with embroidery?

It’s a serious risk. The summit will start in less than a fortnight. The published submissions are not encouraging.

The person to watch at the summit - the one who along with former Treasury head Ken Henry knows more about the system than anyone else - is Greg Smith, the architect of dividend imputation, which he designed for Paul Keating in the mid-1980s; also a designer our fringe benefits and capital gains taxes; later the man who gave birth to the goods and services tax for John Howard as head of the Treasury’s revenue group, and along the way head of the secretariat that ran the Wallis financial system inquiry.

Most recently he has studied every aspect of the tax system all over again as part of the Henry tax review.

His big concern - as far as I can see unmentioned in the 60 or so submissions on the tax summit website - is that our income tax take is set to accelerate, slamming consumption, kneecapping the GST as a source of income for states and depressing the entire economy.

Smith can read budgets. The latest has personal income tax collections soaring, climbing from $140 billion to $199 billion over four years. Much of it is due to bracket creep - what you expect if you don’t hand back the inevitable move into higher tax brackets year after year. What’s unusual is that for next four years none of it will be handed back; quite a change after eight successive budgets that handed back some or all of it.

The government has to do it in order to regain a respectable surplus. Even before employment and the global outlook headed south it was projecting only a $6 billion surplus by 2014-15. It has no choice but to soak working families...

“The thing that amazes me,” Smith told a recent seminar “is that it dwarfs everything else we are debating”.

“We’re going to lift personal tax collections by at least $55 billion. This dwarfs the $8 billion minerals tax, this dwarfs the $8 billion carbon tax. Personal income tax collections will climb from 9.8 per cent to 11.2 per cent of GDP in four years.”

“A worker on $60,000 will go from paying 20 to 22 per cent of their income in tax.”

“And while it’s happening we are going to start ratcheting up the superannuation guarantee to take even more of their household income.”

Employers will have to start handing over an extra 0.25 per cent of their wage bill in 2013, climbing to an extra 2 per cent taking the super guarantee to 12 per cent by 2019.

Will it depress the economy? No doubt. Will it hit already ailing goods and services tax collections? Smith says while income tax collections will grow $55 billion the GST will grow just $12 billion.

“The states need need the money to run schools and hospitals. They’ll be squealing. Forget academic talk about changing the tax mix, we’re seeing it switch to income from consumption before our eyes.”

Will it kill the ability to sell tax changes? Absolutely. There has never been a significant tax change that hasn’t been sold to the public by overgenerous personal tax cuts.

With government finances in no shape to cut income tax, there will be no serious tax reform for most of the decade. Which doesn’t mean the forum shouldn’t prepare the way for when the time is right.

The only problem is the government has made things harder.

The increase in compulsory super - against the advice of Henry and his committee - makes it harder to fund the really big needs that will demand attention.

“The super guarantee is about lifestyle for 60 to 80 year-olds,” Smith says. “It’s not the problem. The problem is super-late aging; the experience of people aged over 80 and people of any age who need care.”

The cost of aged and disability care is set to skyrocket from just over 1 per cent of GDP to 3 per cent within 15 to 20 years. “This is the cost of care, not income. The super guarantee doesn’t help.”

“I think one or two people who have happily been supporting the super industry getting this bigger grab at significant fiscal cost are beginning to agree with this: we need longevity insurance, aged care, and disability care to be incorporated within the super system.”

“Let’s stick with the 12 per cent super guarantee but lets rework it, because we can’t put extra levies on top of fiscal drag, on top of the extra guarantee, on top of huge reductions in disposable income for the next 5 to 10 years.”

The other big change Australia will have to confront is the need for a lower company tax rate.

Smith is certain. The arguments in favour of it are overwhelming and the academic support fairly new.

“The evidence before the Henry review is that cutting the company tax rate is the most helpful thing we could do,” he says. “We need to stay competitive to attract capital.”

“But to be honest, why would you do it tomorrow in Australia which has about the highest investment rate - foreign investment as a share of GDP - of any developed country? We’ve already got the investment, so why would we cut taxes when we are already straining to manage a huge surge?”

“It’s the wrong time now, but in the longer run we will need to make this change. I would like a commitment to a 25 per cent company tax rate as a policy goal, with flexibility about the timeline.”

“As soon as there is a sharp fall in our terms of trade the need for a lower rate will reappear.”

“I have thought seriously about a 15 per cent company tax rate partly funded by the abolition of imputation. There is an intellectual case for a zero rate.”

“That’s the way the world is going, that is the direction in which our competitors are moving.”

Smith dismisses many of the worthy concerns mentioned in submissions ahead of the tax forum, even those he agrees with. Yes, stamp duties could be replaced with land tax, road use could be taxed, special insurance taxes could be axed and alcohol could be taxed more evenly. But they’re not going to happen quickly and they’re not the main game.

The goods and services tax will have to increase and we will have to prepare ourselves for it.

But the big problems - the squeeze on consumption, looming aged care costs and the need for much lower company tax rates, they’re staring us in the face.

Published in today's SMH and Age

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