Holistic tax reform ‘a solution to Australia’s crumbling tax base’

Comprehensive and bold tax reform will be an important part of the solution to managing some of the demographic and structural pressures outlined in the 2023 Intergenerational Report, according to the IPA and Grant Thornton.

The Intergenerational Report released last week outlined some of the significant changes that Australia must prepare for in coming decades including shifting revenue and expenditure patterns.

IPA general manager, technical policy, Tony Greco said poor economic conditions, high inflation, increasing interest rates, climate change and an aging population will present fiscal challenges for expenditures such as the National Disability Insurance Scheme, aged care, health, defence and interest payments on debt.

Mr Greco said introducing holistic and bold tax reform, starting with the tax mix, is part of the solution to addressing Australia’s “crumbling tax base and lagging productivity growth”.

“Clearly, our tax settings are not fit for purpose, and the situation will get worse as demographic changes cause long-term pressures to build up over time,” said Mr Greco.

“To ignore tax reform is like putting your head in the sand while allowing debt to climb as deficits are locked in for at least the next ten years in order to fund essential services.”

The Intergenerational Report indicated that Australia is heavily reliant on individual income taxes, and company income taxes.

Approximately 60 per cent of the Australian Government’s tax receipts come from these taxes, which is nearly twice the Organisation for Economic Cooperation and Development average.

The OECD has warned Australia that the outlook for future living standards will be downgraded if reforms to increase productivity growth and decrease expenditures from an ageing population are not introduced.

Mr Greco warned that a piecemeal approach to tax policy such as the introduction of the $3 million superannuation cap only adds to the complexity of the tax system without addressing the real problems.

“The best insurance we have is to undertake fundamental tax reform to address the deficit and improve lagging productivity growth,” he said.

Grant Thornton national managing partner of tax Sandie Boswell agreed that tax reform is a crucial component of addressing the fiscal challenges identified in the intergenerational report.

“With fewer individuals in the workforce, there could be a reduction in income tax revenue. Intergenerational reports highlight these shifts,” said Ms Boswell.

“As such, it is important to emphasise the need for tax policies that ensure a sustainable revenue stream to fund government services.”

Ms Boswell said this might involve evaluating the balance between different types of taxes as income taxes, indirect taxes, and higher taxes for multinational companies and focusing on tax reform that aligns with the current GDP trends to maintain stable revenue sources.

“Also, tax incentives can be designed to encourage behaviours that mitigate the negative effects of these demographic changes. For instance, providing tax breaks for employers who hire older workers can help increase labour force participation rates among seniors,” she said.

Tax reform can also be geared towards promoting economic growth.

“Tax policies, such as incentives for investments or innovation, can contribute to economic growth and create opportunities for future generations,” said Ms Boswell.

“Tax incentives can be targeted towards activities that stimulate the economy. This might include tax credits for research and development, investment in technology, or support for small businesses.”

Ms Boswell said it is also a perfect time for the government to consider implementing the Patent Box initiative, and other incentives to drive innovation such as reduced capital gains taxes for startup investments, and tax breaks for intellectual property development.

The government should also look at tax breaks for renewable energy investments or energy-efficient technologies that align with the goal of leaving a healthier environment for future generations, she said.

“The intergenerational report highlights the potential strain on social welfare programs like pensions and healthcare due to an aging population,” said Ms Boswell.

“Tax reform can provide the necessary funding to sustain and adapt these programs. For instance, governments should introduce new taxes or modify existing ones to allocate funds specifically for these programs.

“This also shows the need for the need for citizens to save adequately for retirement. Tax incentives like tax-deferred retirement accounts can encourage individuals to save more for their post-work years.”

Ms Boswell said a broader agenda of tax reform did not seem to be the current focus on the Federal Government with the Treasurer ruling out reforms to GST in recent days.

"GST reform would be a big step alone in rebasing our tax system and taking the burden off income tax payments, which as stated in the report are forecast to diminish," she said.

"While recent budgets have not covered tax reforms, with the government’s commitment to Net Zero along with the issues raised in the Intergenerational Report, it’s almost inevitable that they will need to think about tax reform going forward.”

Mr Greco said that an effective tax system should achieve fairness to ensure equal taxation that corresponds with the ability to pay it and efficiency to create a system that doesn’t distort economic decisions.

It should also be simple, he said, to ensure there is clarity for taxpayers and less administrative burden.

“Arguably, the Australian Government’s tax system has moved away from these principles,” said Mr Greco.

“The current system relies on high levels of compliance, but this can change over the next 40 years if Australians don’t believe the system is fair.”