7 April 2015
Media Release - #2015025, 2015

Revenue system needs a refresh

Written for The Australian

Our tax system was built before the 1950s, before black-and-white televisions first appeared in Australian lounge rooms. This was when Australians were driving around in the latest model FJ Holden.

When you think about how Australia has changed since this time, you’d be right to wonder why we have almost exactly the same tax system.

We have reached a point where Australia relies more on personal income tax and company tax collections than nearly all other developed countries. Among OECD nations, only Denmark raises more revenue from these taxes.

So is it sustainable that as much as 39 per cent of tax raised in Australia comes from personal income tax? Further, about 2 per cent of individuals have taxable income in the top tax bracket but pay about 26 per cent of all personal income tax.

Are we fiscally vulnerable because company taxes make up 19 per cent of our taxes, especially with only 12 companies paying about one-third of all of our company tax?

We have to be mindful that with globalisation and the rise of the digital economy, high reliance on company tax may be unwise.

Of course, we will continue to ensure multinationals pay taxes in Australia on the income they earn here. As chair of the G20 last year, we provided leadership and the political will needed to ensure multinational companies pay their fair share of tax.

Genuine tax reform needs to go much further than this and to look at the foundations of our tax system. We need to look at how modern commerce has changed and the role companies and individuals will play in our future tax system.

Is our tax system ready to deal with the disruptive technology and commerce of entities such as Airbnb and Uber? Airbnb is the largest hotel chain in the world and doesn’t own one hotel room.

When we use Uber, what taxes are charged? And what does that mean for the taxi driver who is charging GST and paying for the taxi licence plate?

When we look at personal income taxes, we find that during the next two years about 300,000 Australians will be pushed up into the second highest tax bracket.

Some will argue this bracket creep is a natural consequence of a growing economy. Others will argue the Australian community is prepared to pay more in taxes to address the demographic challenges we face.

I do not subscribe to the view that we can sit idly by and allow bracket creep to cover rising government spending.

Within two years someone on average full-time earnings will have moved up into the second highest tax rate of 37c in the dollar.

These tax increases reduce the reward for effort and can reduce incentives to work and innovate.

Within 10 years the percentage of taxpayers on the top two rates is expected to increase from about 27 per cent to 43 per cent.

All of this suggests to me that we need to re-evaluate how appropriate our tax system is for the future.

To help us make these difficult decisions, the recent Intergenerational Report projects what the Australian population, economy and budget could look like in 40 years.

While the broad nature of our tax system has not changed much in recent times, the global economy has changed significantly.

Global economic power is shifting from Western nations towards Asia, and technological changes are transforming ways of doing business.

This has implications beyond the revenue we collect. It goes to whether our tax system supports jobs, growth and opportunity, and whether it is capable of meeting future challenges.

We need to consider all commonwealth and state taxes, because the systems operate in an integrated national system. Unlike the previous government’s review, the GST is included for discussion.

However, the government has made it clear that legislated changes to the GST require unanimous agreement by all state and territory governments, as well as both houses of the Australian parliament.

We know the status quo is unsustainable and detrimental to our continued economic growth. The only option is to reform our tax system so we can raise the revenue we need while supporting economic growth in the Australian economy.

There have been many reviews of our tax system in recent decades, and numerous changes to different taxes, but not much has changed.

A good system raises the revenue to provide public services without imposing unnecessary costs on the economy. How the government raises revenue affects economic growth and our standard of living.

So the discussion paper released last week begins the conversation about how to achieve a better system with lower, simpler and fairer taxes.

The government will release an options paper for further community consultation before the end of the year. The government’s tax plan will then be put forward for consideration by the Australian people at the next election.

The discussion paper does not talk about options for reform or solutions to problems. We want to have an open conversation without any entrenched views and that’s why we have deliberately not ruled anything in or out.

In coming weeks, our website bettertax.gov.au will be regularly updated to provide more information about different parts of our tax system.

I encourage all Australians to use this information to engage in a genuine discussion about the possibilities for reform, and the trade-offs across different parts of the tax system and the economy.