12 June 2024
Taxing times for Australia

Taxing times for Australia

Australia’s tax system faces a looming crisis, with an ageing population and a deteriorating security environment pushing up budget outlays, and some traditional sources of revenue withering.

‘Young people have been screwed’ on tax, according to former Treasury boss, Ken Henry. Australia Institute’s Richard Denniss laments that “The Australian government collects more money from HECS than it does from the petroleum resource rent tax” (HECS or Higher Education Contribution refers to the fees that Australian higher education students must pay.)

These are just two of the many expert voices calling for reform of the Australian tax system. It is very timely that Paul Tilley, a former tax official from the Australian government, has recently written an excellent book, analysing the country’s record in the arduous process of tax reform – "Mixed Fortunes: A History of Tax Reform in Australia". Not surprisingly, Tilley also argues that Australia’s tax system is “sorely in need of reform”.

Taxation and the social contract

Tilley reminds us that a country’s tax system is all about how a community shares the burden of funding government services. So when the Liberal Party of Australia (right wing) insists that it is the political party of low taxes, it is implicitly saying that it is also the party of low public services. This is scandalous.

Looking ahead, the reality is that Australia faces large spending pressures for disability support, age care, health and defence which will increase the country’s overall tax burden. These are not luxuries. They are mainly the consequence of the inevitable and predictable ageing of Australia’s population, and the severe deterioration in Australia’s international security environment. In sum, Australia faces the prospect of an historic step up in the size of the tax-take, and the role of government.

With the government currently withdrawing about $800 billion (or 30 percent of GDP) in the form of taxes, there is a lot at stake in terms of economic productivity and social equity. So the challenge for tax reform is ensuring the efficiency, simplicity and fairness of Australia’s tax system – in a context where more tax revenues will need to be raised, but where big business and much of the public are howling for tax cuts.

US Supreme Court Justice Oliver Wendell Holmes reportedly once said, “taxes are the price we pay for a civilised society”. It is very difficult to observe such a sentiment in today’s Australia – once upon a time, the land of the “fair go”!

Commonwealth and state government taxes

Australia’s tax system has “grown like Topsy” over the past two centuries. In doing so it navigated the Federation of Australia in 1901, the process by which the six separate British self-governing colonies of Queensland, New South Wales, Victoria, Tasmania, South Australia, and Western Australia agreed to unite and form the Commonwealth of Australia.

This means that taxes are levied by both the Commonwealth and the state governments, with the Commonwealth redistributing some of its tax revenues to the states. According to Tilley, this is because the Commonwealth raises about 80 percent of Australia’s tax revenues, whereas the states are responsible for about half of government expenditure.

Taxation and political shenanigans

It’s hardly surprising that tax redistribution should lead to political shenanigans. The most egregious one must be the 2017/18 deal that the then Liberal government negotiated with the government of the state of Western Australia for a special handout of moneys from the Commonwealth’s goods and services tax (GST). Why – essentially to buy electoral votes! Today, the Commonwealth government can ill afford to give political handouts to Australia’s richest state. But it is reluctant to touch this deal for fear of an electoral backlash.

In sum, as half-cocked as much of Australia’s tax system might be, it is difficult to reform. Any reform results in winners and losers. And the losers are inevitably a smaller concentrated group who can easily mobilise lobbying efforts, while the winners might be a vast and dispersed group for which collective action is impractical.

Personal income tax and the social contract

The revenue side of the Commonwealth budget is characterised by a heavy reliance on personal income tax, the source of about half of Commonwealth tax revenues. Tilley writes that this is becoming problematic.

Without reform, in Australia’s ageing society, a declining proportion of workers will have to provide the Commonwealth with all its personal income taxes through higher tax rates (or “bracket-creep"). Further, these taxes will need to be boosted to cover increases in disability support, age care, health and defence expenditures. These workers would also have to shoulder an increased tax burden to cover the likely fall in company income and excise taxes.

This could undermine the credibility of Australia’s social contract, meaning the relationship between citizens and the government, which is based on a sense of a “fair go”.

There are other long standing issues in Australia’s personal income tax system. For example, there are the significant concessions and inconsistencies in the taxation of savings vehicles, such as superannuation, housing and capital gains generally.

Company income tax dilemmas

Another pillar of Commonwealth taxation is company income tax, which supplies about one-quarter of Commonwealth tax revenues, according to Tilley. In the globalising world economy, Australia’s company tax rate of 30 percent is high by international standards and thus can be a break on business investment and competitiveness. Commentators like Ken Henry are pushing for this tax rate to be cut substantially to improve the business environment for both domestic and international investors.

Tilley may be correct in noting Australia’s corporate income taxes are high. But it also seems clear that many companies find a way to avoid taxes. More than 800 large companies paid no tax in 2021-22, according to the Australian Taxation Office ninth corporate tax transparency report, which covers 2,713 corporate entities. In short, tax avoidance and evasion are still endemic in Australia. Just ask any chartered accountant!

Resource and GST taxes

Perhaps the most distressing aspect of the Commonwealth’s tax system is the massive under taxation of natural resource extraction, the consequence of aggressive corporate lobbying. Wise countries like Norway and Kuwait have substantial taxes on natural resource extraction, and save much of this money for future generations or for a “rainy day" through sovereign wealth funds, something which Australia has never managed to do. Instead of accumulating assets, the Australian government is growing its debt.

As I have witnessed, many Australians are hysterically opposed to carbon taxes to address climate change. The reality is that a carbon tax would be not only good for the environment, it would be much better than relying on increasing personal income taxes.

Australia’s GST is levied by the Commonwealth government, but with the revenue passed to the states – in a highly questionable manner, as mentioned above. Tilley writes that this tax applies to only half of consumption and operates at a significantly lower rate than most OECD countries. In other words, increasing GST is an excellent option for raising more revenues for addressing Australia’s increasing government spending pressures. There is at least one big problem though – it would require agreement of all of Australia’s nine governments (Commonwealth, six states and two territories).

At the state level, Australia’s tax system is also badly in need of repair. It relies on the use of outdated and inefficient transaction taxes, like stamp duties and payroll taxes, which are rife with economic disincentives and impediments to economic efficiency.

Challenge of tax reform

Tllley tells us that while there have been numerous tax reviews at the Commonwealth and state levels, most have not resulted in substantive tax reforms. Hence the title of his book – Australia’s tax reform fortunes have been “mixed”. Indeed, he identifies only three tax reform success stories. They are the Curtin government’s 1942 income tax unification, the Hawke government’s 1985 income tax base–broadening package, and the Howard government’s 2000 consumption tax base–broadening package.

Tilley identifies a few key ingredients for making tax reform happen. First, a “burning platform”, like a major problem that needs solving or a crisis, can provide the justification for launching major tax reform. Even with a burning platform, a government needs “political capital”, meaning strong public support, to manage all the vested interests which will oppose reform. A major inquiry into the need for tax reform can help make the case for reform and give everyone all stakeholders a say.

Tilley also argues that “fiscal room” is desirable, meaning a sound fiscal position (low public deficits and debt), so that the government can manage any short-term revenue losses and can compensate losers from the reform process. Last, and perhaps most importantly, it is necessary to have “skilled politicians” who can advocate and sell reforms. This was so, in the three cases of successful reforms with very effective Prime Minister/Treasurer partnerships, namely, Curtin/Chifley, Hawke/Keating and Howard/Costello.

Tax reform pessimism

Despite his expert analysis and insights, Tilley does not leave this reader feeling confident about the prospects for tax reform in Australia. Most recent Australian governments have only governed with slim majorities or hung parliaments, leaving them with little political capital to play with. And with the decline in popularity of Australia’s major political parties, this may be the new normal in Australian politics. Further, in recent years, governments have been more concerned with other issues like Covid-19, deteriorating relations with China, and inflation and cost of living. And recent Australian leaders do not seem to be of the same calibre as those that led the successful cases of tax reform.

The failure of the last major inquiry into the Australian tax system, known as the Henry Tax Review, to lead to major reforms certainly does not inspire hope. The case of the Henry Tax Review also highlighted the power and scare tactics of business sector lobbyists to undermine good policy proposals.

A burning platform tax reform

Looking ahead, Tilley sees a very important burning platform. I think that it goes something like this.

The Australian economy is stuck in a rut with low investment, and low growth in productivity, wages and the economy. Reducing corporate income taxes and “transactions taxes” could stimulate both domestic and foreign investment in Australia, and thus boost the economy.

Action is also necessary on personal income taxes for several reasons. Budget spending pressures are mounting for disability support, age care, health and defence. Australia also faces a withering of company and excise taxes. The risk is that the government might rely on increasing personal income (through “bracket creep”) to fill the gap. With an ageing population, the rising burden of income tax will fall on an ever smaller proportion of the population. Younger workers may feel the tax system closing in on them. This could act as a disincentive to join the workforce. The coming generations could well be less prosperous. This would undermine not only the economy, but also generate a greater sense of unfairness and undermine the social contract.

While there are strong arguments for reducing company income tax and at least stabilising personal income tax, this cannot be done alone in light of losses to budget revenues. A comprehensive reform package is necessary. It would be critical for tax reform to mobilise underutilised revenue sources, notably GST, and natural resources, carbon and land taxes.

How could a tax reform package be implemented? It would need to be led by a person like Paul Keating or Peter Costello, who was able to articulate a narrative that there is something seriously wrong, which is threatening our economy and undermining our social contract.

Realistically perhaps all we can hope for is a major future crisis to shake the country, together with wise leaders, to trigger for Australia’s fourth case of successful tax reform.


Tilley’s book is an excellent reference for all budding tax reformers and economists more generally. When and if the time arrives for a new wave of tax reform, it will stand as a key reference. Meanwhile, it can also be a reference for any incremental reforms undertaken.

I also believe that the book is very important for all interested citizens. Taxation is at the heart of the social contract between governments and citizens, and trust in our democracy. Thus, I hope that Tilley’s book improves public understanding of and support for the complex process of tax reform.

A very good friend of mine from Finland assures me that Finns don’t mind paying high taxes because they appreciate the services that their government provides. One can only hope that one day effective tax reform in Australia might strengthen the social contract between our increasingly multicultural citizenry and the government, and improve trust in government. Hope springs eternal!
Tags: asia, australia, taxation, paul tilley

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