No. 94

Welcoming the tax collectors’ kiss (as in keep it simple Swanny)

What a surprise. Penny Wong warns a surplus next financial year is not assured! Last Monday, the best she could manage was that the government has a plan which, “it is working towards”. [i] Just like the Crows are working towards a plan to save more than they spend.

But not to worry, by week’s end Wayne Swan was assuring us everything was on track, that the hard yards were being made (and so forth and so on) to get the government back in the black. And to prove it he pointed to a better than expected final underlying federal cash deficit of $27bn for the year before last, $5bn better than expected. And the Treasurer assured us the government “is fully committed to its fiscal strategy to return the budget to surplus as the global economy recovers.” [ii]

So that’s all right then. The government has a plan to which it is fully committed, which means the Tax Summit, sorry Forum, can chat about fine-tuning the system.

No, it’s not and no they shouldn’t.

While the Treasurer may conjure up a smoke and mirrors surplus in time for the next election the chance of this, or any other, government spending significantly less than it now spends in these hard, and getting harder, times is somewhere between buckleys and none.

As John Howard and Peter Costello both point out, it is easy to spend a surplus. And, once wasted, it is very hard to get out of deficit.[iii] It took the Howard Government nine years to reduce general government sector net debt from 19.5 per cent of GDP to a surplus. [iv]

And Penny Wong knows that staying in surplus, while funding the services of an ageing population , is going to be very hard indeed given the way a proportionately shrinking workforce will not generate the productivity improvements of the past.

According to the Finance Department, real GDP growth per person was 1.9 per cent per annum over the last 40 years. In the four decades to come, it will be just 1.5 per cent per annum. “Without policy change, spending is projected to exceed revenue by 2.75 per cent of GDP by 2049-50,” Wong says. [v]

The Business Council of Australia explains the implications of a less productive economy, warning tax will take an extra 5 per cent of GDP by the middle of the century.[vi]

So what the Tax Summit, damn, sorry Forum, should be doing is talking about root and branch reform. This is what Ken Henry and his colleagues may have assumed they were supposed to provide in their report and which Mr Swan kyboshed by taking the GST off the table months ago. [vii]

This will not stop special pleaders and, hopefully, independent experts from having their say this week. [viii] Or commentators in the weekend papers who laid down the law on what needs to be done. Like Jessica Irvine who cited two sources for her piece on why high income earners should lose superannuation tax breaks, Treasury and ACOSS.[ix]

But debating specific taxes ignores the impact of the overall system on the economy and the need to keep the cost of collecting revenue down.

As Tracy Oliver and Scott Bartley put it “often, government is asked to make a ‘simple’ change to the tax law, but the compounding effect of many separate relatively simple tax measures can result in complex interrelated provisions. As the number of provisions increases, understanding the relationships between them can become more difficult.” [x]

Professor Chris Evans from Atax at the University of New South Wales makes the point, saying:

The Australian tax system is highly complex both in absolute terms and relative to most other tax systems. One look at the sheer size and density of Tax Pack is enough to scare off most otherwise would-be compliant personal taxpayers. [xi]

Not to mention ministers and mandarins who have had largely unsuccessful goes at simplifying the system. For all the major variations, the FBTs and GSTs, all sorts of fine tuning has hit the wrong, or no note, down the decade

According to Evans, Australia has had at least ten inquiries into simplifying the tax system in 20 years. But it still consists of 120 plus taxes implemented by around 7850 pages of legislation.[xii] And this after 4100 pages of obsolete law was deleted in 2006![xiii]

Dr Henry and his colleagues claim that although improvements are in order, stating:

The operation of Australia”s tax system is fundamentally sound and there is general confidence in the system. The level of voluntary compliance is high, reflecting positive perceptions about the fairness and integrity of the system and how it is administered.[xiv]

However, Evans points out that 70 per cent of taxpayers use a professional to complete their return, exceeded among OECD members only by Italy – and not all Italian income earners have to complete returns. [xv]

So what does this cost? Evans and Tram-Nam estimate that tax administrative costs are 1 per cent of revenue collected, and Henry states that compliance costs for all taxpayers are between 1.36 per cent and 2.1 per cent of GDP [xvi] With just 10 per cent of taxes accounting for 95 per cent of federal revenue, there is a lot of unproductive effort occurring.[xvii]

Finding ways to collect taxes more cheaply is one way to require fewer of them, or lower rates, in the first place. Sure it does not appeal to the social engineers who want to use the tax system to change behaviour. But it can help contain the tax increases everyone expects we shall have to pay.

Stephen4@hotkey.net.au


[i] Minister for Finance and Deregulation, Doorstop, September 26 @ http://www.financeminister.gov.au/transcripts/2011/tr_20110926_doorstop.html recovered on October 1

[ii] Wayne Swan, “Final budget outcome 2008-2009,” September 29, @ recovered on October 1

[iii] Blair Speedy, “Costello predicts choppy sailing for Rudd,” The Australian, January 6 2009

[iv] John Wilkinson, “Australian federal and state budgets: an overview,” NSW Parliamentary Library Research Service, Briefing Paper, 2/10 @ www.parliament.nsw.gov.au/prod/parlment/publications.nsf/0/2AD704754A45EC72CA25771A000C31EC/$File/Australian Government Budgets BP 2 2010.pdf recovered on October 1

[v] Penny Wong, “Tax reform next steps for Australia,” Commonwealth of Australia, 2011 @ www.futuretax.gov.au/content/TaxForum/discussion_paper/fiscal_pressures.pdf recovered on October 1

[vi] Peter Martin, “Business warns of budget blues for decades,” Business Day, October 1 @ www.businessday.com.au/business/business-warns-of-budget-blues-for-decades-20110930-1l1od.html recovered on October 1

[vii] Phillip Coorey, “Everything on the table for tax talks, Swam says – except GST,” Sydney Morning Herald, July 29

[viii] Ben Packham, “Labor faces pressure at forum as interest groups push tax agendas,” The Australian, September 28

[ix] Jessica Irvine, “Give tax breaks to those most in need,” Sydney Morning Herald, October 1

[x] Tracy Oliver and Scott Bartley, “Tax system complexity and compliance costs – some theoretical considerations,” The Treasury, Economic Roundup, Winter 2005, @ www.treasury.gov.au/documents/1009/HTML/docshell.asp?URL=05_Tax_Complexity_and_Compliance.htm recovered on October 1

[xi] Chris Evans, “Statement of reform priorities,” Australian Government, Tax Forum @ http://www.futuretax.gov.au/content/taxforum/statements/academics/UNSW_evans.pdf recovered on October 1

[xii] Chris Evans and Bin Tram-Nam, “Controlling tax complexity: rhetoric and reality,” (in) C. Evans, R. Krever and P. Mellor (eds), Australia’s Future Tax System: The Prospects After Henry, (Sydney 2010) 437-461, 443

[xiii] Ken Henry et al, “Australia’s future tax system: a report to the Treasurer”, II,G1,A, December 2009 @ http://taxreview.treasury.gov.au/content/FinalReport.aspx?doc=html/publications/Papers/Final_Report_Part_2/chapter_g1-1.htm recovered on October 2

[xiv] Henry et al ibid

[xv] Evans and Nam ibid

[xvi] Evan and Nam ibid, Henry et al, 11.3 http://taxreview.treasury.gov.au/content/Paper.aspx?doc=html/publications/papers/report/section_11-03.htm recovered on October 2

[xvii] Henry et al, Executive summary, http://taxreview.treasury.gov.au/content/downloads/report/Executive_Summary.pdf recovered on October 3

'2012