If Tony Abbott and Joe Hockey, not to mention the states, were to pay attention to the OECD, they would raise GST rates and take away incentives to negatively gear and to avoid paying tax on super payouts.
They would introduce new taxes on land, mining super profits, congestion and death. And at the same time as doing all this, they would reduce company and personal taxes.
The question of which economic and tax policies are best for Australia is, as usual, at odds with the reality of politics. Most of these suggestions are not vote winners.
The Organisation for Economic Co-operation and Development’s two-year Economic Survey of Australia is aimed at dealing with one core issue for Australia – how do we grow and prosper as our resource treasure box keeps dwindling?
“We don’t really have easy solutions,” OECD senior economist Phil Hemmings said. “We try to make sure policy makers know what the economics say, what direction things should be heading in. There are varying degrees of difficulty in implementation.”
Among the most difficult is lifting the GST, given our leaders have promised repeatedly they won’t. But the OECD says it makes sense. Its report suggested room for a more growth-friendly tax mix that could include broadening the base and raising the rate of the goods and services tax and increasing the use of state-based land taxes. These changes, it suggests, could be combined with a reduction in the company tax rate and personal income taxes.
“With a rate of only 10 per cent and fairly widespread exemptions, GST raises only half the revenues, as a share of GDP, compared with the OECD average and significantly less than the countries making the most use of such tax,” the report said.
While it did not advocate a specific rate, it said New Zealand and Israel had wide bases and rates of 15 per cent and 18 per cent respectively.
Mr Hemmings said somewhere between 15 and 18 per cent would make sense, but would have to be accompanied with compensation to lower-income households. The current system of not having a raft of goods and services taxed was that, despite them being well meaning, they are very inefficient, he said.
“If you’re not charging GST on bread you’re not charging it on bread bought by everybody, including the wealthy,” he said. “It’s far better to have targeted policies that make transfers to low-income households.”
The report also suggested lower personal tax rates, but at the same time stopping those on high incomes claiming concessions to reduce their marginal tax rates. It took particular aim at high-income earners who could lower the tax they paid by salary sacrificing cars, through superannuation concessions and deductions for rental property.
It suggested incentives to negatively gear could be reduced.
“For instance, the Henry tax review recommended a discounting mechanism that would lower the reduction in taxable income from net investment loss.”
Mr Hemmings said those on higher incomes benefited most from rental deductions. He also raised issues with the fact there was no tax on super payouts for over 60s. The report said the current tax treatment of pensions was unusual.
“Making superannuation income tax-free has meant that sizeable sums of public money are implicitly being spent in a way that largely benefits middle and upper income earners,” the report said, adding that for 2013-14 the spend was estimated at about $32 billion, the equivalent to about 2 per cent of GDP.
“There’s room for tax savings on that front,” Mr Hemmings said. “[Australia] is extremely light on tax at the payout of superannuation.”
The report also suggested the Abbott government review the current paid parental leave plan and look at other tax incentives to encourage workforce participation by women. It did not mention tax-deductible child care, but Mr Hemmings said this could be a good option in addition to other forms of support for child care.
In terms of lowering corporate taxes, the report welcomed the Abbott government’s promise to cut the corporate-tax rate. It did not signal a perfect rate but Mr Hemmings said it could go low as 20 to 25 per cent, and be coupled with a tax system that stopped companies profit shifting.
“Campaigns against tax evasion and aggressive avoidance should continue,” the report said.
It also said tax policy should not be a one-way street favouring immediate business interests and called for a tax on miners’ “supernormal profit” despite the Coalition’s big campaign to get rid of the mining tax introduced under the former Labor government.
Some combination of a super profits tax and greater state-based royalties would make sense, Mr Hemmings said.
“With a supernormal profits tax the government only gets revenue when companies are making profits, whereas with royalties they always get revenue, as it’s based on volume. We think a combination of the two would work.”
Other taxes called for in the report included increasing the fuel excise, the introduction of a congestion levy, and a possible new tax on death to stop rich people bequeathing assets to younger generations.
“It’s an issue worth exploring, but one of the problems with death taxation is various forms of avoidance,” Mr Hemmings said. “People start transferring wealth before they die. So you’d also have to look at taxation of gifts. It’s a complicated area.”