It's time for tax reform
Australians are over-taxed. And, to paraphrase Kerry Packer's immortal phrase, governments don't spend our money well enough to deserve any more of it.
Australia is generally a very business-friendly country. Indeed, we routinely rank at the top of free-market indices. This year's 'Economic Freedom Index' ranked Australia as the third most free market country in the world, behind only the hyper-capitalist city-states of Hong Kong and Singapore. We even outranked the former bastion of capitalism, the United States, and other well-credentialed pro-market countries like New Zealand, Canada and Chile.
As the index argues, there is an overwhelmingly strong correlation between economic freedom and prosperity. The world's richest countries dominate its upper ranks. This observation is supported by reams of academic literature, and basic economic theory - free markets create wealth, and government regulation hampers it.
It makes intuitive sense too. We all know that it is the entrepreneurs who take risks and have great ideas that are the growth engines of successful economies. The best thing that government can do is get out of their way and let them concentrate on running their businesses.
Yet there is one area of economic freedom that Australia sadly lags behind in: tax.
Despite ranking third overall, Australia doesn't even make it into the top 100 in terms of freedom from taxation. With a top personal income tax rate of 45% and a company tax rate of 30%, that's hardly surprising.
It's not just tax-havens and developing nations (who struggle to levy high taxes on their poorer citizens) who offer more attractive taxation arrangements to businesses and entrepreneurs. Australia's major competitors in natural resources, such as Canada, much of South America and the resource-rich chunks of Africa all offer lower tax rates to individuals and investors.
Low taxes are good for three main reasons.
Firstly: both capital and, increasingly, labour are internationally mobile, and therefore it is important to offer better tax arrangements than our competitors. Failing to offer competitive tax arrangements will mean that talent, ideas and investment will go elsewhere.
Secondly: high taxes don't just risk losing people and capital overseas. They also depress economic activity in their own right. People respond to incentives, particularly those who are willing to take big risks to generate wealth.
Thirdly: taxes can distort economic activity away from productive sectors. Punitive taxes on the mining industry, for example, could lead to less investment there and more investment in lower-taxed but much less efficient industries elsewhere in the economy.
Of course, there is a moral element here too. Why should government take a massive proportion of your money? By definition that assumes that you can't be trusted to spend your own money wisely, and that a group of experts could put it to much better use. Recent examples of appalling government waste and mismanagement at every level persuasively suggest that is not the case.
But while lower taxes are good, tax reform is also important too, because not all taxes are created equal. Some are much more 'efficient' at raising revenue than others - that is, they cause fewer distortions in the economy. Some taxes, particularly those at the state level such as stamp duty, are very inefficient. Taxes which discourage work and investment should be avoided, where possible.
But good tax reform is not just about collecting revenue efficiently, and it certainly shouldn't be about collecting more revenue. For example, imposing a carbon tax and then allocating the revenue to politically favoured groups is not tax reform, despite the audacious spin put on it by some government ministers.
That's why the report by Treasury Secretary Ken Henry into Australia's tax system in 2010 was so disappointing.
The few good ideas contained in the report, such as minor reductions in company tax rates, were bizarrely linked to increasing taxes elsewhere. It's as if the report was written from the perspective that government revenue must be preserved at all costs.
It was a missed opportunity to cut taxes, and also to reform them.
And yet there is much to do. For a start, our high company tax rates must be reduced to internationally competitive levels. Next, our high personal tax rates should be cut. Some have even suggested that the current multiple rates be consolidated into just two or three, to flatten the system out and remove the current disincentive to earn more.
It is reasonable to ask how this should be paid for. After all, government does perform some functions, such as national defence, that must be funded somehow. Personally, I'd like to see government doing far less, and playing a much smaller role in our lives and the economy. But even if you think the current size of government is the right one, tax reform is still possible.
Government subsidies to private businesses, for instance, could easily be removed to help fund business tax cuts. After all, corporate welfare is just as distorting as welfare for individuals. Loopholes in the personal income tax system could also be eliminated to help pay for lower rates. Income spent on accountants to help navigate complex deductions and avoid a higher tax bracket is not an efficient use of capital.
Tax reform is not politically easy, as the former Treasurer Peter Costello discovered with the GST. But it is important. Too important, in fact, to be cast into the too hard basket, particularly amid fears of a second global financial crisis. Some are already suggesting that additional fiscal stimulus will be necessary to avoid recession. While the failure of stimulus to kickstart the global economy following the GFC should be a salutary lesson, if we do have to have it, there's a much more efficient way of doing it than $900 cheques, pink batts and school halls: tax reform.