Australia Needs Personal Income Tax Reform by csj15612


									                                                                                         December 2005

            Australia Needs Personal Income
                      Tax Reform
Reform to personal taxes remains a key priority for ACCI. The tax cuts in recent
Budgets have been welcome, but are no substitute for true reform. In particular, our
top marginal tax rate places Australia at a significant competitive disadvantage against
many other countries in our region and beyond.

The last significant reduction in the top marginal tax rate occurred twenty years ago when in
1985, the Hawke-Keating Government announced that it would reduce the top rate from 60
per cent to 49 per cent.

The top rate has remained almost unchanged since then (though it was cut to 47 per cent in

Australia is long overdue for significant personal income taxation reform, including to the top
marginal tax rate.


Australia’s top marginal tax rate is uncompetitive compared to many of the countries with
which we compete. In addition, many countries are reducing or intending to reduce their top

Australia is in a ferocious global competition for capital and skilled labour. Tax is very often
a factor driving capital movement and tax is becoming more of a factor driving the movement
of skilled labour.

ACCI’s research shows that while individuals do not necessarily leave Australia because of
tax, tax is a disincentive to return after time spent overseas – and there are 1 million
Australians living overseas. An uncompetitive tax system discourages Australians from
returning. This is a loss of substantial human capital and Australians with overseas
experience are very valuable to the economy.

Australia’s tax system is gradually, but surely, falling behind. Our top rate of tax at 47 per
cent is basically a museum artefact from a bygone economic age.

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Personal tax reform will provide important benefits. It will:

•   encourage labour force participation, particularly by older workers and second income
    earners. This is particularly important as the Australian population ages, reducing the size
    of the workforce;

•   encourage greater work effort by those already in work;

•   encourage greater entrepreneurial activity and growth in small businesses;

•   encourage investment in human capital, through education and training, because the
    returns on investment are taxed less;

•   discourage wasteful tax avoidance and evasion; and

•   increase the efficiency of the economy.

These benefits are examined in more detail in ACCI’s Taxation Reform Blueprint: A Strategy
for the Australian Taxation System 2004-2014, available from


To the dismay of big government advocates, many of the former Eastern European
communist countries have decisively broken with their past and implemented large reductions
in personal tax rates.

The Economist magazine has reported that reforms to personal tax rates have resulted in the
following top rates: Lithuania (rate 33%); Latvia (25%); Slovakia (19%); Romania (16%);
Serbia (14%); Ukraine (13%); Russia (13%); and Georgia (12%). Estonia has also just cut its
tax rate to 20%.

Meanwhile, most of our Asian neighbours have much lower rates of personal tax than

Singapore is reducing its top tax rate to 20%; the top rate in Thailand is 37%; Indonesia 35%;
the Philippines 32%; Malaysia 30% and Hong Kong 16% (source:

Other countries could be soon jumping on this bandwagon. For example, the US is
undertaking a major review of its income tax system.

To justify the current system, many compare Australia to the OECD (basically the developed

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While the limited tax changes in the 2005-06 Budget have meant that Australia’s personal tax
rates and thresholds will be around average in the OECD by 1 July 2006, this is not a valid

Australia is competing more and more with lower taxing countries and we should not copy
the unsuccessful policies of uncompetitive OECD countries if we want to be a successful 21st
century economy.

Against a much larger sample of 111 countries (in the Economic Freedom of the World 2005
Annual Report), Australia’s top marginal rate ranks a dismal 88th lowest (or 23rd highest).


In light of booming government revenue and Australia’s strong financial position, it is time
for the Australian Government to stop denying the need for significant taxation reform.

Australia needs tax reform – not just tax cuts.

Australia should progressively move to a top rate of 30 per cent; reduce the number of tax
brackets to ideally two and eliminate bracket creep by indexing the tax brackets to the
inflation rate.

ACCI has been calling for a reduction in the top marginal tax rates for some time. In our
Taxation Reform Blueprint, we argued that the current top rates of 47 and 42 per cent are too
high, holding back productivity and growth, discouraging innovation, investment, education
and entrepreneurship, discouraging skilled migration to Australia and encouraging tax

While it has been argued that the indexation of tax thresholds is not desirable given that the
Australian Government has already provided larger tax cuts through explicit decisions to
raise thresholds than would have been provided through automatic indexation, we do not
believe you should have to choose between these two options – i.e. we should have threshold
indexation as well as other tax cuts.

In addition, there may be substantial benefits from rationalising the interaction between the
tax and welfare systems. A particular proposal worth examining is an earned income tax
credit, which offsets income tax at low incomes and is withdrawn at higher incomes.

Expenditure Cuts

Sometimes major tax cuts have not cut Government revenue. Estonia and Russia in particular
have had increases in revenue since cuts to personal tax were introduced. Sometimes this is
because people work harder. In Russia’s case the IMF argues that revenues increased
because the new system was easier to administer and comply with.

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Australia’s tax reforms should not require revenue to be maintained or increased.

ACCI considers that the Government should in fact be reducing its revenue take. The size of
Government is getting too large and we are advocating major reductions in Government

A thorough review of unnecessary Government spending is essential to achieve this goal. To
aid the debate on this issue, ACCI released a discussion paper earlier this year entitled
Government Spending (And Taxes) Can be Cut - And Should Be (available from our website).

This paper shows that it is a furphy to argue that the size of Government has been shrinking.
Commonwealth expenditure in 2003-04, excluding GST, is the same as in 1995-96 (with
grants to the states excluded to be consistent) and is 2.5 percentage points higher than the last
year of the Whitlam Government. Much of the growth has been through income support
payments and a large amount of this goes to families that pay significant tax. This ‘churning’
of money is inefficient.

Reducing Tax Concessions

Many commentators argue that tax cuts should be funded by reducing tax concessions (also
known as broadening the tax base).

Particularly mentioned is a reduction in the Capital Gains Tax (CGT) concession.

However, as explained in the October Review article Capital Gains Tax – In Need of Reform,
it is very unlikely that business would be willing to support a reduction in the CGT
concessions as a tradeoff for lower personal tax rates.

Therefore, ACCI considers that the debate about tax cuts does not need to assume that tax
cuts need to be funded by the broadening of the tax base. Spending cuts can and should be
examined as a funding source.


Australia is in a global race for investment dollars and skilled workers.

Our competitors are constantly looking at ways to attract human and financial capital so as to
improve their competitive advantage.

They are not sitting around while the rest of the world becomes more competitive and neither
should we.

Significant structural reform to personal income taxes is an important component of the
policy measures necessary to ensure that Australia maintains and increases its international

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The business community is looking to the Howard Government to recognise this in the May
2006 Federal Budget.

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