Australia has more than 125 taxes at a state and federal level, but 90 per cent of revenue is raised through just 10 of them. The pressure is now on to tear up the system and start again.
The tax-free threshold would be scrapped, tax rates would increase for every $1000 of income earned, and savings would be targeted by the tax office under one of the most ambitious blueprints for economic reform seen in a decade.
The proposal has been unveiled as leading economists and powerful lobby groups on either end of the political spectrum – the Australian Council for Social Services and the Business Council of Australia – demand a new wave of reform, warning Australia must overhaul its 20th century tax system or risk leaving workers, welfare recipients and business behind.
The PricewaterhouseCoopers tax plan, released to Fairfax Media, argues for major tax changes given the budget is inching towards a surplus for the first time in a decade and policy-makers have more flexibility than at any time since the global financial crisis.
While the PwC proposal kicks off a discussion over the future of income tax, Australia’s top economists have also said increasing the GST base, death taxes, and a transition to land tax from stamp duty should all be on the table after the last two attempts at serious reform were shelved by Coalition and Labor governments.
Former second tax commissioner Richard Highfield said in the eight years since the landmark Henry tax review, structural issues have not been resolved and costs are growing, with lost revenue blowing out to $8 billion a year, according to the Australian Tax Office.
“The longer we wait the more serious it becomes,” the UNSW Business School adjunct professor and former OECD tax administration chief told Fairfax Media.
“We have a very poor mix and too many taxes, which result in enormous compliance costs and a lot of administrative pain for little gain.”
Australia has more than 125 taxes at a state and federal level, but 90 per cent of revenue is raised through just 10.
Ross Garnaut, a lead adviser on the Hawke-Keating economic policies of the 1980s and 1990s called for a new national debate.
“Australia is in trouble,” he said. “The situation is more dangerous than any in my lifetime. We have made it difficult to face up to shocks as they arise.”
PwC tax partner Paul Abbey said an impending budget surplus meant policy-makers could be much more dynamic and compensate those who lost out, while growing the overall economic pie.
His controversial income tax proposals are designed to start a debate about what kind of tax system Australia needs as the population ages and the gap between asset wealth and income grows.
Under the PwC plan, every dollar earned would be taxed by eliminating the tax-free threshold for earnings under $20,000, and redistributing the billions of dollars in extra revenue to low-income earners through welfare and low-income tax offsets.
The move would prevent people currently earning more than $100,000 a year from getting the benefit of the tax-free threshold and target welfare payments at those who need it most.
The system has been in place for more than two decades in New Zealand, where the tax leader of Chartered Accountants John Cuthbertson says the economy is better off.
“You’re not getting your best bang for your buck,” he said. “You are having to give money to everyone.”
The PwC plan also calls for dynamic income tax rates, which would increase progressively from 0.2 per cent up for every $1000 earned rather than jumping from bracket to bracket.
Dynamic Tax Rates
Effective rates paid on individual incomes in 2024-25 on budget proposals compared to scenario of dynamic tax rates.
Taxes are currently levied at 19 cents for each dollar earned between $18,200 -$37,000, and 32.5 cents for $37,000-$90,000, before rising to 45 cents for every dollar earned above $180,000.
The Coaltion’s 10-year plan will abolish the middle 37 cent tax bracket for earnings between $90,000 and $180,000, but the PwC proposal goes further by smoothing the remaining jumps and applying one effective average tax rate for the entirety of a worker’s income.
Mr Abbey said eliminating bracket creep, which occurs when people earn more and push income into higher tax brackets, would boost productivity, particularly among self-employed and primary carers returning to work after having a child.
“It takes out any of the bracket creep disincentive around working extra hours,” he said.
Fashion retailer Alpha 60 used to lose 11 hours a week on processing payroll taxes, but the digitisation of the system makes the prospect of dynamic tax rates more feasible.
“It now takes 20 minutes,” said owner Alex Cleary.
Head of industry at accounting giant Xero, Matt Prouse, said a dynamic system could be plugged into their operations.
“Just like you don’t care about how Netflix streams video, you just press play,” Mr Prouse said.
PwC’s final proposal would see a flat 30 per cent tax rate applied to all interest earnings from savings, share dividends and other capital gains, eliminating discounts and a myriad of different rates for housing investors and shareholders and pegging them to the top company tax rate.
The move would trigger an outcry from investors who have been taxed at a 50 per cent capital gains discount and many retirees who have no income and rely on tax concessions to fund their lifestyles.
Separate taxation of labour and savings income
If savings and capital gains were taxed at a flat 30 per cent rate, this is how it would affect each income quintile.
Australian Bureau of Statistics figures show that between 2002 and 2014, wealth for those aged 55 and over grew by 42 per cent compared to 7 per cent for people aged 25-34.
PwC modelling shows implementing the flat 30 per cent rate would increase the number of taxpayers by 27 per cent, helping to alleviate pressure on the tax base as the population ages.
The Henry review found in 40 years’ time there would be just 2.7 people of working age for each person aged 65 years or older, compared with 5.0 people today and 7.5 people 40 years ago.
The PwC proposal has won the support of one of the Henry review’s top advisors, John Freebairn.
“Why in the hell do we tax different savings differently?” he said.
Former Treasury secretary and governor of the Reserve Bank Bernie Fraser said the mishandling of tax reform over the past two decades had provided the grounds for a new rethink.
He said “less than justice” was done to the Henry review and called for bold ideas beyond a focus on piecemeal reform through company tax cuts.
“Are we trying to promote the business sector though company taxes or are we trying to produce a better, fairer society?” he said.
The political inaction has provoked despair among business and welfare groups, who while not endorsing each of the specific PwC proposals, called for new tax ideas to be put on the table.
“After 27 years of uninterrupted economic growth, Australia has become complacent,” said Business Council of Australia chief executive Jennifer Westacott.
“A combination of global risks, Australia’s high household debt, high government debt, weak wages growth and low productivity growth is not a recipe for resilience in a volatile world.”
Australian Council of Social Services chief executive Cassandra Goldie said the business community, union movement and community sector agree we need to improve the fairness and stability of the system.
“There is broad agreement that we have a revenue challenge over the medium to long term and that we need to tackle tax concessions that are no longer fit for purpose,” she said.