Ron Clarke and Taxation
Today I wish to argue the case for urgent and widespread tax reform, but, to begin with, I want to pay tribute to one of Australia's greatest athletes, Ron Clarke, AO, MBE, who, sadly, passed away today. In his stellar career, Ron Clarke set an astonishing 17 middle- and long-distance world records. He was chosen to light the flame at the 1956 Melbourne Olympics and won a bronze medal at the 1964 Tokyo games in the 10,000 metres. He was the fastest man alive for a decade and also won long-distance medals at the Perth, Kingston and Edinburgh Commonwealth Games. I understand that the great Czech runner Emil Zatopek had great admiration for Ron. In 1968, he invited Ron Clarke to Czechoslovakia and, as a parting gift, gave him Emil's 1952 Olympic 10,000 metres gold medal with the following words: 'Not out of friendship but because you deserve it'. Ron was mayor of the Gold Coast from 2004 to 2012 and is an iconic figure in Australian support. To his wife, Helen, and their family, I extend my deepest sympathies, which I am sure will be shared by all senators.
Moving to tax, lower taxes are good for you; low taxes are good for you; no-one has ever been hurt by lowering taxes. So the time has come for us to embark on the great crusade in Australia to lower taxes—because Australia, the lucky country, is at an important juncture. We know that the population is ageing, with the ratio of working age Australians to over-65s falling from 7.3 in 1975 to 4.5 today, and it is expected to decrease to 2.7 in 2055, placing pressure on family and government budgets alike. Australia needs meaningful tax reform if it is to overcome these challenges and flourish in the decades ahead.
This coalition government has taken great strides already, particularly in tackling the debt and deficit and spending legacy left to us by Labor and the Greens. Government spending should be low, open and accountable, but spending is only one side of the equation—and I will address ideas on that in a later speech. The tax white paper process is calling for a frank national conversation on how to build a better tax system that delivers lower, simpler and fairer taxes. On this side, we are fully committed to lowering taxes for Australians, and it is important that the Liberal-National party takes to the next election a platform of reforms that deliver lower taxes. Taxes, though necessary, diminish individual freedom. I believe that Australians themselves are best placed to decide how they spend, save and invest their own money. Lower taxes constrain the ability of government to spend and meddle in people's lives, but any proposals to reform our tax system must be taken to the Australian people at an election. In keeping with the spirit of Magna Carta, it is only with the people's consent that governments have the right to impose tax, and so any changes should have a mandate from the people. The Howard government lived up to this high standard with the 1998 election on the GST. In 2010, the Gillard government failed this test and failed as a government because it lacked a mandate from the electorate to introduce the carbon tax.
The composition of taxes has a critical influence on how our economy functions. In Australia, 58 per cent of all taxes are on income: 39 per cent from individuals and the other 19 per cent from companies. Compared to other developed countries and our regional competitors, our reliance on income taxes is too high. Personal income tax—especially one with high marginal rates like in Australia—is less than ideal economically. It discourages people from working and earning more and has a greater effect on decision making than a consumption tax. Increasingly, income tax bracket creep is further undermining work incentives. It is expected that, in 2016-17, an average full-time employee will fall into the second highest marginal tax rate. The proportion of taxpayers in the top two tax brackets will increase from 27 per cent in 2014-15 to 43 per cent in 2024-25. Income taxes must be cut across the board as a matter of priority. In particular, marginal rates should be cut and the structure flattened to reduce disincentives to work.
Company tax is even more damaging economically. It reduces the attractiveness of investment in Australia, which is especially detrimental to the inflows of foreign capital that we rely upon to build and grow our economy. New Zealand's company tax rate is 28 per cent, while the United Kingdom has progressively reduced its rate to 20 per cent. Singapore and Hong Kong have company tax rates of 17 per cent and 16½ per cent respectively, while Ireland has a general rate of 12.5 per cent. The company tax rate must be significantly reduced, for all businesses, to drive investment in our economy and create jobs. Payroll tax, a state tax, is another bad tax that needs the chop. It is a key revenue stream for the states and territories, to be sure, representing around 10 per cent of their revenues, but the effect of payroll tax is fewer jobs, lower wages and higher prices—a disastrous troika for our economy.
The only way that we can compensate for the reduction in revenues from these taxes is to bring in a GST that covers all consumption and is increased to 15 per cent. Despite its promise as a growth tax, the GST currently applies to only 47 per cent of Australia's national consumption. This coverage has progressively fallen since the GST was introduced. Moreover, the GST rate of 10 per cent makes it one of the lowest value-added taxes in the OECD, where the average is about 20 per cent. By way of comparison, across the Tasman, the GST applies to 96 per cent of consumption at a rate of 15 per cent. New Zealand also has lower personal and company income tax rates—hardly an accident. It is true that lower income households spend a greater portion of their disposable income on GST exempt items, but in terms of revenue forgone it is the highest 20 per cent that receive the greatest dollar benefit from GST concessions—over 30 per cent in dollar terms. How is it equitable for one family to pay GST on dinner at McDonalds while another pays none on Wagyu steaks? It is not. We should broaden the GST to everything and increase its rate to 15 per cent. Instead of thinking of new items to take out of the GST base, the correct approach is to treat all consumption equally by broadening the GST.
Accompanying income tax cut and increased income support for pensioners and others can more than cover concerns about equity for low-income earners. No discussion about tax can occur without considering our federal framework. Indeed, the tax and federation white papers are running concurrently for that very reason. In Australia, 82 per cent on taxes are collected by the Commonwealth; 15 per cent by the states and territories; and only three per cent by local governments. This very high vertical fiscal imbalance has increasingly led to the states being 'financially bound to the chariot wheels of central government', as Alfred Deakin said, more than 100 years ago. About 45 per cent of state budgets come from the Commonwealth—about $107 billion, including the GST, in 2015-16. Reductions in Commonwealth income taxes and an increase in the GST goes some way towards freeing state and territory budgets from federal meddling. But we should go further and once again share the income tax base with the states and territories in exchange for a further reduction in Commonwealth income tax rates and the elimination of tied grants and other specific purpose payments. States should be able to set income taxes and should be accountable for the money raised and the money spent.
We should not fear the model of competitive federalism that the framers intended us to have when they wrote the Constitution. Rather, competition in taxation and service delivery amongst the states and territories will be the best guarantor of productivity and innovation. Those jurisdictions that succeed will be rewarded with growth, jobs and happy voters, while the others will be forced to adapt their rickety economies or suffer politically.
If we do not meet the challenge of substantial tax reform, then we will have no-one to blame but ourselves when the luck Australia once had runs out. We should be bold and take to the next election a policy platform of lower taxes, with reductions in productivity taxes partially offset by an increase in the GST. States should get a proportion of income tax, with federal tied grants all but abolished. Low taxes are good for you. The time has come for my party and my government to lower taxes, as lowering taxes never hurts anyone. A low-tax economy will help Australia and will help Australians.