Federation – A unified approach to tax is vital | KPMG | AU

Rethinking Federation – A unified approach to tax is vital

Federation – A unified approach to tax is vital

The challenge to uphold Australia’s prosperity is vast, and the onus is on state and federal Governments to work together to secure our competitiveness, opportunity and greater equality for all. Building an optimal approach to tax is central to this vision, requiring bold thinking, a shared will for improvement and honest communication to achieve change.

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With tax a core pillar of Australia’s prosperity, it must be front of mind when planning for our future. To uphold our standard of living, global position and opportunity for citizens, it is essential that state and federal governments, the Council of Australian Governments (COAG) and the broader community, are willing to be bold, confident and work together to instil a better system.

In The Future of Tax in Australia’s Federation report, we delved into the current state of Australia’s tax system, explored all the key tax bases and how each could contribute to overall reform. Most importantly, we proposed that a coordinated effort is vital to overcome the obstacles.

We know holistic reform is currently not on the table. However, if we can think deeply, establish the right environment for change, from timing to promotion and being sensible about what can be achieved, we could make improvements.

 

1. Timing and promotion

Politicians can set the agenda for tax reform, but it takes time for ideas to blossom with industry, organisations and the community. It also takes time to identify and promote the need for change, as well as an ability to know when it’s the right time to go ahead.

At present, ideas such as lifting the GST rate or broadening its base; a reduction in the company tax rate; or a trade-off between the introduction of a land tax and a reduction in stamp duty, would appear to have been condemned to the backburner. But a failure to secure public consensus for these reforms should not be an excuse to give up the cause.

To secure public backing, we need to be very clear about the purpose of any reform. In the two great periods of fiscal reform that Australia has seen – the 1985 Hawke-Keating reforms and the 1997-8 Howard-Costello reforms – there was a clear discussion on what was broken and how we would fix it.

In the current environment, making this argument is more difficult than ever. The problems are very complex and in a world where communicating solutions has to be broken down to 140 characters, we need to change the ways in which we talk about tax.

2. Focus on realistic options for reform

Our options for reform are currently limited to targeted areas, rather than wholesale changes of the system. Yet, each would improve the way our tax system operates overall.

Communicating this message is not just about saying “we can do tax better”. It needs to also be conveyed with a reason – for example, “we need more tax to pay for health and education”. Places to start include:

  • Finding new tax bases: They would include “rectification of the cash economy”, environmental taxation, congestion, and other user-charging and asset, wealth or inheritance based taxation.
  • Sharing revenue from existing bases: This could reduce the imbalance between federal and state revenues and spending (known as vertical fiscal imbalance).
  • Reallocate functions of government: All health, for instance, might move to the Federal Government, or all education might move to the States.
  • Focus on: Efficiency formulas on funds provided to States.
  • Harmonisation and consistency: Merging the Offices of State Revenue into the Australian Taxation Office to provide one Australian tax administration would drive considerable productivity benefits.

3. Build a new partnership of equals

In the current political climate, enacting any of these reforms and achieving consensus between the competing interests of the state and federal governments would be extremely challenging. The answer is a new political infrastructure which will give rise to different thinking on our Federation.

The past has involved the Federal Government directing change and options. There needs to be a new partnership of equals. Instead of defending their ‘state’ against ‘Australia’, state and territory leaders need a different mindset. The COAG agenda needs to be set largely by an independent secretariat with a long term view rather than the Prime Minister of the day. Reform will require political champions at the federal and state levels of government to lead us on a new path. To help find our way, there should be regular meetings, peer reviews and programs designed to find best practice.

4. Put transparency first

This fresh mindset requires a new level of transparency. We need to prepare “Combined Australian Government Accounts” to be released at the time of the Federal Budget that would disclose total revenue and expenditure by source and function including internal contributions. They would highlight different expenditure outcomes for residents in different states on a per capita basis.

New Intergenerational Accounts at both at the federal and state levels would be produced that would include future contribution rates by income, taxes and transfers. There would also be a description of the change in the tax collections over the last 10 years and the projected future change over the next 10 years as a percentage of GDP, as well as efficiency indices for taxes.

These relatively simple changes would not only drive efficiency in their own right, but also create the general awareness about taxation which is needed to build a case for reform. A dedication to fiscal transparency would help us look past our political self-interests and work together to secure our prosperity for generations to come.

For our full exploration of the opportunity that lies within each tax base and the environment we need to cultivate to achieve change, read: The Future of Tax in Australia’s Federation.

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