Australian corporate taxes are unlikely to be reduced for five years - but fuel duties have more potential to rise, while GST and tobacco taxes may have reached their limit.
A rethink of state-federal tax arrangements is necessary for boosting national productivity.
And a potential US shift from its traditional global positioning would increase volatility and uncertainty and exert pressure on the stability of the Australian tax base.
These are some of the findings in ‘The Future of Tax in Australia’s Federation‘, a report released by KPMG today.
The paper argues that the Border Adjustment Tax being promoted by the new President will act as a de facto barrier for those importing good into the US.
Australian exporters to the US will be immediately less competitive and in the longer term the result could be substantially different levels of trade flows.
David Linke, KPMG Australia National Managing Partner, Tax, said: “ The prospect of a Destination Tax in the US will not help to preserve the company tax base here in Australia - rather such taxes are likely to diminish global trade. And while our political impasse at home makes it unlikely we will see any reductions in corporate tax rates for the next five years, ultimately we cannot rely on company tax revenue holding its own in the future. This should be taken into account when considering the likely shape of our federal budget in the medium-term.”
Stamp duties are also unlikely to change with the exception of a rise in rates of non-resident purchase surcharges, already brought in by several states.
GST too may be in decline as it will not match the increased demands for health expenditure demanded of the states.
David Linke said: “the politics of expanding the GST has proved too difficult even though newer empirical analysis casts doubt on its perceived regressiveness. The political need for compensation on this or other areas makes tax reform much harder now than in the 1980s and 1990s, the golden eras of meaningful reform. It is also harder to do it in an era where policies have to be summed up in 140 characters”.
The report argues that tobacco excise, which is currently bolstering the budget figures, may soon reach the point where equity concerns about the inherent regressiveness of the tax outweigh the clear health benefits. The relatively low fuel price in Australia, compared to Europe and Asia, however means there is scope for future hikes in excise duty. Increased user charges – which comprise nearly half of the Singapore government’s revenue base – also have potential to rise.
A key area that needs reform, KPMG believes, are the current federation tax arrangements, with a White Paper-level review of the operation of the federation - promised by the Abbott government - taking place once a decade.
Grant Wardell-Johnson, KPMG Tax Partner and report author, said: “We really need a new political infrastructure which will give rise to a fresh approach on our federation. The demand on business to deal with multiple rules in different jurisdictions is damaging to national productivity.
“While COAG (the Council of Australian Governments) has done a reasonable job in terms of inter-state relations, we think it would benefit from an independent secretariat setting the agenda, rather than the federal government directing change and options.
The current mindset is one of states defending their immediate interests – while understandable, we need to persuade them that they have an equity interest in the country as a whole. Secondment programs for individuals in public administration between states and the federal government would help in breaking down barriers.”
KPMG also argues that our system suffers from a lack of transparency in terms of the nature and amounts of transfers to each of the states. So-called vertical Fiscal Imbalance (VFI) is high in Australia, internationally-speaking, with about 40% of the states’ revenue coming from the Commonwealth to cover state needs.
But the principle of Horizontal Fiscal Equity (HFE) in the federation, where measures are taken to equalise the outcomes caused by states’ differing economic strength, have been generally accepted, despite regular arguments over GST revenue distribution.
Grant Wardell-Johnson said: “As part of a new approach to federal-state relations, it would be useful if ‘Combined Government Accounts’ were created, to be released at the time of the federal budget, disclosing Federal, State, Territory and Local government total revenue and expenditure by source and function. This would make clear both the level of structural VFI and the compensation measures needed to deal with HFE. We should not let political difficulties override transparency.
We should also produce intergenerational Accounts both at state and federal level which would show future contribution rates by income, taxes and transfers over the next 10,20 and 40 years based on current policies. We should illustrate the effect of debts left to future generations but also the benefits they will receive via additional infrastructure and education spending.”