ACCI puts its case to the Tax forum
Chief Executive Peter Anderson laid the perfect foundation ahead of the tax forum with an opinion article in "The Australian". The key message ACCI put forward are:
- Tax reform is NOT just about redistribution. You need to build the pie, as well.
- Business tax reform is not just about a cut in the company tax rate.
- Small/medium business is in danger of becoming "the Retirement Poor" is there’s no reform to capital gains tax.
Mr Anderson told the tax forum there are two elephants in the room—one is need to reform indirect tax as a means of funding tax reform; and the other is the appetite the government has for cutting expenditure.
Tax Forum - Day Two
ACCI’s Economic Director Greg Evans addressed day-two of the Tax forum. Here’s his opening statement:
Opening Statement by Greg Evans to the Tax forum Canberra – Wed 5 October 2011
Agenda Item - Personal Taxation
Personal income tax is the largest source of Australian tax revenue. As a core element of the tax architecture it is crucial for wage and salary earners that the personal tax system is efficient, transparent and encourages workforce participation.
A well-conceived personal tax regime can provide the platform for stronger growth and phased reductions in the level of taxation can bolster the overall economy.
The majority of Australia’s small and middle ranking businesses, some 1.7 million enterprises, are unincorporated entities also subject to personal income tax.
Policy makers do not necessarily appreciate the strong incentive effect that lower tax rates can have on the decision making of these small business operators.
Preserving incentives for entrepreneurship, hard-work and capital accumulation need to remain core objectives for tax policy, even as we acknowledge the desire of the Australian community for progressivity in income tax scales.
There are however inevitable trade-offs between efficiency and equity objectives. Any debate about tax reform should not shy away from discussing what we lose as a result of attempting to make our personal income tax system more progressive.
While ACCI welcomes the proposed reduction in the company tax rate – it is a significant area of unfinished business that we need to more closely align the top marginal rate with the company tax rate.
Modelling for the Henry Review has quantified the economic damage caused by personal income taxes. For each additional dollar of revenue raised from personal income tax there is a net loss to social welfare of 24 cents arising from the destruction of work incentives. Conversely, for every one dollar of tax relief there is a net social gain of 24 cents stemming from enhanced incentives to engage in paid work.
Increasing economically damaging taxes makes the economic pie smaller while reducing them makes it bigger.
These findings are uncontentious and should be the starting point for any debate about tax reform.
Tax cuts, in this case - income tax, provide an instant social dividend in excess of their cost.
More difficult to quantify but arguably of far greater importance is the impact of the tax system on incentives for entrepreneurship and innovation.
Because it is difficult to model the role of a dynamic business culture is often neglected or taken for granted in tax policy debates. Entrepreneurial activity is fundamental to Australia’s economic success and policy makers should be wary whenever they propose – to diminish productive risk-taking and innovation in the economy.
In general, business welcomes the flattening and simplification of the income tax schedule as this will promote participation, enhance productivity and lift living standards.
Income tax burdens increase steadily over time without the need for explicit changes to income tax thresholds or marginal rates. Growth in wages, reflecting both inflation and productivity gains, automatically pushes taxpayers into higher income tax brackets thereby exposing them to a heavier tax burden. So called “bracket creep” automatically increases income tax receipts by around $4bn per annum and does so in a manner that lacks transparency and for which no political mandate is sort by governments.
Too often income tax cuts amount to little more than the handing back of what has been appropriated by governments over time. The indexation of tax thresholds to wages growth would arrest the tendency of the income tax burden to increase over time and ensure that future income tax cuts delivered lasting benefits.
Tax reform which includes lower personal tax needs to be funded - and ACCI has a strong view that meaningful tax reform can only happen if it coincides with a review of the overall size of government and a root and branch consideration of spending priorities.
In any case we will have no choice in this regard if we want to achieve and maintain an internationally competitive taxation system.