Australia's taxation system needs efficiency and simplicity

When it comes to contemplating positive change to the tax system, efficiency and simplicity are just as important as aiming for fairness amongst taxpayers. Efficiency looks to minimise the negative impact of taxation on the economy leading to the inefficient allocation of resources. Simplicity is also key to ensuring the tax system can be understood effectively, as an over-complicated system invariably leads to both unintentional tax errors as well as exploitation. However, efficiency and simplicity are not always easy to achieve. 

Australia’s over-reliance on income tax 

The inherent need for tax reform was more than hinted at in Treasury’s 2023 Intergenerational Report, which highlighted increasing pressure on the revenue base due to structural economic changes. For instance, changing consumer preferences will have an increasingly negative effect on tobacco excise and fuel excise revenue, due to health and environment influences. Other changes include technological advances, and a push to reduce and eventually neutralise carbon emissions. As a result of these changes, government must look elsewhere to source revenue. 

Personal income tax already accounts for over 50 per cent of government revenue, with a recent report by the OECD highlighting the unsustainable reliance on income tax, which is expected to continue to grow. In a recent article Tax surge consuming up to 45% of household income, it was found that families are facing an enormous tax burden each year not only through personal income taxes, but also business taxes which are in effect passed on to households through higher prices and lower wages. Such reliance on personal income taxes is a vital issue with Australia’s aging population reducing the individual tax base each year, creating an unfair burden on taxpayers. 

Tax inefficiencies – broadening the tax base 

Consumption taxes are generally front and centre when discussing tax reform. The OECD suggested a suite of recommendations for tax reform, including raising and broadening the GST base, address the generous retiree tax concessions, replace ‘inefficient’ property stamp duties with land taxes, tap into natural resource potential, increase the focus on windfall capital gains and carbon emissions, and consider introducing inheritance taxes. 

Compared to the OECD GST average of 19.5 per cent, our own 10 per cent GST is relatively modest. However with any significant increase to consumption taxes, the Government must also assess and compensate low-income households, which will add complexity to an already complex tax.

Treasurer Jim Chalmers has dismissed the idea of major tax reform on the horizon, instead ‘tinkering around the edges’ with smaller changes. The Government’s tax agenda has been to ramp up focus on multinationals, bringing forward Petroleum Resource Rent Tax revenue, limiting tax concessions for large superannuation balances, and making minor changes to the original Stage 3 tax cuts. Such minor changes remain in the ‘political comfort zone’, not going far enough to lose voter confidence, but also not going far enough to bring about the significant structural change that the country needs. 

The Stage 3 tax cuts commencing July 2024 are a means to address bracket creep. Despite lowering the income tax burden for a large portion of individuals, it is clear that this does not represent the structural change that actual tax reform requires and does nothing to pivot away income tax as a key revenue source. 

Efficiency and sustainability are paramount when considering how we generate tax revenue for the future of Australia’s economy. The OECD and Intergenerational Report have made it clear that Australia is too dependent on income taxes, and consumption taxes need to play a bigger role in Australia’s tax base, as the lack of tax reform over the last 24 years poses a threat to economic sustainability and intergenerational fairness.