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A road map for tax reform

The Government has a strong record on tax reform. We recognise that Australia needs a tax system that allows it to grow and prosper. Our tax system needs to facilitate a stronger economy, a fairer society, a modern economy for the 21st century, all while rewarding effort.

The Government’s vision for reforming the tax system has three key aspects.

First, the tax system should seek to enhance productivity in the economy and lift growth. It should promote sensible risk taking and generate new investment opportunities. This will translate into more jobs and higher living standards.

Second, the tax and transfer system should encourage, not discourage, participation in the workforce. It should provide reward for effort.

Finally, the tax system should be fair and sustainable. It should make society more equitable, so that those who have the ability to contribute do so, and those on similar incomes are treated within the tax system in similar ways. The tax system should provide revenues to fund our world class living standards and services, now and for the future.

Across all of these aspects of the tax system, simplicity is a major aim of the Government’s tax reform. Simplicity cuts across all aspects of our vision. A tax system buried in red tape and complexity will reduce investment, stifle innovation and risk taking, and ultimately reduce productivity and economic growth. Complexity in the tax system will reduce the time an individual or company has for other pursuits, and detract from further participation in the workforce. It also makes the system unfair, as it imposes a higher burden on low income households.

The Government believes that tax reform is an ongoing process that is built around community and business engagement, delivered in a fiscally responsible way.

Building a stronger, fairer and simpler tax system

In the Government’s first Budget, we commissioned the most comprehensive review of the tax and transfer system in Australia’s history. The Australia’s Future Tax System (AFTS) review, chaired by Dr Ken Henry, presents a vision of a future tax and transfer system that would position Australia to deal with the demographic, social, economic and environmental challenges of the twenty-first century.

The AFTS review outlined a set of guiding principles for Commonwealth and State tax reform for the next 40 years. The Government has progressed nearly 40 measures advancing the AFTS Review recommendations (Appendix 1), starting with the Stronger, Fairer, Simpler package, which centred around the mining tax, superannuation and small business tax reforms.

The Stronger, Fairer, Simpler package was the first step in a long-term agenda that will help ensure we share prosperity fairly, maximise our opportunities, and keep Australia in the box seat as the global recovery gathers pace.

The Tax Forum in October 2011 carried forward the national conversation on tax reform and provided the impetus for a number of processes to develop further reform options: the Business Tax Working Group, the Superannuation Roundtable, the Not-for-profit Sector Tax Concession Working Group and the Tax Studies Institute.

Australia is a low taxing country

Australia is one of the lowest taxing economies in the developed world. In 2009, Australia had the sixth lowest tax-to-GDP ratio out of 34 OECD countries (Chart 1). Australia’s tax-to-GDP ratio is also on par with developed economies in our region.

The Government is committed to keeping tax as a share of GDP lower than the level it inherited in 2007 (23.7 per cent of GDP). The Government is also committed to allow tax receipts to recover in line with the economy and to hold real growth in spending to 2 per cent a year while the economy is growing above trend until the budget returns to surplus.


This chart shows that Australia’s tax revenue to GDP ratio is amongst the lowest in the OECD, with only five countries having a lower ratio and 28 countries having a higher one. This demonstrates that Australia is a relatively low taxing country.

Source: OECD Tax Database and ABS. Data for Poland, Japan and Netherlands are for 2009.

Since the beginning of the Global Financial Crisis (GFC), tax receipts have fallen significantly. The tax to GDP ratio fell 4.2 percentage points to 20.1 per cent in 2010-11, compared to the all-time peak of 24.2 per cent under the former government in 2004-05 and 2005-06 (see Chart 2).


Chart 2: Tax receipts as a percentage of GDP

Source: Budget documents.

Although the economy has recovered since the GFC, the recovery in tax revenue has overall been weak.

Company tax and resource rent taxes represented around 5.4 per cent of GDP in 2006-07, but fell to around 4.1 per cent in 2010-11. This is partly due to lags in the recovery of company income tax receipts, because losses accumulated during the GFC are now being claimed against current profits. The GFC also caused capital gains tax receipts to fall by around two-thirds from their peak of 1.5 per cent of GDP in 2007-08. Asset markets have remained sluggish and there is an unprecedented stock of losses that remain to be absorbed by future gains before tax will be payable. Capital gains tax receipts are predicted to recover, but not to reach their pre-crisis share of GDP.

There are structural influences also at work on the revenue base. Even with an enduring global recovery, we have not seen a similar recovery in revenues. The first phase of the mining boom before the GFC saw a large increase in company tax receipts driven by high commodity prices, but the second phase hasn’t seen a similar increase in tax receipts, because of the dramatic increase in investment in new projects.

The write down in tax receipts following the GFC is in stark contrast to the windfall revenue the previous government received during the first stage of the mining boom. From 2003-04 to 2007-08 Budgets, including the forward estimates, the previous government received an additional $334 billion in unexpected revenue, and spent an unsustainable $314 billion in new expenditure and poorly targeted tax policy.

By contrast, this Government has faced substantial write-downs in tax receipts and is undertaking one of the largest fiscal consolidations in history. Since the GFC, revenue write-downs over the 5 years to 2012-13 amount to around $150 billion.


Chart 3: Revenue write-ups and write-downs from 2003-04

Source: Budget documents.

Returning the Budget to surplus and pursuing tax reform have been made much more difficult by weakness in tax receipts that has persisted since the global financial crisis. Weak tax receipts, not high spending, is the main driver behind Australia’s tight fiscal circumstances.

The prolonged weakness in revenue makes tax reform especially challenging. There are no rivers of gold to ‘buy’ reform. As a result, reforms that cost money need to be funded by reforms that raise money.