In a competitive global
economy where capital is increasingly mobile,
politicians are waking up that corporations should be
taxed less and immobile bases like consumption tolled
more.
The archaic US corporate
tax code, including a global high maximum rate of 39 per
cent on worldwide income including state income tax, is
causing companies like Pfizer and Burger King to flee
the US and relocate through cross border mergers.
YET TO SEE AN EXODUS
Australia is yet to face
an exodus. Yet the rapid winding down of the mining boom
inevitably means that foreign investment will be more
difficult to attract unless economic policy, including
tax, remains competitive.
A switch in the tax mix towards raising more revenue
from consumption is patently obvious to most economists.
However, where the Cruz and Paul plan fails, will be a
political and fiscal problem that Turnbull and Treasurer
Scott Morrison seek to avoid.
The radical tax plans of the Tea Party darlings will add
trillions of dollars to the US budget deficit, because
they are not revenue neutral. Second, the Cruz and Paul
proposals would not compensate low-income earners
adequately for the regressive nature of consumption
taxes.
Turnbull has been at pains to emphasise that fairness
would be "absolutely critical" in any tax overhaul.
To that point, elsewhere in the US a "progressive
consumption tax" is being pushed by Democrat Senator
Benjamin Cardin who last year introduced a bill in
Congress for a 10 per cent VAT to finance business and
personal tax cuts. Families earning up to $US100,000
($139,000) and individuals making $US50,000 would be
compensated via tax credits.
Michael Graetz, a Columbia Law School tax professor and
author of 100 Million Unnecessary Returns, proposes
making the VAT distributionally equal, partly by paying
compensatory child credits to low-income families via
debit cards that could be used at grocery stores.
Graetz is a former US Treasury official in the George H
W Bush administration and last year spent a month in
Australia, where he liaised with the Treasury and
Business Council.
His innovative approach is an option Turnbull and
Morrison will need to consider to ward off Labor's
message that an increased GST hurts the poor.
ONLY SOME HELP IN ADDRESSING REGRESSIVITY
KPMG Asia Pacific regional leader for indirect taxes,
Lachlan Wolfers, points to an OECD report that says
reduced rates of GST or VAT for food, while of some help
in addressing regressivity, are "clearly not well
targeted at poor households". The OECD concludes there
are more targeted measures to compensate low income
households.
Yet raising or broadening the GST, should not simply be
a revenue raising exercise for the states, even if we
acknowledge the rising budgetary costs of the ageing
population and healthcare.
As a former federal Treasury official in the
commonwealth-state division in Canberra, I believe it
would beggar belief if the states were given a bucket of
new money without eradicating economically damaging
taxes.
This was the original intention of former treasurer
Peter Costello, before the Australian Democrats watered
down the GST intake by exempting fresh food.
The Labor-commissioned Ken Henry tax review nominates
property stamp duty as one of the most inefficient
taxes. It is a tax on moving, not property wealth.
Stamp duty impedes labour force mobility by deterring
people moving closer to better jobs. It arguably
increases carbon emissions as people travel further to
work. The levy puts off old people from downsizing to
free up larger homes for growing families. It perhaps
distorts the decision to undertake renovations and
extensions, instead of moving to a more suitable home.
Stamp duty dangerously leverages state budgets to
housing booms and busts.
Yet cutting stamp duty, as well as corporate and
personal incomes taxes, is unaffordable from a small GST
increase.
Hence, if there is any change to the GST, the base
should first be broadened to fresh food. New Zealand has
a broad-based 15 per cent GST that helped slash personal
income tax and trim company tax. The UK has done
similar. The average OECD VAT is about 19 per cent.
Not only would a broader GST raise revenue more
efficiently and fund serious tax reform, it would lower
compliance costs. The current fresh food exemptions
force the Australian Tax Office and business to employ
an army of compliance staff, to police and work on gray
areas.
The courts have heard unusual cases adjudicating whether
pizza rolls, prepared meals, alcohol-free wine,
carbonated juice and mini ciabatta bread are liable for
GST.
This imposes unnecessary costs on taxpayers and
business, and diverts human capital and business time
away from more productive economic activities.
In an internationally dynamic economy, there will be an
early mover advantage for economies in developing a tax
mix that attracts investment, encourages work, rewards
saving and ultimately delivers a bigger pie for all to
share.
Source:
The Australian Financial Review, dated 25/11/2015.