The announcement of the process for the Government’s tax reform White Paper is an important first step. But the current norms behind our tax system need to be looked at afresh. It is conventional wisdom that broadening and increasing GST is politically difficult. Yet we rely disproportionately on income taxes and inefficient indirect taxes. Letting the current mix continue will lead to a drag on the economy, and may drive down participation rates in the economy. Doing nothing is not an option.
The ‘Temporary Budget Repair Levy’ – even though for 3 rather than 4 years as widely predicted – still comes on top of an already high personal tax rate and leaves Australia near the top of the global scale for direct taxes. This is unsustainable if we want to be internationally competitive, and shows the desperate need for comprehensive tax reform.
In a recent paper, KPMG challenged some of the conventional thinking behind the current combination of taxes and pointed out that in Treasury’s own figures, people earning around $70,000–$80,000 will be paying an average of 28 percent tax rather than 23 percent, in 10 years' time. We cannot keep relying on bracket creep, which will undermine the social compact between taxpayers and the Government.
Modest single-earner households will be worst hit by bracket creep, facing a 60 percent increase in income tax within a decade. Households with a single income of $70,000–$80,000 pay almost 20 percent of their income in tax now. After 10 years, assuming a 3 percent a year increase in income, they will move into the next tax-bracket and will pay about one-quarter of their income in tax, resulting in a 60 percent increase from their current income tax levels.
This is inevitable as recent analysis by Bernard Salt, KPMG Demographics has shown, that while the assumptions underlying Australia’s pensions system are that 20,000 people reach 70 years old each year, it is now up to 60,000 and in 3 years' time would be 80,000. So these fundamental demographic changes require a clear response. It is likely to have a positive impact on participation rates for older Australians.