By Innes Willox, Chief Executive, Australian Industry Group
As published in The Australian - 14 January 2025
Since the comprehensive Henry Tax Review of 2010, successive Australian governments have admired the problem of tax reform. Lots of talk and little action has happened since to boost our competitiveness, investment attractiveness and productivity and we are now paying the price.
The past 15 years and even the 15 years before that has seen piecemeal changes that do little to address the problems afflicting our tax system. We are stuck with a 1990s tax system in a 21st Century global economy.
We aren't going to lift our falling living standards unless the uncompetitive, complex mess that our tax system has become is properly fixed. It impacts business growth, holds back personal aspiration and is increasingly internationally uncompetitive.
From a business perspective, there are three major problems with the tax system's structure.
First, the lack of competitiveness makes us unattractive for global companies allocating capital for new projects. We rank second in the OECD – behind only Norway - for corporate profit taxes as a share of GDP. Our 6.6 per cent rate is double the OECD average of 3.3 per cent, and more than four times higher than the United States.
Governments have become more dependent on company taxes, which in the past decade have risen from 20.1 per cent to 25.1 per cent of the Commonwealth tax take.
Second, we labour under a cumbersome two-tier corporate tax system that discourages investment and growth. There are complications around dividend imputations credits, the treatment of franking credits, and differential treatment for different ownership structures. There is clear evidence that the Research & Development Tax Incentive is being under-utilised due to excessive complexity in its design.
Third, state government taxes are rapidly growing, are increasingly inefficient, and hostile to investment. The state and local government tax take has surged by 31 per cent since the pandemic, and now accounts for 5.4 per cent of GDP. Payroll taxes on employment raise now around a quarter of all subnational tax receipts.
A myriad of ad hoc state government levies has gradually accreted, producing an incoherent and inefficient system. With structural budget deficits now forecast through the next decade, governments need to better control spending. The spending growth only fuels the need for tax grabs and reduces the willingness for reform.
Tax reform has broadest and deepest reach of any economic reform available to government, and should be a major public policy priority in 2025. If we are to make successful transition through the challenges of technological, energy, geopolitical and demographic change, we need to update, upgrade and simplify our tax system.
There are three principles that should inform reform efforts.
First, international competitiveness must be front of mind. Capital is increasingly mobile, and Australia is a comparatively high-cost investment jurisdiction. Uncompetitive tax settings will price us out of areas where we do not possess commanding natural advantages.
The clearly negative impact of the US Inflation Reduction Act on our clean energy investment prospects has sharpened minds regarding our tax competitiveness. A similar approach should be applied across all tax settings . Second, we need greater simplicity across the federal and state system.
Third, there needs to be a greater focus on productivity in tax discussion.
Rarely are tax reforms designed or debated on their merits in supporting businesses to make productivity improvements. The recent abolition of so-called 'nuisance tariffs' is a welcome example that put productivity front and centre.
There is hesitancy by policy leaders to discuss tax reform leading into the next election, but to overlook its importance to enhancing prosperity is a major blind spot in our national debate.
Real reform takes courage but the rewards from far greater business investment, job creation, supporting personal aspiration, economic dynamism and greater productivity are enormous.
