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Broken tax system costs economy $50bn

  • July 19 2021
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Broken tax system costs economy $50bn

By Cameron Micallef
July 19 2021

Australia’s tax laws are costing the nation about $50 billion in compliance costs, while inefficient taxes are slowing down economic growth, an industry expert has warned.

Broken tax system costs economy $50bn

Broken tax system costs economy $50bn

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  • July 19 2021
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Australia’s tax laws are costing the nation about $50 billion in compliance costs, while inefficient taxes are slowing down economic growth, an industry expert has warned.

Broken tax system costs economy $50bn

The Tax Institute has released a 287-page report called The Case for Change, pointing to current issues with Australia’s tax system.

In launching the report, the institute’s director of tax policy, Andrew Mills, said previous estimates show that tax law compliance is costing Australia $40 billion.

However, that is from the Henry tax review, which was undertaken 12 years ago, meaning the cost today is likely to be higher, with Mr Mills ball parking it at around $50 billion.

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“A huge part of that cost is avoidable if we address the systemic issues of our system instead of continuing to tweak around the edges,” Mr Mills explains.

“You can put as many band-aids as you like on a broken limb, but it doesn’t change the fact that it’s broken. We need significant intervention, and we need expertise to undertake the right surgery.”

According to the report, reform is needed in four key pillars – business taxation, personal tax and transfer, superannuation and retirement and in direct taxes – which all need overhauling.

One of the key findings suggests that due to Australia’s ageing population, the country cannot rely on personal taxes, with the institute calling for a rework of the tax system to rely less on income and other taxes that hurt economic growth, and more on GST and land taxes.

In fact, the report argues that nearly 60 per cent of the taxes Australia is currently collecting are harmful for economic growth.

Among them are corporate tax, which is the fourth most relied upon tax globally, and personal income taxes, which are the equal second most relied upon tax globally.

The report also argued that super taxes are inefficient and that the rules, which are currently only understood by industry experts, need to be shared with everyone.

“There was considerable (and perhaps surprising) agreement among experts in this area during the course of The Tax Summit: Project Reform event series that the current design of the taxation of superannuation is far too generous,” Mr Mills said.

“The fact that the taxation is levied at concessional rates on contributions and income of the funds during the accumulation phase for members, yet fund income and benefits during the retirement phase are exempt, means that concessions are significant and their affordability in the context of the whole system is questionable.”

Andrew Mills shares 5 pitfalls of our current tax system

Aside from superannuation law needing to be altered, Mr Mills argued for five main changes to the current taxation system, including:

1. GST could be crucial to revitalising our economy.

“Australia’s GST revenue is already significantly lower than other OECD countries. Complexity in the system means that compliance costs eat up an average 51 per cent of that already low revenue – more than $155 million over five years. We can do better,” he said.

2. We rely on the exact wrong kind of taxes ...

“The taxes we rely on for 60 per cent of revenue are among the most harmful for economic growth: corporate taxes (fourth highest reliance globally) and personal income taxes (equal second highest globally).”

3. … and fail to explore more efficient options.

Mr Mills said: “When it comes to economic growth, land taxes are considerably less damaging than more harmful stamp duties. The stamp duty hike and increase in the tax-free threshold for land tax announced in Victoria’s state budget this year are the opposite of what we would hope to see.”

4. Tax law is not ‘fair’ anymore and mistrust of the system comes with a hefty bill.

“Contrary to public perception, most multinational corporates ‘not paying tax’ are not dodging the law – they pay exactly what the law requires them to. The problem is, the law hasn’t kept up with what most people think is fair. This is a failing of successive governments to maintain a sustainable tax system,” the tax specialist argued.

5. Regulators ‘paper over’ complexity, leading to bigger problems.

“Our tax law is now more than 10,000 pages long, covers 125 taxes, with dozens of anti-avoidance measures and countless complex concessions. Ten of those taxes raise 90 per cent of Australia’s tax revenue. We cannot keep tacking on more measures and more inefficient and ineffective taxes and expect to have a working economy in a decades’ time – let alone a thriving one,” Mr Mills concluded.

Broken tax system costs economy $50bn
Broken tax system costs economy $50bn
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About the author

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Cameron is a journalist for Momentum Media's nestegg and Smart Property Investment. He enjoys giving Aussies practical financial tips and tricks to help grow their wealth and achieve financial independence. As a self-confessed finance nerd, Cameron enjoys chatting with industry experts and commentators to leverage their insights to grow your portfolio.

About the author

author image
Cameron Micallef

Cameron is a journalist for Momentum Media's nestegg and Smart Property Investment. He enjoys giving Aussies practical financial tips and tricks to help grow their wealth and achieve financial independence. As a self-confessed finance nerd, Cameron enjoys chatting with industry experts and commentators to leverage their insights to grow your portfolio.

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