What Can Australia Teach Us
about Tax Reform?
by Jon Forman
Professor in Residence
IRS Office of Chief Counsel
(Room 3501; 622-7639)
&
Alfred P. Murrah Professor of Law
University of Oklahoma
Norman, Oklahoma
Overview
• In 2008, the Australian Government established
Australia’s Future Tax System Review panel to
examine Australia’s tax and transfer system and make
recommendations to position Australia to deal with its
demographic, social, economic and environmental
challenges.
– The Review Panel prepared detailed background reports,
received more than 1,500 formal submissions, and held a twoday conference in June 2009.
– In December 2009, the Review Panel delivered its final report to
the Australian Government.
– In May 2010, the Government released the report, along with an
initial response.
• Will Australia’s Parliament soon enact comprehensive
tax reform?
Source: http://www.taxreview.treasury.gov.au/Content/Content.aspx?doc=html/home.htm
2
Australia’s Future Tax System
Review
• Almost accidental birth
– Not on the agenda when the Labor
Government was elected in 2008
– At a 2008 summit on Australia’s future,
business leaders nominated tax reform as a
priority area
• Government appointed the Secretary of
the Treasury Ken Henry + four advisors
– The Henry Review
3
4
Geography
• Area: 7.7 million sq. km. (3 million sq. mi.); about
the size of the 48 contiguous United States.
• Cities (2008): Capital--Canberra (pop. 345,000).
Other cities--Sydney (4.4 million), Melbourne
(3.9 million), Brisbane (1.95 million), Perth (1.6
million), Adelaide (1.2 million), Darwin (120,000),
Hobart (209,000).
• Terrain: Varied, but generally low-lying.
• Climate: Relatively dry and subject to drought,
ranging from temperate in the south to tropical in
the far north.
Source: U.S. Department of State, Background Note: Australia (2009),
http://www.state.gov/r/pa/ei/bgn/2698.htm.
5
People
•
•
•
•
•
•
•
•
Population (2009 est.): 21.8 million.
Annual population growth rate: 1.7%.
Ethnic groups: European 92%, Asian 6%, Aboriginal 2%.
Religions (2006): Catholic 26%, Anglican 19%, other Christian
19%, other non-Christian 1%, Buddhist 2.1%, Islam 1.7%, no
religion 19%, and not stated 12%.
Languages: English.
Education: Years compulsory--to age 16 in all states and
territories except New South Wales and the Northern Territory
where it is 15, and Western Australia where it is 17. Literacy-over 99%.
Health: Infant mortality rate--4.7/1,000. Life expectancy-males 78 yrs., females 83 yrs.
Work force (10.8 million): Agriculture--3.3%; mining--1.5%;
manufacturing--9.8%; retail trade--11.3%; public
administration, defense, and safety--6%; construction--9.2% 6
Koala
Kangaroo
7
Government
• Type: Constitutional monarchy: democratic, federal-state
system.
• Constitution: Passed by the British Parliament on July 9,
1900.
• Independence (federation): January 1, 1901.
• Branches:
– Executive--Queen Elizabeth II (head of state, represented by a
governor general); the monarch appoints the governor general
on the advice of the prime minister.
– Legislative--bicameral Parliament (76-member Senate, 150member House of Representatives). The governor general
appoints the prime minister (generally the leader of the party
which holds the majority in the House of Representatives) and
appoints ministers on the advice of the prime minister.
– Judicial--independent judiciary.
8
Government, cont.
• Administrative subdivisions: Six states and two
territories.
• Political parties: Australian Labor, Liberal, the Greens,
the Nationals, and Family First. The Australian Labor
Party currently forms the government.
• Suffrage: Universal and compulsory 18 and over.
• Central government budget (revenue): FY 2008-2009
A$295.9 billion (U.S. $236.7 billion); FY 2009-2010
A$290.6 billion (U.S. $232.5 billion).
• Defense: A$25 billion (U.S. $20 billion) or 2.20% of GDP
for FY 2009-2010.
9
Principal Government Officials
• Governor General--Quentin Bryce
Prime Minister--Kevin Rudd
Deputy Prime Minister--Julia Gillard
Treasurer--Wayne Swan
Foreign Minister--Stephen Smith
Australia's national
Defense Minister--John Faulkner
gemstone is the opal.
Trade Minister--Simon Crean
Ambassador to the United States--Dennis Richardson
Ambassador to the United Nations--Gary Quinlan
• Australia maintains an embassy in the United States at
1601 Massachusetts Avenue NW, Washington, DC
20036.
10
Economy
• GDP (2009-2010 estimate): A$1.17 trillion (U.S. $893.6
billion).
• Inflation rate (year to March 2009): 2.5% per annum.
• Reserve Bank official interest rate (May 2009): 3.00%.
• Trade:
– Exports ($178.9 billion, 2008 estimate)--coal, iron ore, gold,
meat, wool, alumina, wheat, machinery and transport equipment.
Major markets--Japan, China, South Korea, U.S. ($10.7 billion),
and New Zealand.
– Imports ($187.2 billion, 2008 estimate)--machinery and transport
equipment, computers and office machines, telecommunication
equipment and parts; crude oil and petroleum products. Major
suppliers--China, United States ($23.96 billion), Japan,
Singapore, and Germany.
• Exchange rate (2009): U.S. $1 = A$1.25
11
Economy, cont.
• Australia's economy is dominated by its services sector,
yet it is the agricultural and mining sectors that account
for the bulk of Australia's exports.
• Australia's comparative advantage in the export of
primary products is a reflection of the natural wealth of
the Australian continent and its small domestic market;
21 million people occupy a continent the size of the
contiguous United States.
• Since the 1980s, Australia has undertaken significant
structural reform of its economy and has transformed
itself from an inward-looking, highly protected, and
regulated marketplace to an open, internationally
competitive, export-oriented economy.
12
Key economic reforms
• unilaterally reducing high tariffs and other protective
barriers to free trade
• floating the Australian dollar
• deregulating the financial services sector
• reducing duplication and increasing efficiency between
the federal and state branches of government
• privatizing many government-owned monopolies
• reforming the taxation system, including introducing a
broad-based Goods and Services Tax (GST) and large
reductions in income tax rates.
Echidna
13
Economy, cont.
• Australia enjoys a higher standard of living than
any G7 country other than the United States.
• Australia's economic standing in the world is a
result of a commitment to best-practice
macroeconomic policy settings, including the
delegation of the conduct of monetary policy to
the independent Reserve Bank of Australia, and
a broad acceptance of prudent fiscal policy
where the government aims for fiscal balance
over the economic cycle.
14
Source: Congressional Budget Office, Fiscal Policy Choices,
http://www.cbo.gov/ftpdocs/112xx/doc11277/CBOPresentation-NABE_3-8-10.pdf
15
Economy, cont.
• Over the last year, unemployment has risen to around
5.5% from 4.2%, and the labor market participation has
remained at around 65%.
• Both the federal and state governments have recognized
the need to invest heavily in water, transport, ports,
telecommunications, and education infrastructure to
expand Australia's supply capacity.
• A second significant issue is climate change. Prime
Minister Kevin Rudd plans to introduce a domestic
carbon trading system by 2011.
Platypus
Source: U.S. Department of State, Background Note: Australia (2009),
http://www.state.gov/r/pa/ei/bgn/2698.htm.
16
Political Conditions
• A written Constitution
• Parliamentary Government
• Voting
– In 1855, Victoria introduced the secret ballot.
– For all citizens over the age of 18 it is
compulsory to vote in the election of both
federal and state governments, and failure to
do so may result in a fine or prosecution.
Australian Government, Australia’s System of Government, http://www.dfat.gov.au/facts/sys_gov.html
17
Political Conditions
• Three political parties
– The Liberal Party nominally representing urban business
interests, and its smaller coalition partner
– The Nationals nominally representing rural interests are more
conservative
– The Labor Party nominally represents workers, trade unions, and
left-of-center groups – really social democrats
• Labor, under the leadership of Kevin Rudd, defeated the
Liberal/National coalition, led by then-Prime Minister
John Howard, in the November 24, 2007 election.
– House: Labor holds 83 seats, against 64 for the Liberal/National
coalition, and 3 independents.
– Senate: Liberal/National Coalition holds 37 seats, against 32
seats for Labor, 5 seats for the Greens, 1 for Family First, and 1
independent.
Source: U.S. Department of State, Background Note: Australia (2009),
http://www.state.gov/r/pa/ei/bgn/2698.htm.
18
Past Political “Achievements”
• A Universal Pension System
• Goods and Services Taxation
Australia's national
floral emblem is the
golden wattle.
19
A Universal Pension
• 1986—industrial agreements for 3 percent
of payroll contributions
• 1992/1993—superannuation guarantee
legislation, mandating 3 percent
contributions to individual retirement
accounts
– Higher levels phased in, reaching 9 percent in
2002/2003
20
Goods and Services Tax
• Broad-based consumption tax that
replaced all sales taxes
• Now 10% tax on most goods and services
• John Howard, Liberal party Prime Minister
• Started at 8% tax
– Passed in 1999
– Began operation 2000
Tasmanian
Devil
21
Australia’s Future Tax System
Review
• An Overview of the Australian Tax System
• Australia’s Future Tax System Review
– a/k/a The Henry Review
• The Government Response
Emu
the unofficial national bird
22
Many Australian taxes
• Australians pay at least 125 different taxes
each year. Of these, 99 are levied by the
Australian government (including 67
agricultural levies), 25 by the States and 1
(council rates) by local government.
• In 2006-07, the Australian government
collected $262.5 billion in tax.
Australia’s future tax system, Architecture of Australia’s tax and transfer system,
available at http://taxreview.treasury.gov.au/
23
Ranking of Australian taxes by revenue
in 2006-07
24
The Australian Tax System
• Taxes on labor provided 39% of total tax revenue
– personal income tax on labour income – 31%
– payroll tax – 5%
– taxes on fringe benefits and superannuation contributions –3%
• Taxes on capital provided 34%
– 20% from corporate tax (including petroleum resource rent tax, crude oil
excise and taxes on the earnings of superannuation funds)
– 9% from annual taxes on real property and conveyancing and other
stamp duties, in roughly equal proportions
– taxes on individuals' capital income, such as interest, net rental and
business income, capital gains and dividends, and some state
government taxes on financial and capital transactions – 5%
• Taxes on consumption contributed 27%.
– GST contributing around half of total consumption tax revenue
– excises contributed around 7%
– while a range of state taxes – including on motor vehicles, gambling,
and insurance – 7%
Australia’s future tax system Consultation Paper, available at
http://taxreview.treasury.gov.au/
25
Composition of Tax Revenue, 2007-2008
26
Statutory corporate income tax rates of
OECD countries (1985 to 2008)
27
The personal income tax base
• Applied against most receipts that have the character of
income
• Generally distinguish between income from capital and
income from labor, except:
– unlike in most other countries, fringe benefits are taxed in the
hands of the employer rather than in the hands of the employee;
– the range of deductions that can be claimed against income for
tax purposes is broad by international standards; and
– income from some forms of savings, such as superannuation
and capital gains, is treated differently to other income.
• The Medicare levy is a structural element of the personal
income tax system
– another 1.5 per cent of a taxpayer's income
28
Personal tax rates and
progressivity
• Australia has a progressive personal
income tax system.
• The personal rate scale has 4 personal
income tax rates, as well as a zero rate of
tax below the tax-free threshold.
• In addition, other elements such as the low
income tax offset (LITO) alter the effective
rate of taxation.
29
Marginal rates including the low income
tax offset, by taxable income (2008-09)
30
Tax revenue as a percentage of
GDP — OECD 2005
31
Australia’s transfer system
• The transfer system is the means by which the
Australian Government redistributes around $70
billion of income each year. While much of this
redistribution is targeted to those on low
incomes, some transfers assist middle and
higher income individuals and families. The
transfer system has evolved over time, with a
range of provisions that are complex for
recipients.
• Key ongoing forms of family assistance include
Family Tax Benefit (FTB) Parts A and B, Child
Care Benefit and the Child Care Tax Rebate.
32
Transfers and taxes by level of income
Single income family, two children aged 3
and 8 (2008-09)
33
Transfers
Australian government program expenditure
by payment group in 2006-07
34
The Henry Review
• The Australia's Future Tax System Review was
established by the Rudd Government in 2008 to examine
Australia's tax and transfer system, including state taxes,
and make recommendations to position Australia to deal
with the demographic, social, economic and
environmental challenges of the 21st century.
• The review panel comprised:
–
–
–
–
–
Dr Ken Henry AC, Chair (Secretary to the Treasury)
Dr Jeff Harmer (Secretary of FaHCSIA)
Professor John Piggott (University of New South Wales)
Mrs Heather Ridout (Australian Industry Group), and
Mr Greg Smith (Adjunct Professor, Australian Catholic
University)
35
Blue Winged Kookaburra
Sulphur-crested Cockatoo
Major Mitchell's Cockatoo
36
The Henry Review, cont.
• In December 2010, the panel delivered its
final report to the Government.
• On Sunday, May 2, 2010, at 2:30 p.m.
– The Government released the Henry Review
– And the Government’s Initial Response
Sydney
Opera
House
37
Tax Reform and GDP
http://www.taxreview.treasury.gov.au/content/FinalReport.aspx?doc=html/Publication
s/Papers/Final_Report_Part_1/index.htm
38
Henry Review Recommendations
• Recommendation 1: Revenue raising should
be concentrated on four robust and efficient
broad-based taxes:
– personal income, assessed on a more
comprehensive basis;
– business income, designed to support economic
growth;
– rents on natural resources and land; and
– private consumption.
• Additional specific taxes should exist only where
they improve social outcomes or market
efficiency through better price signals.
39
Personal Taxation
• Recommendation 2: Progressivity in the tax
and transfer system should be delivered through
the personal income tax rates scale and transfer
payments. A high tax-free threshold with a
constant marginal rate for most people should
be introduced to provide greater transparency
and simplicity.
• Recommendation 6: To remove complexity
and ensure government assistance is properly
targeted, concessional offsets should be
removed, rationalised, or replaced by outlays.
40
Company and other investment
taxes
• Recommendation 26: The structure of the company
income tax system should be retained in its present
form, at least in the short to medium term.
– A business level expenditure tax could suit Australia in the future
and is worthy of further consideration and public debate. It is
possible that other economies will move towards such systems
over coming years and it could be in Australia’s interest to join
this trend at an early stage.
• Recommendation 27: The company income tax rate
should be reduced to 25 per cent over the short to
medium term with the timing subject to economic and
fiscal circumstances. Improved arrangements for
charging for the use of non-renewable resources should
be introduced at the same time.
41
42
Charging for Nonrenewable
Resources
• Recommendation 45: The current resource charging arrangements
imposed on non-renewable resources by the Australian and State
governments should be replaced by a uniform resource rent tax
imposed and administered by the Australian government that:
– (a) is levied at a rate of 40 per cent, with that rate adjusted to offset any
future change in the company income tax rate from 25 per cent, to
achieve a combined statutory tax rate of 55 per cent;
– (b) applies to non-renewable resource (oil, gas and minerals) projects;
– (c) measures rents as net income less an allowance for corporate
capital, with the allowance rate set at the long-term Australian
government bond rate;
– (d) requires a rent calculation for projects;
– (e) allows losses to be carried forward with interest or transferred to
other commonly owned projects, with the tax value of residual losses
refunded when a project is closed; and
– (f) is allowed as a deductible expense in the calculation of income tax,
with loss refunds treated as assessable income.
43
Taxing consumption
• Recommendation 55: Over time, a
broad-based cash flow tax — applied on a
destination basis — could be used to
finance the abolition of other taxes,
including payroll tax and inefficient State
consumption taxes, such as insurance
taxes. Such a tax would also provide a
sustainable revenue base to finance future
spending needs.
44
Alcohol and tobacco taxation
• Recommendation 71: All alcoholic beverages
should be taxed on a volumetric basis, which,
over time, should converge to a single rate, with
a low-alcohol threshold introduced for all
products.
• Recommendation 73: The existing regime for
tobacco taxation in Australia should be retained,
with the rates of tax substantially increased,
depending on further evidence on the costs of
harm from tobacco smoking.
45
46
Rationalising other taxes
• Recommendation 79: All specific taxes on insurance
products, including the fire services levy, should be
abolished. Insurance products should be treated like
most other services consumed within Australia and be
subject to only one broad-based tax on consumption.
• Recommendation 80: The luxury car tax should be
abolished.
• Recommendation 81: Governments should undertake a
systematic review of existing and potential user charges
and minor taxes against the principles set out in this
report. This should be coordinated with the introduction
of the system wide Tax and Transfer Analysis Statement
proposed in Recommendation 132.
47
Income support payments
• Recommendation 82: There should be three categories
of income support payments:
– (a) A pension category
– (b) A participation category
– (c) A student assistance category
• Recommendation 90: Current family payments,
including Family Tax Benefit Parts A and B, should be
replaced by a single family payment. The new family
payment should:
– (a) cover the direct costs of children in a low-income family (that
is, the costs associated with food, clothing, housing, education
expenses); and
– (b) assist parents nurturing young children to balance work and
family responsibilities.
48
State tax reform
• Recommendation 119: Reforms to State taxes should
be coordinated through intergovernmental agreements
between the Australian government and the States to
provide the States with revenue stability and to facilitate
good policy outcomes.
• Recommendation 121: Over time, State land tax and
local government rates should be more integrated. This
could involve:
– (a) moving to a joint billing arrangement so that taxpayers
receive a single assessment, but are able to identify the
separate State and local component; and
– (b) using the same valuation method to calculate the base for
local government rates and land tax (with this method being
consistent across the State).
49
The Government Response
• Released on Sunday, May 2, 2010, at 2:30 p.m.
• This is a long term plan to apply a Resource Super
Profits tax to the profits earned from resources that are
owned by all Australians, and use it to:
– generate more superannuation savings for working families;
– lower tax for all companies, especially small businesses; and
– invest in our future infrastructure needs, particularly for mining
states.
• The Government’s tax reform agenda is fiscally
responsible.
http://www.futuretax.gov.au/pages/default.aspx#newsDocs-factSheets;
http://www.deewr.gov.au/Department/Documents/Files/Final%20Tax%20policy%20Statement.pdf;
http://www.deewr.gov.au/Department/Documents/Files/100502%20stronger%20fairer%20simpler%20a%20tax
%20plan%20for%20our%20future.pdf
50
FISCALLY RESPONSIBLE TAX REFORM
• This package is fully funded over the forward
estimates and in the medium term.
• The reform agenda fully meets the
Government’s fiscal strategy, including the
commitment to keep the tax to GDP ratio on
average below the 2007‐08 level of 23.6 per
cent.
– And it strengthens the economy, generating a growth
dividend that will be returned back to the budget to
strengthen the fiscal position.
http://www.deewr.gov.au/Department/Documents/Files/11_Fact_sheet_Fiscally_r
esponsible_tax_reform.pdf
51
BUDGETARY IMPACTS (AU$ Million)
2011-12
2012-13
2013-14
‐300
‐2,000
‐
‐
‐1,030
‐50
‐300
‐200
State Infrastructure Fund
‐
‐700
‐735
12 per cent superannuation guarantee
‐
‐
‐240
Extend the superannuation guarantee up to age 75
‐
‐
15
Refund of superannuation contributions tax for low
income earners
‐
‐
‐830
$50,000 concessional cap for super balances
under $500,000
‐
‐545
‐785
Resource Exploration Rebate
‐
‐520
‐600
Resource Super Profits Tax Total
‐
3,000
9,000
‐50
635
2,595
Company tax cut
Small business instant write‐off and simplified
depreciation
Head start on a lower company tax rate for small
business
‐
52
A 28% Corporate Tax Rate
• A LOWER COMPANY TAX RATE
– The Government will cut the company tax rate to 29 per cent
from the 2013-14 income year and then to 28 per cent from the
2014-15 income year.
– will move Australia towards achieving an internationally
competitive tax rate.
– Australia will become an even more attractive place to invest.
– is expected to increase long run GDP by 0.4 per cent (excluding
the gains from refunding royalties).
• A HEAD START FOR SMALL BUSINESS
– This measure reduces the company tax rate to 28 per cent for
eligible small business companies from the 2012-13 income
year, one year earlier than the start of the general reduction in
the company tax rate.
53
Infrastructure
• INCREASING INVESTMENT IN INFRASTRUCTURE
– The introduction of the RSPT will enable the Government to
make infrastructure spending a permanent structural feature of
State and Commonwealth budgets for the first time.
– The Government will establish a new infrastructure fund for the
States worth $700 million in 2012-13, and that will grow over
time.
• PROMOTING RESOURCE EXPLORATION
– The Government will also deliver on its commitment to promote
investment in exploration, through a new Resource Exploration
Rebate.
– Under the new rebate, companies will receive a refundable tax
offset at the prevailing company tax rate for their exploration
expenditure.
54
40% Resource Super Profits Tax
(RSPT)
• BETTER CHARGING FOR OUR
NATURAL RESOURCES
– The RSPT is a more economically efficient
arrangement for charging for our resources.
– Royalties are amongst the most inefficient
taxes levied in Australia (see Chart 2). An
inefficient tax results in lower GDP because it
induces people to change their work,
investment or saving decisions.
55
56
40% Resource Super Profits Tax
• The RSPT is at the centre of the Government’s tax
reform agenda. This tax is designed to tax resource
projects on the basis of profits rather than production,
but also to ensure that Australia gets a fair return from
our natural resource wealth.
• The effective resource charge (charges as a percentage
of super profits earned) has almost halved from an
average of around 34 per cent over the first half of this
decade to less than 14 per cent in 2008-09.
– Existing resource taxes and royalties have only captured a small
share of the increased value of the nation’s resource deposits.
Resource profits were over $80 billion higher in 2008-09 than in
1999-00, but governments only collected an additional $9 billion
through resource charges (see Chart 3).
http://www.deewr.gov.au/Department/Documents/Files/100502%20stronger%20fairer%
20simpler%20a%20tax%20plan%20for%20our%20future.pdf
57
58
40% Resource Super Profits Tax
• The Australian Government will introduce a 40 per cent
resource super profits tax (RSPT) from 1 July 2012.
Under the RSPT the Government will provide a
refundable credit to resource entities for state royalties
and will guarantee to contribute 40 per cent of the
investment cost of a resource project. In effect, the
Australian community will share in the costs of, and
returns from, realising the value of resource deposits.
• There will be a staged consultation process over the
course of this year to work through detailed design
issues, particularly the transition for existing projects.
This is a major reform and the Australian Government is
committed to a genuine and open consultation process
to make sure we get it right.
http://www.deewr.gov.au/Department/Documents/Files/FERGUSON%20MEDIA%20RELE
ASE%20(4).pdf
59
IMPROVING NATIONAL SAVINGS AND
SUPERANNUATION ADEQUACY
• The Government will increase the
superannuation guarantee (SG) rate from 9 to
12 per cent over time.
60
Superannuation
• GOVERNMENT CONTRIBUTIONS FOR LOW
INCOME EARNERS
– A new superannuation contribution of up to $500 will
be provided by the Government for workers with
income up to $37,000.
• CATCH-UP CONTRIBUTIONS FOR OLDER
WORKERS
– The Government will allow individuals aged 50 and
over with total superannuation balances below
$500,000 to make up to $50,000 in concessional
superannuation contributions.
61
STRONGER.FAIRER.SIMPLER A tax plan for our future
• STRONGER.FAIRER.SIMPLER - A tax
plan for our future - Overview PDF
(850KB)
• STRONGER.FAIRER.SIMPLER - A tax
plan for our future - Tax Policy Statement
PDF (231KB)
• The Resource Super Profits Tax: a fair
return to the nation PDF (373KB)
http://www.futuretax.gov.au/pages/default.aspx#newsDocs-factSheets
62
Conclusion
• “Experience suggests that tax reviews rarely
lead to successful tax reform.” . . . But “Tax
Reform in Australia is necessary and
overdue.”
– Chris Evans and Richard Krevor (2009).
• Let’s see if we can do better in the US:
– Delayed: Tax report from the President's
Economic Recovery Advisory Board (PERAB)
– Forthcoming: National Commission on Fiscal
Responsibility and Reform,
http://www.fiscalcommission.gov/
63
About the Author
•
Jonathan Barry Forman (“Jon”) is
–
–
–
•
•
The Professor in Residence at the Internal Revenue Service
Office of Chief Counsel for the 2009-2010 academic year;
the Alfred P. Murrah Professor of Law at the University of
Oklahoma College of Law, teaching tax and pension law; and
the author of Making America Work (Washington, DC: Urban
Institute Press, 2006).
Prior to entering academia, Professor Forman served in
all three branches of the federal government. He has a
law degree from the University of Michigan and
master’s degrees in both economics and psychology.
Jon can be reached at (202) 622-7639;
Jonathan.B.Forman@irscounsel.treas.gov;
www.law.ou.edu/faculty/forman.shtml
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