Supplementing the ideas put forward in the recent tax discussion paper, “Re:think – Better tax system, better Australia”, Treasury has released a working paper regarding the efficiency of key taxes levied in Australia. The working paper, which has been prepared by a number of members of the Tax White Paper task force, is titled Understanding the economy-wide efficiency and incidence of major Australian taxes.

What does the working paper do?

The working paper commences the process of providing the all-important detail which will feed into the Government’s Options (Green) Paper scheduled to be released later this year. In doing so, it provides an important indicator of Treasury's current intentions with respect to future tax reform. In particular, the stated aim of the paper is to:

“contribute to a broader discussion about the structure of Australia’s tax system by estimating the welfare cost and identifying the economic incidence of marginal changes to the tax system”

The modelling adopted in the working paper is reflective of that used in a number of other studies in recent years. In this way, the paper supplements previous thinking on key taxes in the Australian context.

Importantly, the paper does not assess all taxes in the Australian system. It seeks to focus on five principal taxes - the company tax, personal income tax, GST, a hypothetical broad-based land tax (which is not based on the current state land tax regimes but is reflective of municipal rates levied by local governments) and stamp duty.

Whilst the paper recognises that payroll tax is “a significant source of taxation revenue to state governments in Australia”, it does not seek to examine the efficiency of Australia’s currently payroll tax system. This is largely due to the complexity of the various exemptions and concessions regarding payroll tax across the different States and Territories in Australia.

Key conclusions of the working paper

The working paper sets out a number of important findings regarding the incidence and efficiency of Australia’s tax system. The key conclusions of the paper are that “stamp duties and company income tax have high relative marginal excess burdens” and that the “most efficient tax captured in [the] model is a hypothetical broad-based land tax”.

The paper finds that while less efficient than the broad-based land tax, GST and the personal income tax system are also efficient tax bases in the Australian context. This is a very interesting finding given recent tax studies (including the tax discussion paper) which note that certain aspects of Australia’s personal income tax system create significant economic distortions. A key reason for this discrepancy may be that the modelling on which the working paper is based does not capture the progressive individual income tax scales, which the paper recognises as “expected to have implications for the efficiency of personal income taxation”.

Insights as to next steps

The paper is an important step in the Government’s ongoing research program aimed at garnering a better understanding of Australia’s overall tax system. In this way, it provides some helpful guidance as to the matters which are likely to be canvassed in the Options (Green) Paper.

Most notably, nothing in the working paper suggests that the current key media proposals regarding significant GST reform (which are noted in our previous alert) are inconsistent with the internal views of Treasury. In particular, although the paper does not explicitly support or recommend GST reform, it does little to slow the tide of public opinion in favour of that reform as a key solution to Australia’s budget and tax issues.