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Pages tagged "Tax Fiscal Reform"

Budget Blueprint 2024: Financing our Future

Our 2024–25 Budget Blueprint paper focuses on three areas critical for Australia’s long term success—system-wide tax reform, picking up the pace and impact of the climate and energy transition, and boosting Australia’s innovation and productivity.

Despite the enormous looming challenges of climate change, an ageing population, mounting public debt, time-limited foreign demand for our key exports as the global economy shifts away from fossil fuels, and a generation becoming more and more indebted— incrementalism prevails as the political status quo. The specter of election cycles render long-termism unappealing for our politicians.

Both major parties have shied away from brave reforms, leaving those to the crossbench. Inertia reigns supreme in Parliament House. These indicators signal the need to progress beyond the jaded narratives of Australian mercantilism and secure future economic prosperity with meaningful reform. Substantive, ambitious policy reform is overdue.

In a per capita recession with mortgage stress on the rise, the cost of living remains at the forefront of the electorate’s mind. We are just emerging from a sustained period of inflationary pressures, and persistent services inflation suggests that pain may continue. We rang in the new year with an all-too-familiar song and dance about income tax—where bracket creep has become the most convenient can to kick down the road. Although Labor adjustment to the Stage 3 tax cuts are intended to reflect cost-of-living pressures, ambition to advance wholesale tax reform is still found wanting.

That is why comprehensive, wholesale tax reform is first on our Budget agenda. Making

improvements to our taxation system’s efficiency, complexity, and equity will be a crucial lever to quell voter dissatisfaction. Fairer taxes will stem the populist urges of the electorate, and will be key to raising enough revenue to fund critical investments into clean energy, education, and innovation. We need to rely less on personal income—and more on consumption, land, resources, and rents.

Our priorities for tax reform are simple. First, we must address the growing intergenerational equity chasm that threatens our social compact. Second, we need to promote simplicity and clarity in our bloated tax system to increase compliance and better identify inefficiencies. We need to raise more revenue to fund critical investments in our long term prosperity, and for budget repair—all whilst attempting to minimise distortionary effects on the economy. And finally, we need to incentivise business investment and boost productivity.

Our taxation system must reduce its dependence on labour and the normal return on capital, and much more on consumption, land, windfall gains, and economic rents. Our tax system must encourage, not penalise, economic activity, innovation, and productivity, to reverse our long-term economic decline.

Key recommendations

 

  • Financing our future: a new, fairer tax bill for Australians 

 

  • Broaden the tax base
    • Introduce a broad-based annual tax on the unimproved value of land
    • Establish a natural-resource based sovereign wealth fund for renewable energy investments
    • Broaden the base of the GST and raise it to 15%
  • Reduce the complexity of the tax system
    • Reverse and repeal the new GST distribution regime
    • Abolish state payroll taxes
    • True indexation of income tax brackets
  • Address intergenerational equity
    • Index HECS to real wage growth and implement a 3% indexation ceiling
    • Revert to indexation of capital gains
    • Remove negative gearing deductions on investment properties
    • Abolish stamp duty on residential, commercial, and industrial property purchases
  • Boost productivity
    • Reduce the corporate tax rate to 25%

Budget Blueprint 2024: Invigorating our future

Our 2024–25 Budget Blueprint paper focuses on three areas critical for Australia’s long term success—system-wide tax reform, picking up the pace and impact of the climate and energy transition, and boosting Australia’s innovation and productivity.

‘Invigorating our future’ outlines reforms to boost our research capacity and stimulate investment to revitalise Australia’s productivity and competitiveness on the world stage.

We need to usher in a new era of productivity, dynamism, and innovation in the Australian economy. To achieve this, we must increase expenditure in technology, labour mobility, and initiatives to spur innovation and genuine competition.

The story of Australia’s innovation and productivity growth makes for sombre reading. Our productivity is in a rut, at its lowest rate since the 1970s. This stagnation is beyond an economic problem—it's holistic, cultural, and emblematic of the complacency that now permeates our national identity. The same can be said about our diversification, and poor integration into APAC markets. Australia ranks 93rd for economic complexity, just ahead of Uganda. We punch above our weight in terms of quality of research, and innovation.

To address these deficiencies, we outline two key focus areas: research and investment. 

We see two key target areas for research funding reform: firstly, toward basic, curiosity-driven foundational research to strengthen our sovereign research capacity, and second, toward outcomes-driven translation of applied research to bear economic fruits.

Building Australia’s early-stage investment capacity—and by extension the startup and innovation ecosystem—will support diversification, long term prosperity and productivity. The investment ecosystem is fundamental to building new markets, jobs, companies, and industries. It is time to address the commercialisation bottlenecks that exist for our home-grown technologies.

Summary of recommendations

  • Boost research capacity
    • Increase government spending in research and development as a percent of GDP on par with the OECD average 
    • Increase funding to develop Australia’s foundational research capacity
    • Employ an outcomes-driven approach to government research investments
    • Increase PhD stipends and exempt part-time stipends from tax
    • Fund mechanisms to retain and effectively engage talented international graduates
    • Establish an Australian Institute of Applied Ethics
  • Stimulate investment
    • Invest in venture funds themselves instead of startups
    • Exempt investment in startups from the unrealised gains exemption on super balances
    • Introduce an ‘educated investor’ exemption for the proposed overhauled sophisticated investor test
    • Exempt startup acquisitions from proposed merger reforms

Bye-bye tax returns

Australians spend $2.3 billion a year managing their tax affairs—about what we spend on Coca-Cola products. And, because it’s tax deductible, a big chunk is picked up by the taxpayer. 70% of people pay an accountant to prepare their tax return—an unusually high proportion compared to other countries. The ATO costs us $3.8 billion a year to administer and enforce the tax law, employing nearly 20,000 people. That means 1 in every 300 dollars in our economy goes to the ATO or a personal tax accountant or lawyer—two sides of the same coin.

When you get your phone bill, the phone company doesn’t ask you to itemise all the calls you made, on what dates, for how long, and to whom. They send you a bill. And that’s exactly how our tax return process should work. We’ve made big leaps with pre-filling and the online myTax system, but they’ve hardly moved the needle in peeling people away from their tax accountants.

The single biggest impediment is our complex and open-ended system of tax deductions. In the war on tax returns, tax deductions must be the opening salvo. Three quarters of people claim tax deductions, totalling $37 billion a year. Because they aren’t pre-filled, people have to keep a box of receipts to take to their accountant at tax time. We estimate this complex system costs Australians $6 billion a year in compliance costs alone.

The system is also unfair. Those who know how (and are willing) to game the system do so—and pay less tax than everyone else as a result. That means that, in order to raise a given amount of revenue, taxes must be higher on everyone else. Four in five discrepancies in tax returns are for deductions, half for work-related expenses. The Government is not a charity; taxes, by definition, are not optional. But our vague system of deductions, which affords considerable discretion to the taxpayer, makes them so.

But, of course, we already know the answer. Review after review has told us. And every day we dither, the bill racks up. No longer. Australia should introduce a $3,000 standard deduction covering work-related expenses and a range of other personal deductions. Charitable giving, super contributions, and investment expenses, like the interest on negatively geared property, would be excluded. Taxpayers could continue to itemise their deductions if they wished, so nobody would be worse off. And 11 million taxpayers would be better off.

A standard deduction would:

  • give 80% of taxpayers a tax cut, typically $400–$1,000 per year;

  • reduce compliance costs by $4 billion per year;

  • make our tax system more progressive and stamp out gaming;

  • pave the way to eliminating 7–9 million tax returns per year, saving $750 million a year in accounting and legal fees; and

  • cost the budget less than $5 billion per year.

Our failure to introduce a standard deduction, despite a series of reviews recommending it, is a microcosm of our failure to enact serious tax reform in the last two decades. A new tax reform process must focus on tangibly improving people’s lives. On simplifying our tax system, cutting away the red tape that makes our lives more difficult. And on stamping out gaming, which undermines people’s faith in the system. All other things equal, simpler is better.


Igniting the next boom—Tax & Fiscal Reform

Australia's economic prosperity is at the heart of our research agenda. Policy makers should target tax reform, unemployment benefits, innovation, and productivity to ignite the next economic boom.


JobMatcher: Real unemployment insurance

Australia doesn’t have true unemployment insurance. Not really. Instead what we have is a fairly meagre form of permanent welfare—not too high to prevent recipients from accepting whatever work they can get, but not high enough to ensure a dignified standard of living. With its universal, flat, and very low rate, our one-size-fits-all unemployment benefit fits nobody well. By lumping together the short- and long-term unemployed into one system, the Government is left hamstrung—forced into a trade-off between living standards and work incentives.

But there’s a better way. Almost every other wealthy and advanced country—Canada, South Korea, Israel, you name it—does it differently. They all offer a high initial rate—usually a portion of the former wage—that steps down at some point to a lower level. The high initial rate helps people weather the temporary income shock, and provides them ample opportunity to search for the job that’s right for them and for their employer.

It’s hard to believe that today Australians receive very little protection from income risk due to unemployment. A significant portion of people live paycheck-to-paycheck. And for many, the only source of debt finance is a high-interest credit card. The private market for unemployment insurance is virtually non-existent, with super funds refusing to cover it and only a small handful of insurers offering it under restrictive terms and at high prices. It’s hard to imagine a stronger case for government intervention.

Australia should introduce real unemployment insurance, called ‘JobMatcher’, which would:

• top up the existing benefit to 70%
of the individual’s former wage for the first six months;

• be capped at $35,000 and limited
to a cumulative six months every two years; and

• be fully funded by a 1% JobMatcher Premium administered like the Medicare Levy.

By paying into the system, people earn the right to access it when they fall on hard times. Because an unemployment spell can happen to any of us, everyone who contributes also benefits.

JobMatcher would offer substantial benefits to recipients, employers, taxpayers, and the economy, including:

  • getting people off the dole faster;

  • getting workers back into better jobs;

  • smoothing the temporary income shock; and

  • serving as an automatic stabiliser.

In the debate about the unemployment benefit, the only thing anyone ever talks about is the rate. While the rate for the long-term unemployed should rise, we’re much further out of step with the rest of the world when it comes to our short-term benefit. The Government recognised as much by supplementing JobSeeker during the crisis—but only for a limited time. Job losses don’t only occur during recessions—the risk is ever-present. A real unemployment insurance system should be one of the few good things we take with us beyond the crisis.


Kickstarting the engine - short-term support for Australia's Small Businesses

Small businesses are the bedrock of the Australian economy, but they are suffering disproportionally through the COVID-19 crisis. With limited cash reserves and limited access to capital relative to larger businesses, many small businesses have been riding out the times of lockdown and uncertainty by relying on government support, tax holidays (e.g. federal income tax), concessions handed down by state and territory governments, and the limited personal reserves of SME owners. This situation is exacerbated in Victoria, where the introduction of Stage 4 lockdowns is presenting a significant challenge.

While the Australian Government has extended the JobKeeper program to March 2021, and revised eligibility criteria for businesses and employees as recently as last week, this payment support — a lifeline for businesses and sole traders — will eventually be phased out. The provisions policymakers put in place now to ensure that businesses can survive on their own will be critical for the vibrancy and future strength of the Australian economy.

Some avid free marketeers may argue that we should let these businesses fail. But a pandemic doesn't give you creative destruction—it destroys otherwise-viable businesses that would have been just fine with adequate access to insurance and capital. And business disruption due to COVID-19 is on an unprecedented scale. A ‘laissez-faire’ attitude would likely result in a devastating loss of businesses and firm-specific human capital that would set back the Australian economy for years to come. The links between businesses and their workers, as well as suppliers and customers, are valuable; a loss of a business reverberates through the local economy. On a large scale, it could be cataclysmic.

Many otherwise-viable small businesses are suffering not due to poor business practice, but because of legally mandated lockdowns and the economic uncertainty wrought by COVID-19. There was no escaping this economic fallout—the majority of countries that did less to contain the virus than Australia had much larger economic contractions. But having done their part to help halt the contagion, the small businesses affected deserve the support of policymakers.

At Blueprint Institute, we are deeply concerned that governments will miss vital opportunities to ensure the survival of Australia’s vibrant small business community. What can governments do to ensure a soft landing? A lot, we believe. 

This Blueprint seeks to enrich the public discussion by making policy recommendations that are practical and economically sound. We outline three problems currently confronting small businesses — access to capital, insolvency, and skill shortages— and proposes innovative and timely solutions to these problems within three key recommendations:

Recommendation 1: Capital on tap New HECS-style loans for small businesses

Publicly-funded loans for private enterprise may seem like a radical idea, but we are living in unprecedented economic times. Capital is the fuel that drives innovation in small businesses. Without it, small business owners will be hampered in their efforts to provide goods and services in a post-COVID economy. Without capital assistance, many small businesses will not survive the lockdowns.

At Blueprint Institute, we believe urgent government action is needed to provide small businesses with fast and unbureaucratic access to capital. We recommend introducing HECS-style loans to achieve this goal. These would offer small businesses certainty and peace of mind because repayments would be contingent on future revenue.  

We recommend:

A new small business HECS-style loan system

  • Blueprint Institute recommends that the Federal Government provide time-limited, revenue-contingent small business loans as part of support for the sector.
  • A HECS-style loan system for small businesses would drive much-needed business investment and job creation. It should thus be considered separately from the JobKeeper program in stimulus discussions.
  • Loan arrangements could be available until the end of 2021, at which point the program should be assessed for its uptake, repayment levels, effect on business investment, and its broader economic return.
  • These subsidised loans would be repayable from future revenues — the loans are subsidised in the sense that they offer businesses a zero real interest rate, which may equate to a saving of 3-4% of the loan value per year until it is paid off. Indexation would be added each year in line with increases to the consumer price index to maintain the true value of the loan.
  • A HECS loan system would represent a defensive investment that could decrease overall government spending during the period of virus prevalence and economic recovery. This system may reduce the cost and burden of other schemes (such as JobSeeker) as viable businesses would be provided with the capital they need to lead the economic recovery and support jobs. 

End the Coronavirus SME Guarantee Scheme

  • The new HECS-style loan program should replace the Coronavirus SME Guarantee Scheme. While we support the Government’s commitment to helping small businesses, the existing program has been largely ineffective in driving capital to the sector.
  • Funding for the $20 billion Coronavirus SME Guarantee Scheme should be redirected to this new small business loan program. This means that putting this recommendation into practice would not require new spending commitments from the Government.

Financial health checks for small businesses

  • Loans should only be available to viable small businesses to avoid wasteful spending and reduce exposure for taxpayers. The Government should engage licensed private practitioners to assess, via financial health checks, whether the business was financially viable prior to COVID-19. Small businesses that pass a financial health check would be eligible for the new loans. 
  • Financial health checks could be funded through a voucher system, paid by the taxpayer and administered by the ATO, with proceeds going to a trusted small business advisor (accountant, bookkeeper or other registered professional) who understands the business in question. Successful applicants could have the cost of the financial health check added to their loan amount to minimise cost to taxpayers. Additional conditions could be applied to reduce risk to taxpayer funds — for example, loans might only be available to businesses that have lodged 2 years of tax returns.

  • Extensive public education campaigns should be conducted to inform small business owners about the HECS-style loan program.

Cost: $20 billion has already been allocated for the SME Guarantee Scheme, so this should simply be repurposed for a HECS-style scheme. There may be some additional costs to the budget from loan defaults given the higher uptake of HECS-style revenue-contingent loans and the fact that the Government is funding the entire loan amount, not 50% of the loan (as with the SME Guarantee Scheme). 

While it is too early to say what default rates may be for the SME Loan Guarantee, let us conservatively assume a 100% repayment rate for these loans. If an 80% repayment target is set for the HECS-style revenue-contingent loans (the same repayment rate as existing HECS loans), this would represent a cost of $3.85 billion to the Government in loan defaults

During our consultation process, leading economists noted that default rates are actually likely to be lower with revenue-contingent loans than traditional bank loans, as repayments are only dependent on a business remaining viable and receiving revenue at some point in the future. Default rates will be lowered further due to financial health checks determining businesses’ viability prior to loan approval. In contrast, a typical bank loan requires businesses to service ongoing interest payments regardless of revenue, thus adding pressure to already strained balance sheets. When considering the cost, we must also consider the counterfactual to this scheme: less businesses surviving post COVID-19.

Recommendation 2: New ‘Insolvency Checkpoint’ program for small businesses

Business insolvencies are at record lows, suggesting a large number of ‘zombie’ companies are currently being propped up by JobKeeper. As JobKeeper payments are gradually rolled back, small businesses must have the ability to restructure their operations in an orderly manner. 

The financial health check, discussed above, will provide high quality financial advice to small businesses who are in trouble — small business owners who complete the check would be well-positioned to restructure or liquidate their business. However, to provide adequate time for these processes to run their course, COVID Safe Harbour measures should be extended to the end of March 2021. In addition, Blueprint Institute urges the Government to establish an education campaign to inform small businesses and sole traders on the brink of insolvency of both their legal rights under COVID Safe Harbour and the availability of the financial health check. Such an ‘Insolvency Checkpoint’ program would take some immediate pressure off businesses that are facing hardship but have good prospects of recovering from the crisis. It would also give small businesses more time to consider the most effective method of repaying creditors to free up capital for investment and job creation.

We recommend:

Extend COVID ‘Safe Harbour’ provisions

  • Introduced in March 2020, COVID Safe Harbour measures provide protection from liability, for directors of small businesses and sole traders, for insolvent trading that occurs in the ordinary course of business — until the end of September 2020. At the same time, it increased the minimum debt that can form the basis of statutory action ($20,000 from $2,000), and the time in which companies must pay that debt (from 21 days to 6 months), providing breathing room for small businesses to deal with financial issues without facing winding up proceedings. To ensure the efficacy of the proposed insolvency program, the Government should extend COVID-19 Safe Harbour mechanisms until March 2021, for those businesses that complete a financial health check, in line with the extension to JobKeeper. 

Offer taxpayer-funded vouchers for financial health checks 

  • As part of the financial health checks mentioned above, small business owners should be provided with clear information as to their options, whether their business is viable, and if so, which strategy will offer them the best chance to survive and thrive. 
  • These financial health checks should be delivered by a business' existing trusted advisor, such as an accountant, tax agent or bookkeeper. In this way, the financial health checks can be delivered in a timely manner, and also act as a safeguard against poor advice from non-qualified and/or exploitative actors. 
  • Cost: the cost of providing financial health check vouchers to small businesses (assuming 66% uptake) would be $4.4 billion; while this represents a significant investment for the Federal Government, it is a reasonably small amount in the context of overall stimulus spending. Further, it is likely to drastically increase the efficacy of the Government’s other policies targeted at saving jobs by strengthening the viability of small businesses through provision of high quality advice and planning for restructuring. This covers the cost of financial health checks relevant to recommendations 1 and 2.

Recommendation 3: Fast-tracking skilled migration - open the border for small business to recruit global talent

At the end of 2019, over 50% of small businesses said that availability of suitable labour was limiting their output; these shortages will likely increase as the continued restrictions on foreign arrivals and a lack of visa extensions limit the capacity of small businesses to access skilled labour. 

Blueprint Institute urges the Government to promote a skilled migration and visa pathway for small businesses, even as borders remain closed due to the pandemic. This would require a tiered system that streamlines applications and burdens small business owners with lower costs than large businesses when recruiting skilled foreign workers. The skill needs of the small business sector should be prioritised in any scheme to drive innovative activity, both because they are disproportionately affected by the lockdowns and because they are the primary drivers of innovation in our economy.

We recommend:

Streamlining visa approvals for those already in Australia

  • For migrant workers who are already in Australia, the Government should prioritise approvals for visa renewals where small businesses wish to employ workers.

Skilled migration targets and fee waivers for small business

  • To meet the skill needs of small businesses and ensure the labour market functions smoothly, the Government should set a target for temporary and permanent skilled migration that encourages workers with skills in critical areas (such as medical services, engineering, construction, technology, advanced manufacturing and cybersecurity) to enter the country, even when borders are closed. 
  • As an additional incentive to draw foreign talent into Australia’s small business sector, the Government could consider reducing or waiving expensive fees for visa applications and hotel quarantine. 
  • Cost: the exact cost of this program depends on the exact arrangement the Government settles upon, and whether costs are passed to businesses or taxpayers. The contribution of highly-skilled migrants in economic output and taxation is likely to dwarf even a generous approach to this program. Migrants to Australia contribute far more in taxes than they receive in welfare, and even during the current economic turmoil and recovery, this is likely to remain true. 


The Australian public is in favour of the Government supporting small businesses

Blueprint Institute believes that support for small business is a question of values, and that most Australians value fairness and the role of aspiration in our economy. Our recent polling supports this view.  

83 per cent of Australians support innovative policy which helps to level the playing field between small and large businesses to make it easier for small businesses to thrive.  

Australians also feel for small businesses and want them supported through this crisis. In response to the current economic crisis, 63 per cent of Australians said they would shop local to support small businesses, compared to just eight per cent who said they would shop at large businesses. 

Definition of ‘Small Business’

There are a number of definitions for small business in Australia. In recent years, the Australian Small Business and Family Enterprise Ombudsman (ASBFEO), the Australian Taxation Office (ATO) and the Australian Bureau of Statistics have used different definitions of small business. The ASBFEO prefers to use the same definition as the ATO: that a small business is one that has less than AUD$10 million turnover. This is the basis of our definition of small business, and it applies to 98% of Australian businesses. 

A huge proportion of these are very small — 95% of Australian businesses are very small (those with a turnover between $75,000 and $2 million) or micro (those with a turnover of under $75,000) in size. Another approach defines small businesses as those that employ less than 20 people; under this definition, 98% of Australian small businesses are ‘small’. Occasionally, we will use these more conservative definitions of ‘small businesses’ in this Blueprint paper in order to incorporate the widest amount of available data and statistics. Whenever we do so, we clearly note it in the text. Otherwise, all references to small businesses refer to the definition of a company with less than $10m in turnover.

Small businesses are the powerhouse of Australia’s economy. Those with less than 20 employees contribute 35% to Australia’s GDP. Together, they employ 44% of all Australian workers. Small businesses are also motors of innovation, accounting for 92% of all Australian companies which innovate, thus driving increases in productivity and economic growth.