What if you could change the whole taxation system?
Listen to our tax experts thinking outside the square
The Australian states should no longer receive revenue from the goods and services tax (GST), the base of the GST should be increased, states should raise their own income tax, the capital gains discount should be eliminated, and negative gearing should be neutralised as an investment strategy.
These are some of the proposals from senior taxation academics at UNSW Business School when asked to debate the question: "If you could change the whole system of taxation without restriction, what would you do?"
Concepts for a new style of taxation formed the basis of the two-day Festival of Outrageous Tax Ideas, hosted in the Sydney CBD last month by the school of taxation and business law at UNSW Business School.
The festival brought together leaders in the tax field – academic and professional – from a wide cross-section of disciplines and interests. It was built around four sessions at which a UNSW Business School academic acted as agent provocateur by presenting a radical proposition, then experts from industry and other universities had the chance to provide a contrary view, which led into a wider discussion.
"We not only heard some of the brightest outrageous ideas, we also heard why they might not work, and what would fix them," says UNSW Business School professor Neil Warren, an instigator of the event.
Making global corporates pay
In the opening session, adjunct professor Nolan Sharkey considered making global corporates pay a fair share of tax, and methods to prevent them from moving profits overseas.
With countries offering competitive tax solutions, it's inevitable that multinationals take advantage of them. These businesses are rarely a single company – instead, comprising a complex corporate group with entities all over the planet and it is within these groups that tax planning and arbitrage become possible.
The international tax system relies on the 'entity principle', with separate companies treated as separate taxpayers, even though they are part of a single multinational enterprise.
Drawing a comparison with consolidated accounts, which give a true picture of an overall business, Sharkey's core proposal is to get rid of the entity principle.
"Multinationals should be treated as a single unit and taxed accordingly to stop tax avoidance by global corporates. If companies are permitted to establish entities offshore to repatriate profits, they will do so and to some extent they are obliged to do so," Sharkey says.
Rebasing consumption taxes
Professor Michael Walpole referred to ideas mooted in the Henry Review (Australia's Future Tax System, released in 2010) for his focus on expanding the tax base and lowering the rate of consumption taxes, such as the GST. His core proposal is to tax consumption via a cash flow tax instead of the present invoice credit model.
"It is outrageous that we have moved on so quickly from the Henry Review," Walpole says.
"We should broaden the base of the GST, but perhaps not raise the rate. Indeed, we could actually lower the rate. We need to compensate for the regressive element in this taxation, however, and give more assistance to those who would be hit the most, such as the less well off. This isn't about taxing the poor. It is about establishing a simpler, fairer tax system."
Listen to a podcast of Michael Walpole
Life, the universe and income tax
John Taylor, a professor and head of the school of taxation and business law at UNSW Business School, presented some of the more controversial ideas, with a look at income tax and capital gains tax (CGT), arguing "the CGT discount should be eliminated".
Taylor says the main idea is to have an equivalent after-tax effect with other forms of investment, and in addition eliminating the main residence exemption.
"Death as a realisation event follows on from this, not as an alternative to abolishing the main residence exemption," Taylor says.
"If we get CGT right, it would enable huge tax simplification. However, I do realise that taxing the family home is very much a sacred cow, politically. We should also neutralise negative gearing as an investment strategy. It has been the nettle that governments haven't wanted to grasp. Why don't they do it now?"
Listen to a podcast of John Taylor
The festival concluded with a session led by Warren considering ways to completely change funding within the Australian federation.
"States should raise their own revenue from an income tax – not a GST, not a payroll tax and not property taxes," Warren says.
"This should be substantial, and multi-layered, to allow them to exist without going cap in hand to the federal government. Separately, local government should be funded through substantial broad-based property taxes."
Listen to a podcast Neil Warren
In other highlights, economist, company director and former Liberal Party leader John Hewson delivered a speech at the festival dinner, sponsored by KPMG.
"It is far too easy for governments to cherry pick tax ideas they like," Hewson says.
"Today, politics is incredibly short-term, and it is frustrating to see political opportunism getting in the way of real tax reform. However, I am still hopeful of substantive tax and federation reviews."
Listen to a podcast of John Hewson.