Tax reform – the view of the Executive Director of Revenue Group in Treasury, Rob Heferen.

On 5 December 2011, the Executive Director of Revenue Group in Treasury, Rob Heferen, gave a speech entitled Beyond the Tax Forum.

The first part of the speech outlined the international and domestic fiscal context for tax reform. Namely, the re-emergence of China and India, the increasing size of middle class consumers in Asia, the impact of the global financial crisis on Australia and Australia’s strong overall fiscal position.

Rob Heferen sees the tax forum as part of the continuing national debate on the future tax system that was sparked by the release of the Australia’s Future Tax System report.

A focus for tax policy work going forward will be to alleviate the negative effects on productivity that many taxes have. The Business Tax Working Group has this as one of its focuses.

Labour productivity can be improved through changes to the company tax arrangements. Labour productivity can be increased by capital deepening and by improvements in multi-factor productivity.

In a relatively small capital importing country like Australia, the company income tax acts as a tax on investments and increases the return necessary for investments to go ahead – this inhibits capital deepening.

The company income tax also acts as a tax on economic rents (returns on above normal profit) including location specific rents. Taxing location specific economic rents is much more efficient than taxing normal profits – but unfortunately specific economic rents are difficult things to observe – further work will be undertaken on an Allowance for Corporate Equity to see if it can reduce reliance on the company income tax system, increase capital deepening and encourage multi-factor productivity.

Multi factor productivity is affected by entrepreneurial risk taking. The current treatment of tax losses (deferring deduction without indexation into the future) suggests that it might deter entrepreneurial risk taking. The Business Tax Working Group will also reconsider the current treatment of losses in this context. There will be broad consultation on these loss issues.

Other processes that are underway include:

• Council for small business – working to simplify the tax system for small business
• The states discussing the next stage of state tax reform
• Commitment to funding a tax studies institute 
• Consideration of superannuation changes to allow retires to better manage their superannuation
• Changes to the tax treatment of not-for-profits.

Article last updated 21 March 2012