For someone who has spent a large part of his life trying to reform the tax system, Brian Andrew is remarkably good-humoured about his work.
Even if it is a little like Sisyphus pushing a rock up a hill, he laughs often about the complexities and confusions of the tax system, leavening his observations about the flaws in the system with jokes and wry anecdotes.
To the layman the tax system may be no joking matter, but as Professor Andrew points out, none of us can escape it, and reform is essential if governments are going to achieve what they always promise—to bring in a system that is broad-based, fair and equitable.
Professor Andrew, a fractional staff member who spends his time in the Top End supervising PhD business students at Charles Darwin University, is currently engaged in a major personal tax reform project with colleagues Chris Evans and Binh Tran-Nan from the University of NSW.
The trio’s report will be presented to the Federal Government next year, and will contain recommendations that, if accepted, would represent major reform of the personal income tax system.
“We will be proposing a tax system which is broadly based and low-rate as possible, consistent with the criteria of efficiency, equity, simplicity and revenue adequacy,” he says. “Our long term aim is to reduce the top tax rate to the company tax rate.”
What is likely to hit the headlines, however, is the suggestion that tax rates on personal income should be set at 42 per cent for top income earners, 30 per cent for middle incomes and 12 per cent for those on low incomes.
An alternative scenario is also being prepared in which the tax rates would be 38 per cent, 26 per cent and 13 per cent, with the top tax rate applying from about $80,000 annual income.
The team is also working on another alternative, in which the current three rates of tax would be reduced to two—20 per cent and 40 per cent, with no zero-rated income.
Professor Andrew says the removal of the tax-free threshold would generate an extra $9.9 billion in revenue, which could be used to compensate low-income earners.
He says it is ridiculous that the system has grown so complex that 75 per cent of tax-payers now need a tax accountant to do their returns for them.
“I must admit that on a personal level 10 years ago I considered that I knew nearly everything about the tax system, except possibly a few things around the sharp edges where the sharks lurked,” he says. “Now I couldn’t possibly say I knew everything.”
While simplifying the system is an important goal of the tax project, Professor Andrew and his colleagues will be taking aim at two key elements of the current system—negative gearing and the exemptions granted on capital gains.
He favours dropping the 50 per cent discount on capital gains tax, instead introducing a concession whereby the first $5000 of capital gain would be exempt.
“Research shows that for 80 per cent of people the capital gain is about $5000, so most taxpayers would not be hit by capital gains tax,” says Professor Andrew.
Likely to be even more controversial is the proposal that negative gearing should be scrapped. He says recent figures indicated that negative gearing was costing the government $3 billion each year in lost revenue.
“I find it interesting that these figures were released for the first time in about 19 years, which might suggest that the government is softening us up for something,” he says.
He also favours replacing the work-related deductions in the tax system—which he says benefits only the top 10 per cent of wage earners—with a flat deduction of $300 for everyone.
Professor Andrew concludes that Australia now has a dysfunctional personal tax system which encourages investment in non-productive areas such the purchase of real estate, rather than in productive industries that contribute to the economy and increase employment opportunities.
He says Australia has gone down a destructive path in its tax system and that the imbalance between consumption and investment needs to be corrected if coming generations are to enjoy a sustainable future.