In a speech yesterday at the McKell Institute, Martin Parkinson – the incoming head of the Department of Prime Minister and Cabinet (and former head of Treasury, as well as a distinguished graduate of the University of Adelaide’s School of Economics) – noted the importance of tax reform and, in particular, the need for careful consideration of potential reforms. Dr Parkinson’s speech has attracted much media attention, including in today’s Australian (available here). His comments echoed a key theme that Christopher Findlay and I emphasised in our December 1 article in The Australian and in my November 2 post (both are available here). In particular, Dr Parkinson stated that:
“…every time somebody says to you changes in the GST, increases in the GST, are regressive, and they say we just leave a personal income tax system unchanged, you should point out that changes in the personal income tax system if they are not implemented are also as regressive. So there is no way here you get something for nothing.”
As we said in our recent article in The Australian:
“Some scare us through misleading “partial analysis” – for example, by focusing on only one effect of a tax change, or by considering a change in (or introduction of) a particular tax in isolation. It is illogical to oppose a GST increase solely on the assertion that it isn’t progressive with income. That may be a fair point, but opponents should also recognise a GST rate rise is effectively a wealth tax – a 5 per cent GST increase would reduce the purchasing power of all existing
wealth by about 4.5 per cent. And, unlike other taxes, it is difficult for high-income earners to avoid. In any case, any single tax change will inevitably make some worse off.
If we apply partial thinking to each potential change one at a time, we’ll reject every one of them. Yet the whole point of tax reform is to achieve a more efficient mix of taxes. Therefore, rather than take a piecemeal approach to possible individual tax changes, we should focus on evaluating potential tax reform packages.
A package consisting of the same tax changes we would reject one by one in a partial analysis may together deliver substantial net benefits while protecting/helping disadvantaged members of our community.”
Tax reform is vitally important. We hope that piecemeal commentary will not damage the prospects of reforms that can significantly improve the economic welfare of all Australians.