What's tax reform got to do with productivity? | Insiders on Background

ABC Listen, podcasts, radio, news, music, and more.

The world's eyes are on the small town of Morewell in regional Victoria because the trial of Erin Patterson is well underway.

I'm Stephen Stockwell.

And I'm Rachel Brown.

A jury will decide: did she intend to kill her relatives with a poisoned beef wellington lunch, or was this all a fatal accident?

Mushroom Case Daily is your eyes and ears in the courtroom.

We're dropping a new episode every day with the details everyone's talking about.

Hit the follow button on the Mushroom Case Daily podcast.

Find it on the ABC Listen app.

Tax reform is back on the political agenda.

The Treasurer, Jim Chalmers, has opened the door to potential changes to taxation policy as he looks to try and lift productivity in the economy.

Now, in his speech at the National Press Club earlier this week, Jim Chalmers was keen to point out that there's been three areas he really wants to focus on in this term of government: productivity, budget repair, and resilience in the economy.

And he's saying that productivity can help the other two issues as well.

So, how does taxation fit into this?

What are the levers the government can pull when it comes to tax to try and bolster economic activity and get productivity up?

I'm Melissa Clark, filling in for David Spears on Ngunnawal Country.

This is Insiders on Background.

Now, the Productivity Commission is beavering away on five inquiries into productivity.

They're going to be delivering an interim report on all of these ahead of the government's productivity roundtable coming up in August.

So the Commissioner, Danielle Wood, is a very, very busy person right now, but very pleased to say she's got a little bit of time for us for Insiders on Background to talk all things taxation and productivity.

So Danielle, thank you for clearing a little bit of time in the calendar.

Thank you for having me.

Always willing to make time to talk about productivity, Mel.

Excellent, excellent.

Well, that's good, because I guess I want to start at a really basic level.

And how can governments influence productivity via taxation?

What are the levers they have in this regard?

Well, tax can influence productivity through a number of channels.

Tax can influence decisions to invest and investment really matters because it's what provides the equipment and the tools and the technology that makes workers more productive.

Tax can also influence incentives to work.

And so

if people are facing high tax rates, they may work less.

So we get less of that human capital in the economy.

And taxes can also play other roles.

Some things we might not think about as much, but things like whether you move house to move to a new job, that can be influenced by taxes as well.

And over time,

if you don't get that kind of movement of people and resources around the economy, things just become less dynamic and less productive overall.

So let's start with one of those elements and that's the incentive to invest because I know getting business investment up is one of the things that you're really focused on in the reviews that you're doing.

So how can we look at corporate tax and find ways to increase business investment?

Yeah, this is a really important challenge.

We have seen the

investment as a share of GDP decline essentially since the global financial crisis, even if we strip out mining, which bounces around a lot.

So making sure that businesses do have the incentive to bring that capital and technology to

the market and to the labour force is critically important.

So things like the headline tax rate can matter.

Things like the way investment is treated in the corporate tax calculation matter.

So we're thinking about how do we target any incentives so that they really

maximise

that impact on investment.

And actually there's really interesting literature coming out showing that tax rates will have different impacts on different businesses according to their size, according to their industry.

So we're trying to come up with a package that really sharpens those incentives but without making a huge hit on the budget.

Yeah, there might be some concern from people that, oh, if you give business a tax cut, it just means they have bigger profits.

It doesn't necessarily encourage them to reinvest that money in a productive way.

So is it not just a case of...

cutting the corporate tax rate, as I'm sure many in the business community nonetheless would like to see, but trying to find better ways to target it and how do you target it?

Yeah, that's right.

So if you just cut the headline tax rate, you will create some additional incentive to invest.

You also give a sort of a free kick on activities that would have happened anyway.

So there are various ways you can target it.

You can think about

things like investment allowances.

You can think about reductions for certain groups of companies or types of activities.

There's a range of options that you can think about and the Commission will be having more to say about that in our interim report.

And we already have different corporate tax rates for businesses depending on their size.

And we have seen

things like depreciation for capital investment feature in a number of election campaigns.

So I think there is some appetite at a political level for some of those changes.

Can you give me a sense though of the relative benefits of targeting corporate tax versus income tax when it comes to productivity.

Is there more to get from one versus the other?

I mean typically it will depend on the both the scale and the design of the package.

You know most modelling suggests that you do get a productivity kicker from corporate tax reform.

But

a well-targeted kind of income tax package can also give you economic benefits.

So

I don't know how

you would kind of think about lining them up one for one.

They both matter.

There's a feature for everything here.

I guess when it comes to income tax, there's often been discussion in economic circles about should we be treating

should we be treating income earned from labour the same way we treat income from investments or more passive investments.

Do you think that's something that should be differentiated?

Well, it already is differentiated to some degree.

We have things like the capital gains tax discount, we have super tax concessions, so we have a range of different ways in which we are treating the income from investments differently.

The argument for treating it differently is that because investments tend to be long held, inflation erodes

returns over time.

So if you don't have a lower tax rate, you actually end up taxing those real gains at a higher effective rate.

So that's the complication.

Labour's earned every year.

Investment will typically be held over a period.

So that's the argument for having a different tax treatment.

But what we have at the moment is really a bit of a mess, frankly.

You know, we have lots of different savings and investment vehicles taxed in different ways.

So if you put the money in your bank account, you're taxed at your normal marginal tax rate.

If you put it into super, you get a highly concessional tax treatment, particularly if you're a high-income earner.

You know, if you put it into housing, there's also various discounts.

So what what economists have long said is maybe there is a case for a more consistent treatment across those different savings vehicles.

And that may well look different to the tax rate that you have on earned income.

And that would be simplifying the tax system, which I guess is easier to regulate, but does that then make it less targeted?

It's not necessarily less targeted.

You'd still expect that you would have a progressive income tax scale.

The other option is a reform that looks more like sort of broaden the base, lower the rate type reform.

So if you kind of think about the set of different tax concessions or leakages from the income tax base, some of which I was just talking about, some of those you might wind back or make less generous, allowing you to reduce the rate of income tax.

And that's really important, particularly for middle-income

interact with the transfer system.

They've got a child in childcare or they're getting some level of family tax benefits.

As they increase their hours, they face the double whammy of higher taxation and clawback of benefits.

So that group in particular tends to benefit when you reduce tax rates.

Now right at the beginning you talked about one of the things that tax can do when it comes to productivity is give people an incentive to work.

At the moment

our federal budget relies really heavily on income tax for revenue.

Sometimes the case is put that perhaps consumption taxes would be a better way to make sure that there's money coming in for the federal budget, but people still have a better incentive to work and you can reduce the reliance on income tax.

Do you think there's a good case to be made on a productivity terms?

for having a greater reliance on consumption taxes like the GST rather than income taxes?

I mean, it's certainly true that you can

design a package that would collect more through consumption

taxes, whether that's a higher rate or a broader base of those taxes,

and reduce income taxes that would give you some sort of broader economic or productivity dividend.

The challenge in doing that is you also have to on equity grounds, I think, offer compensation to other groups such as people on welfare payments.

And

it's not something we've looked at specifically at the Productivity Commission, but I've done work in a past life that showed you can do such a package, you can make it productivity enhancing, but if you want to make sure that sort of no one

within a certain range goes backwards, it starts to become very expensive.

You can do a package that is actually slightly revenue positive, that on average

improves incomes for people in the bottom 40% of the population but if you want to make sure everyone in that bottom 40% goes forward then you start to have to throw quite a lot of compensation at it and you know if you go back to the original GST reform in 2001 or the carbon pollution reduction scheme they focused a lot on making sure that people were compensated but that was at quite a significant upfront cost to the budget.

So you kind of use that money to sort of buy reform and make it less painful.

It's just much harder to do that in the current environment when we have a budget sustainability challenge.

And that's, as we know from Jim Chalmers, a key part of what he's trying to achieve too.

So the complexity there is always an issue in this debate.

I just want to ask you a few questions about productivity, I guess, at a more personal level that people might feel a bit more of a direct connection to.

And Jim Chalmers has pointed to skills as being one of the reasons he sees for the slump in productivity that we've had, that people either don't have the skills they need to get better paying jobs or maybe their skills are mismatched with what the economy needs.

Is this an area of low hanging fruit when it comes to trying to drive up productivity?

It's certainly a critical area and we know that in economies like ours, in rich economies, our human capital, that skill and embodied in our people is critically important for our overall performance.

We also know that we do face challenges of labour shortages in key sectors, which does point to a mismatch at least in the short term between the skills we have and what we need in the economy.

We're looking at this as part of our productivity reviews.

We're thinking about how do you make it

easier for people to get credit.

You know, if they've done, for example, a vet course and they want to move into a different stream at university or if say they've worked as a childhood educator and they want to train up further as an early education teacher, how do they get credit for the work that they've done to help them with that transition?

So, this point of being able to re-skill through your career and get recognised for what you've already done is really important for reducing the cost of building up that skills base.

And for a lot of households, when it comes to making decisions about their employment,

what they do with their money, what they invest in, there's a lot of constraint for a lot of households because of the really high cost of housing in Australia.

You know, for a lot of people, their capital is tied up in their mortgage or in an offset account or in saving for a property.

Does the very expensive property prices in Australia,

are they contributing to low productivity rates by tying up what individuals can do with their capital?

Yeah, look, it's a really interesting question.

I mean, I think of housing costs impacting productivity through a couple of channels.

One is that

our cities are these kind of big productivity engines that bring people and high productivity jobs together in our major cities.

And in a world where housing is prohibitively expensive, you know, we see this in Sydney, net migration of young people,

you're taking away that opportunity for them to do some of those jobs.

So that role that cities plays in driving productivity get disrupted when housing becomes essentially unaffordable to certain groups.

The second one is the point that I think you are getting at and there's actually not that much

literature on this but I suspect it is important.

So the idea that when you've got large debt, for example, if you've taken out a home loan,

are you going to take a risk to start a new business, to

take a new job that maybe is in a newer sector that's a bit more innovative but is going to be more risky?

So I do suspect that that kind of the debt burden point can be playing on decisions that may well in the long term impact productivity and dynamism.

And possibly also reduces economic activity if there's not as much consumption because you just don't have the cash to be buying goods and services.

But we're probably getting into a more of an economic growth argument there.

Look, I also wanted to ask

a broader question

of the ability to bring about tax reform in a country in a political environment, because we have had efforts towards that in the past, and the Henry tax review in 2010 is probably the best example of that.

Do you have any reflections on why there wasn't a lot taken out of that review process?

Was it the political climate?

Was it not the right time?

Do you have a sense of why we didn't have a lot of tax reform after the Henry tax review and if anything might be different this time around?

I mean I probably don't want to reflect on a sort of specific

point in time or climate, but I mean I think generally

tax reform has been hard

partly because

Frankly, the media environment seems to dial up to 10 whenever tax is on the table.

And I've made this point

in my previous role at Grattan when I worked more on tax policy.

It is incredible the kind of amount of attention

a tax increase or a tax change gets compared to a relatively similar sized spending change.

I mean, it just sort of disproportionately captures the imagination.

And I think it's probably because it's pretty easy to pick out the winners and losers.

And that makes a a nice and powerful story.

So I mean I do think that plays a role.

In some areas you do have quite noisy vested interests when tax changes are proposed as well.

And I think really what that means is governments have to make the case.

They have to explain why it matters.

Doing things in packages rather than sort of single levers I think can help with that.

It can

so more comprehensive reform coming together, so making multiple changes to balance out those winners and losers.

You think that helps make the case?

I think it helps make the case.

I mean, I don't think you can do everything at once.

It is a big, complex system, and we've, you know, you've probably got a sense of that from our conversation already.

But a sort of package that helps balance that out, that is coherent, and with a government's really willing to go out, make the case for change.

As the treasurer said in his speech this week, I think, you know, getting different groups together and hopefully finding some scope for compromise from the groups that might otherwise be noisy.

I like to think it is possible.

I think it is important for productivity and for economic growth.

And, you know, I'm really pleased the government said that they're going to have a go at it.

Excellent.

Well, I'm really glad you've given us a little bit of your time to talk big picture with us.

So there's plenty more I could quiz you about.

The role of AI.

I know is really interesting.

Red tape is another one we could probably do a whole nother podcast on sometime.

So I might come knocking back on your door a second time around.

But Danny, I would thank you for taking us through a bit of tax and productivity talk today.

Thanks for having me and we'd be delighted to join you again.

Great.

And thanks for tuning in today.

You can, of course, email us anytime with any topics you would like us to cover.

If you've got a great idea, send it to insiders at abc.net.au.

We'll be back in your feed this time next week.

So do stay tuned and make sure you like and subscribe to this feed wherever it is you're listening.

David Spears will be back on the Insider's Couch on Sunday.

So make sure you tune into that on Sunday morning on ABC TV too.

You're making us all feel very excited about being here.

She's accused of murdering her relatives by serving death cat mushrooms inside a beef Wellington.

Erin Patterson has given evidence in a triple murder trial and soon the jury will be arriving at a verdict.

I'm Stephen Stockwell.

And I'm Rachel Brown.

And every day on the Mushroom Case Daily podcast, we're recapping all the evidence presented in the courtroom.

To make sure you don't miss an episode, hit follow on the Mushroom Case Daily podcast, wherever you get your podcasts.