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Australia must move away from high income taxes in favour of GST while abolishing breaks for the wealthy, the international body says.
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IMF urges Canberra to bite the bullet with tax overhaul
22 January 2024
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10 minute read
The IMF has called on Canberra to bite the bullet on comprehensive fiscal reform with a move away from high income taxes “indispensable” to achieving generational fairness and economic growth.
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It said Australia’s “high reliance” on direct taxes was a brake on efficiency while bracket creep was increasing the burden on workers and exposing the challenges of paying for health and aged care as the population got older.
At the same time its country report, released Friday, urged the government to cut tax breaks for high earners, move to land taxes in preference to stamp duty and help states hit hard by the pandemic.
“High reliance on direct taxation is amplifying the challenges of financing health and aged care as population ageing lowers the share of workers and declining productivity growth puts a drag on wages,” it said.
It highlighted the “growing dependence on bracket creep” in the absence of tax reforms and called for an overhaul of the tax base towards greater reliance on the GST, with compensating policies for the least well-off.
“Rebalancing from high direct to underutilised indirect taxes can improve efficiency and generational equity and promote productivity growth,” it said.
“Average income tax rates are high in Australia, and bracket creep will raise tax burden shouldered by workers to finance age-related spending.
“Rebalancing must be supported by expenditure decentralisation and better public service. The regressive impacts should be mitigated by targeted cash transfers and cost-of-living reliefs to vulnerable households.”
It endorsed increased taxes on superannuation, referencing the $3 million levy introduced last year, but said the government needed to do more to cut tax breaks for the wealthiest.
“The 2023-24 budget introduced measures to improve targeting of superannuation concessions. The policy is in the right direction although its scope is limited relative to the size of the forgone revenues.
“The government should implement additional measures to minimise the tax breaks for the high-income earners, including through limiting concessions to capital gains tax.”
It also encouraged recent moves at the state and territory level to ditch stamp duty in favour of land taxes.
“Implementing recurring property taxes in lieu of stamp duties on housing transactions would promote housing affordability, more efficient use of the housing stock, labor mobility, and more stable tax bases over the medium term,” it said.
Australia also needed to “address differential impacts of the pandemic” with some states, such as Western Australia and Queensland, benefiting from favourable commodity prices but others, particularly NSW and Victoria, still recovering from extended lockdowns.
“Uneven post-pandemic recoveries amplify challenges of budget repair for some states,” it said.
“Some states (NSW, Victoria) introduced new tax-revenue measures (eg, payroll tax increases) to finance elevated expenditure, in part driven by rising costs of debt services. Monetary policy tightening is impacting their budgets unevenly.
“These factors created a diverging pace of fiscal consolidation, impacting public balance sheets differently across states and territories. Recalibrating parameters of the equalisation formula to address imbalances will facilitate productivity-enhancing tax reforms at the subnational level and prevent the implementation of distortionary tax measures.”
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