The Australian Tax System Needs a Copernicus Moment

A note to young leaders.

Astronomers didn’t abandon the Earth-centred model when planets misbehaved. They added “epicycles” – circles within circles – to make real world observations fit a failing model.

Hold that image. Now let’s talk about the Australian tax system.

A bad tax system confuses citizens, rewards arbitrage, punishes effort, distorts investment and creates a priesthood of interpreters.

A good tax system, by contrast, exhibits three key charactersitics: simplicity, efficiency, equity.

Simplicity comes first, and for good reason. It’s critical to a tax system’s moral legitimacy.

Simplicity means:

• the tax code as it applies to individuals and small businesses should be understood by a lay person;
• tax liability on salary income, investment property, shares and the sale of a small business should be able to be worked out easily – in your head, or at least on a napkin;
• tax returns for ordinary citizens should require minimal fees to accountants and tax agents;
• the tax code should not be costly for government to administer and enforce; and
• there should be minimal opportunity for loopholes, arbitrage and evasion.

By contrast, Australia’s tax code now runs into thousands of pages which, in turn, catalogue tens of thousands of exemptions, exceptions, concessions, rebates, carve-outs and deferrals. Compliance costs alone are now estimated at just under $60 billion a year (2.1% of GDP).

That alone should tell you that Australia’s tax system is in need of a major overhaul.

A good place to start is to raise the tax rate on all companies, trusts and capital gains to 35% and bring down the top marginal tax rate on salary income to 35%. A single aligned rate does the work of a thousand integrity measures.

When you find yourself defending exception 1,548 because exceptions 1 through 1,547 don’t quite do the job – what you need is not another epicycle, what you need is a new system.

What you need is a Nicolaus Copernicus.