You have my permission to use these ideas yourself should you wish to make a submission to the Treasury.
Submission regarding the review of Australia’s future tax system
To the extent that the intent of taxation is to use coercive powers to achieve government revenues, any tax review, in our opinion, must consider the purpose of the taxation and the context in which that taxation is taking place, in order to arrive at meaningful conclusions. In our submission we generally mean ‘tax’ as any income to government achieved by its coercive powers or the essential nature of the cost itself (e.g. water, power). Also please note we use indicative figures throughout due to lack of coherent information provided by governments.
We believe that Australia has a major systemic problem, in part created by the way that federal, state and local governments operate and are funded. Failure to deal effectively with that problem could lead to a massive collapse in Australia’s ability to govern effectively and to grow as a nation.
The federal taxation review thus represents an unequalled opportunity to recognise systemic weaknesses and to design Australia’s system of funding government to deal effectively with any problem.
In our view, effective action on taxation should:
• significantly reduce the overall cost of government to Australians,
• increase government service quality,
• increase business and Australian competitiveness,
• increase and focus performance on community and country wide benefits, and
• increase voter satisfaction with government.
A systemic problem
We believe that there is compelling evidence that the whole costs of government to Australia are excessive, unsustainable and are impoverishing our communities, damaging our competitiveness and driving businesses and employment offshore.
Even now, in a recession, governments are acting to increase the costs of government to communities without regard to how taxpayers will pay for these increases. They are doing this with a range of actions and policies including increasing prices of essentials and penalties while reducing necessary services.
Overall Australia’s multiple layers of government combine to create a direct cost of over 50% of income for a wage earner on $50,000 p.a. (income taxes, rates, GST, state charges etc). This is reflected in the national accounts by adding together all of the income streams to government.
The high cost of government is compounded by losses of productivity due to under performing government services (e.g. public transport, road networks, communication systems), direct costs created by under performingg services (e.g. hospital wait lists) and direct and indirect costs created by government actions (e.g. loss of Murray Darling Basin productivity through overallocation of water, economic losses due to explosion of W.A. Varanus Island gas system after safety inspection failures by government).
In addition Australian businesses must bear uncompetitive compliance costs (reported at over $86 bn in 2005) which are passed on to consumers via pricing mechanisms, while up to $70 bn of tax subsidies must be made up by revenues from taxpayers. The results of these latter costs increase costs to consumers, impair our businesses ability to compete both internationally and nationally with governments often buying goods from overseas because they are ‘cheaper’. Government thus creates the conditions for making Australian businesses less competitive then drives business and employment offshore by failing to support them with orders.
These are the major components of the whole costs of government that we have identified.
The structural reasons for this situation appear in large part due to the way that federal/state/local government operates. Rather than acting as an integrated system, Australian government is more like a set of quasi hostile fiefdoms each struggling to increase its own importance and reduce its own costs without reference to the effects on the country as a whole.
From a systems perspective we note that:
• Individual levels of government are uncaring about their impacts on the whole
• Service levels to taxpayers are unspecified
• Government incentives mainly reward size, cost reductions and revenue increases rather than achieving community valued outcomes
• Governments uses coercive powers to increase charges & taxes instead of achieving real efficiencies
• There is no regulation to constrain total government collections
• Governments are shifting costs of essentials off budget to the private sector without providing any commensurate tax relief
• Costs of government to the community are neither reported nor measured
• Costs of government error are neither reported nor measured and are thus out of control
• Regulatory compliance costs are excessive and themselves unregulated
• Overall costs to business are making businesses uncompetitive
• Levels of tax subsidisation are excessive and self fulfilling as high subsidy levels create higher taxation levels elsewhere in the system thus justifying the need for more subsidies
• Low levels of government productivity increase overall private sector costs
In general, the systemic problem may be expressed as a failure to regulate the regulators.
The failure to regulate the regulators leads directly to co-ordination, budgeting and performance failures. It also leads directly to taxpayer alienation and distrust as those paying for the ‘service’ are treated like suspects while those providing the ‘service’ have taxpayer funded benefits and are often excused from error that taxpayers themselves must pay for.
The politics of Australia have thus become the politics of dissatisfaction, our regulatory methods punitive rather than motivational or empowering and our costs prohibitive instead of contained.
Dealing with these problems is, in our view, a matter of national priority.
The magnitude of the problem and potential savings
Australia’s federal tax collection system annually returns around $300 bn. In addition, States and Local government charge extra amounts for their existence and services – while we have no published totals we understand this figure to be at least $50 bn pa. Australia’s regulatory compliance costs were reported as $86 bn pa in 2005, while the costs of subsidies have been reported as $70 bn pa. These costs (or income foregone) total over $500 bn pa or 55% of GDP.
On top of this, significant costs are created by losses of productivity created by under performing government systems. Sydney’s traffic systems have been cited as creating 27,000 sickies valued at $16 million per day or $3.5 bn per year. Add in the losses to businesses stuck in traffic, wasted employee time on public transport, and costs of uncertainties created by transport delays and the costs for Sydney alone would easily exceed $5 bn per year. Double that for Melbourne, Brisbane and so on and we get costs of well over $10 bn just for a transport inefficiency component.
Other unreported costs include the costs of lost productivity created by extended hospital wait queues, lost time waiting for court cases and so on. Other errors such as our ships, planes and helicopter’s unreadiness for combat could also cost Australia dearly.
The costs of government errors which would be avoidable had it done its mandated job are also excessive. The loss of the Murray Darling Basin’s productivity due to water over allocations has been valued at $10 bn per annum for example. The failure here was a lack of a system wide resource audit and a failure of governments to assure that water allocations were within available supplies. Despite these costs the same actors draw down the same high salaries, signalling to all in the system that gross error is tolerated, even rewarded at times.
We estimate the overall value of these errors would well exceed $50 bn per annum.
Hence the actual costs of government exceed 60% of GDP while returning substantial error, waste, corruption and losses of productivity.
We argue that taxpayers are entitled to object to these high costs because they must bear all of them, in one form or another.
We suggest that the overall cost of government should be contained to 40% of GDP or lower, thus creating the opportunity for a 20% increase in Australia’s economic performance from the savings made.
Using tax policies to repair the system
While it can be argued that many of the problems are structural, a review of taxation policies at the federal level provides an excellent opportunity to recognise and deal with the various losses, costs, waste and inefficiencies created by Australia’s unintegrated system of government.
Creating a new taxation system while leaving the system in its current state would be an opportunity lost and a massive failure of leadership.
• Regulate total costs of government to a reasonable % of GDP (e.g. 40%) and require all increases to be offset by savings in efficiency etc. Include costs of essentials into the mix.
• Integrate budgets and activities via performance contracts, incentives and similar
• Base critical service budgets on population and similar statistics (e.g. health)
• Specify types, levels and qualities of government services available to taxpayers at all levels
• Create government incentives that are driven by community valued outcomes. Eliminate perverse incentives such as rewarding size of budget which is an incentive to increase budgets.
• Create incentives for public service innovations that reduce community and business costs, or that increase community and business productivity
• Measure and report on the whole costs of government including waste, errors, rework and losses of productivity.
• Factor in Australian business contribution to economy and society when making government purchase decisions
• Mandate the use of effective planning and open reporting and tendering processes
• Regulate the total costs of compliance in Australia to maintain competitiveness
• Review all subsidies and their effects on overall taxation levels.
• Finalise either a free market/low tax environment, or a high tax/limited market model
• Increase government productivity and efficiency
• Exhibit national leadership and support taxpayer rights, service levels and support.
The Republic idea is another opportunity to revamp the way that Australia works to advantage citizens, businesses and our community by removing ‘quill pen’ systems from government.
Expressing these opportunities and creating a motivational atmosphere for effective change is the role of leadership. We strongly urge that you, and your review, identify and highlight these opportunities and the benefits that they would bring to so many.
Mike is a complex systems consultant, change facilitator and executive and management coach.
A BETTER AUSTRALIA has prepared a submission to the federal Treasury review of Australia’s taxation system. I thought that its contents and argument could be a matter of interest to TT readers and I reprint a version of the submission below.