Could major tax reforms be the solution to help the economy? RBA thinks so!

The damage done by the crisis on the human civilisation is extreme, with millions of people traumatised by the infection. However, the secondary effect in the form of economic shock is far more outreaching, which is expected to torment billions for a much longer duration.

With the growing unrest and the majority of the world markets underperforming, the monetary and tax system needs to play a crucial role here.

Amidst the scenario, Reserve Bank of Australia has cut the cash rate twice in the month of March to 0.25% and purchased $47 billion government bonds as a component of its Quantitative Easing Programme.

The government has also been proactive with fiscal policy initiatives to deal with the economic sluggishness.

However, Treasury’s latest forecast concerning the unemployment rate highlights the impending double-digit figures, sending huge worries to the Australian economy. The effect of the job losses would directly be visible on consumer spending, mortgage payments and other cash-generating activities.

Meanwhile, RBA Governor Philip Lowe has highlighted that the economy is expected to shrink by 10% in the first half of 2020 compared to 5.2% in March Quarter.

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Besides, all the measures for injecting the cash into the economy does not seem sufficient to prevent the economic downturn in Australia, which currently lies at the brink of soft inflation and high jobless numbers.

But does resigning to fate seems the only solution for the country amidst the economic plunges? It has once again brought forward the subdued debate on the need for the significant tax reforms in Australia.

Why the Need for Tax Reforms?

The world has evolved considerably from the time during which the Australian tax regime was developed. The globalisation along with cross-border trades and digital economy has together increased the competitiveness for attracting overseas investments. Amidst such a scenario, the high tax burden could be one of the significant factors sending away the investment opportunities in the country.

In the current market downturn lead by a coronavirus, the concern for the tax reform has further boomed. The world witnessing economic shock is expected to see the withdrawal of investments with many businesses shutting down, while others deal with massive plunge in the revenue.

The competitiveness to attract the capital amidst the economic crisis is further going to intensify among the world players. The multinational companies that heavily rely on the digital innovation in the present market scenario are expected to be more selective, with tax regime as one of the primary selection criteria.

However, in the current market downturn, the country would seriously need such investments to ensure higher economic activity and enhanced employment rate, transforming into a higher standard of living.

RBA believes that Australia’s tax system lags behind that of the competitors. Therefore, tax reform is the potential answer to uplift the economy and ensure its sustenance in the period of crisis.

Implications of the Current Tax Regime

Property Market Challenges

Some taxes are believed to levy higher costs on the Australians compared to others. While the differential tax treatment is necessary to a certain extent, the heavy tax burden of specific cost affects the decision making, thereby impacting the economic movement in the country.

The Stamp duties on Property transactions impose a very high cost on the Australian economy, thus curtailing the intentions of both the businesses and households to buy properties.

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The scenario has been further complicated with the real estate market expecting downturn with many companies vacating the leases post their operations closure or revenue slump. With the chances of rent defaults escalating with higher unused spaces, the property market is expected to witness soft demand. The current tax system with very high stamp duties is further likely to crush the property buying intentions.

Choking Investment Attractiveness

Australia has the Company tax rate of 30%, which is considerably higher compared to the other countries such as USA and UK having the corporate tax percentage of 21 % and 19% respectively. Meanwhile, GST and Land tax in the country is comparatively low.

The higher company tax charged in Australia, especially when the firms are eyeing ways to cut costs would severely impair the lucrativeness of the country among the business players.

Indicating the similar concern, RBA Governor Dr Lowe hinted on bridging the gap between the lower threshold taxes (such as GST and Land Taxes) and heavy burdening taxes like Company Tax.

However, the government does not appear to leave its stance in relation to the suggested tax reform. Pinpointing at the over $300 billion tax cuts, Treasurer Josh Frydenberg highlighted that the government is not looking into changing GST.

Bottomline

Reserve Bank of Australia for many years has advocated considerable tax reforms in the face of changing market context. The innovative style of the globalised businesses heavily relying on the technological space demands competitive taxes for higher net profitability. Amidst the ongoing circumstances when the business profits are challenged, and the economy stands at threat, the answers are sought in the existing policy paradigm. The changes and reforms in the current policy frameworks to suit the imminent need and future long-term prospects could be the potential solution for the country’s economic opportunities.