Kansas governor offers lessons in how to achieve tax reform quickly

First published in the Weekend Australian on Sunday 20 December 

It's never easy, but it can be done with real leadership

We're all familiar with a young girl named Dorothy who exclaims to her friend Toto: "I've a feeling we're not in Kansas any more."

Given the Kansas government's current economic predicament, it may be a cautionary tale for the perils and opportunities of tax reform in Australia.

In 2012, Governor Sam Brownback embarked on an aggressive program of tax reform.

His plan involved dramatic cuts to income tax rates, especially for small business, to spur economic activity, attract businesses and jobs and increase future tax revenues. Anticipated revenue shortfalls in the short term were to be covered by increased revenue from improved economic activity longer term.

So far, the hype is not matching the reality. Revenues are significantly down on expectations and now services are being cut. Jobs are being lost and the state's credit rating has been downgraded.

Governor Brownback, who points out to his critics that his reforms will take time, was reelected last month so his "supplyside'' reform experiment is likely to continue.

Tax reform be it in Kansas or Australia is not simply an abstract concept debated periodically between politicians, academics and economists. Tax reform has consequences for how all of us live our lives.

What are the lessons from the Kansas experience for Australia's forthcoming taxation reform white paper process? It's leadership, impact and time.

First, leadership. Governor Brownback told his constituents what he was going to do, that it would take time and there would be short-term pain. That he was re-elected, albeit by a slim margin, shows that being upfront with the electorate on important issues and having the courage to do what you believe in can transcend political pain and electoral terms.

The second point is that tax reform has the power to be transformational. While it's fair to say that there are other forces at work in an economy, it is also true that tax policy can drive economic growth and improve our international competitiveness. It's the most potent and controversial area of public policy.

The issues are generally well known. We need to look at personal, fringe benefits and business taxes. Incentives for retirement savings and the rate and base of the goods and services tax are issues. Negative gearing, dividend imputation and R&D credits also demand examination. The government has even raised the idea of looking at the taxing abilities of our states.

It's all the elements of the tax mix that best positions Australia to deal with the demographic, social, economic and environmental challenges of the 21st century. And Kansas might be closer than we think.

Thirdly, it's about time. If Australian businesses are to compete in the Asian century, we don't have the luxury of time. A drawn out green and white paper process means we're potentially looking at 2017 before we actually see any change, assuming parliamentary processes all go smoothly.

With a deteriorating budget position the imperative for action is building, yet there is a real sense that we've been here before. In 2008 we had a "root and branch'' tax system review called the Henry Review. There were discussion papers, multiple rounds of public submissions, meetings and focus groups and even a two-day summit in 2009. The final report was released in 2010 and there was a National Forum in 2011 billed as a forum that ``will continue the decade-long conversation''.

We've had years of contemplation, so rather than embark on yet another protracted rainbow process of consultation, the national interest may be better served by bringing forward the tax reform debate.

With leadership, I am confident we will eschew the temptation for quick fixes. I have faith that as a community we can come together to frame a tax system that's simpler, enhances the competitiveness of our businesses, rewards innovation, lifts flagging revenues and builds resilience against future shocks while maintaining a core of equity and fairness. We are not in Kansas, but we are certainly not over the rainbow either when it comes to enhancing Australia's competitiveness and tax reform.

If Australian businesses are to compete in the Asian century, we don't have the luxury of time.

Alex Malley is chief executive of CPA Australia.