Tax Reform: Where are we now?

In this episode of TaxVibe, host Scott Treatt, CTA, engages with David Montani, CTA and author of Tax Wars, to discuss the complexities of tax reform in Australia. They explore the definitions of tax reform, the political gridlock that has hindered progress, and the historical context of tax policy debates.

For more information about The Tax Institute: https://www.taxinstitute.com.au/

Transcript

Scott Treatt, CEO  

Welcome to TaxVibe, a podcast by The Tax Institute where we peel back the layers of the Australian tax world. I'm Scott Treatt, your host for today's episode and CEO of The Tax Institute. I'm joined today by David Montani, CTA, who is the author of the book Tax Wars, which came out earlier this year and is also available by the Tax Institute's website. David is a chartered tax advisor with over 30 years of experience in taxation advisor. He's also a lifelong observer of politics, having lived and breathed the political battles over tax reform across more than three decades. In his book, Tax Wars, David's goal is to help you understand the events of the last 30 plus years, providing the perspective needed to see the wood for the trees on what's really been going on. Only then can we start to see the solution. We've had David here on the podcast before. And today we've invited him back to chat about what inroads we've actually made on Tax Reform this year. What's happened, but also what hasn't and what are we actually hoping to see in 2026? David, welcome back. 

David Montani, CTA 

Thanks for having me back again, Scott. 

Scott Treatt, CEO 

Not a problem. Look, let's get started in a big picture sense, I guess. Like there's always so much talk about tax reform. We've worked with you in publishing your book and getting the view of tax wars out there and what it all really means and what have you. So you're really passionate about tax reform as a way, but what is tax reform? Like what does it actually mean and what isn't actually tax reform? 

David Montani, CTA  

Well, that's a great start. What is tax reform? And what is reform? Reform is about achieving desirable outcomes on the subject of tax, as those outcomes might include a tax system that is less costly to comply with, does less economic damage, and pushes the right incentive buttons in people. Now, making changes to our tax system to achieve those outcomes is merely the means to achieve those reforms. And I mean, There can be a tendency for a bit of tunnel vision fixating on the means. That's when we get things like tweaking income tax rates or thresholds or a little bit extra tax on superannuation. They're just tinkering because there's little purpose in there of achieving those desirable outcomes. I think the standard examples of genuine tax reform and living memory, the mid-80s reforms, which included broadening income tax base, allowing reduction in rates. And those of 2000 tax mix switch, shifting away from income tax, which does a lot of economic damage toward indirect taxation, which does much less economic damage. You know, they were what's become known as big bang reforms. That's what Ken Henry has, he's described those big bang reforms and they contributed enormously to those desirable outcomes. And in the process, making us a wealthier, more compassionate and happier nation. But it's been 25 years since the last lot of big bang reforms and we've stagnated, gone backwards even. And look, we sorely need the next round of those big bang tax reform.  

Scott Treatt, CEO 

The politicians that keep talking, we're reforming taxation. You look at, I am being cheeky. You look at the last few federal budgets and you you and I have had this debate probably over a couple of drinks at a conference somewhere, but we've had these debates around the use of the words tax reform. Are they being overused then? Are we training the public to believe that some of this tinkering at the edges is actually tax reform? 

David Montani, CTA  

You're right in that the word reform does get overused and things get labeled reform that actually aren't. And when I say they get labeled reform, it's the politicians who label them as reform. we know that, well, no, they're not really, they're just tinkering, again, just tinkering with the means. And there's not really much in the way of any firepower there to achieve those really desirable outcomes we'd like to see. 

Scott Treatt, CEO 

Yeah. Okay. So are we actually making any progress here, right? Are we starting to progress towards reform in any way? Like I go back, when I first started with the tax Institute, originally we did a big piece of work called the case for change. And there was a pretty comprehensive exploration of different options of tax reform, where the issues are in the system. And I think you've also mentioned case for change in your book Tax Wars. So if we now let's, let's look at that five year period then in that last five years, have we actually seen any genuine progress towards tax reform? 

David Montani, CTA 

Yes, I examined the tax institutes case for change report in my book and I did so as an example of what's going right with pursuing tax reform. Despite that, of course, having set out a moment ago, what is genuine reform? It's clear that progress has been limited, but it's important to understand why. Why do we have this very limited outcomes on reforms? And my book explores the stories behind how we got into where we are, which is a reform gridlock. And that's the phrase I've used. It's a gridlock where nothing seems to happen or nothing seems to be able to happen. And the thing with the gridlock is that  it causes consequential issues to take on prominence and they become a bit of a distraction. An example is the whole division 7A unpaid president entitlements between trusts and corporate beneficiaries. And of course the Bendell decision that we're all waiting for that consumes a lot of attention, certainly in our industry, but it's actually a symptom of our unreformed tax system. If we had, for example, the tax mix reform we need, know, shifting from our over-reliance on income tax towards the GST, a whole lot fewer people would bother with corporate beneficiaries in the first place. And so for those people, the whole Div 7A, Bendel matter just simply wouldn't be a thing. 

Scott Treatt, CEO 

So a couple of things he just said that the tax reform we need. All right. What is the reform we need? How do we know what is the reform we need in that regard? 

David Montani, CTA 

Well, when you ask, well, how do we know? We know because we have 60 plus years of evidence reviews by not just in Australia, but in so many other countries. And I list these out in my book. There's nothing really new in any of this. so all of that, plus all the empirical evidence from other countries who have done this long before us, we actually lag behind. When we say, look, how do we know we need this? We know because we've seen it in other countries. We've seen how other countries have improved their tax systems. And the best example, of course, is New Zealand. New Zealand is the gold standard when it comes to reforming their tax system. They did that way back in the 80s. They did it really well. And there's a whole lot of anomalies and inefficiencies and inconsistencies and so on and so on in our tax system that simply aren't an issue in New Zealand. So it's all been there laid out. And again, there's nothing really new to discover here in that sense in terms of the fundamental reforms we need. Because we're talking mainly about that tax mix switch. As everybody says, we rely too much on income tax, not enough on indirect taxation, because it makes a difference. Income tax is a very damaging tax. 

Scott Treatt, CEO 

But it gets harder too, does it? gets harder. The income tax side of things gets harder when you've got the aging population coming through and you start having more, unless you extend the working ages, you start to have more people not of working age, that we've got to keep funding when you go back to what is tax for your funding, society's support, the hospitals, the schools, the infrastructure, et cetera. You've got less income tax coming through because you've got a higher proportion of those that you've got to help support that aren't actually paying the taxes anymore that you did when you had income tax. Yeah. Less income tax coming through because you've got a higher proportion of those that you've got to help support. 

David Montani, CTA 

Yeah. And we get consequences from that. So we know that how are we predominantly relying more and more on income tax? Bracket creep. That's where most of that is coming from. So people are getting pushed up into high tax brackets just with their incomes rising, trying to keep up with inflation. But of course they end up in paying overall more income tax. So that's an easy revenue increase for the government. But it means that income tax is the one growth tax we have and it's absolutely the wrong type of tax to be a growth tax. as a result, have, you know, it's the, again, I come back to words used by Ken Henry, this, he's coined the phrase the intergenerational tragedy, which is the younger people are suffering and ever increasing income tax burden. Older people over time have been suffering a less and less income tax burden. But of course it's, typically as we get older, we're the ones consuming more of those, those government services you mentioned, but other people are having to younger people having to pay for it. 

Scott Treatt, CEO 

Yeah. So I want to step back as well. So within your book, you do explain this gridlock, right? And maybe the general person's not actually seeing it and yes, for sure. Go buy the book. You read all about it and hear more, but how does it play out? How is this gridlock actually playing out? What are some of the, in your reflections over the years, when I read your book and I chuckled at a couple of the, I'm going to call them backflips, as people paint themselves into their political corners and what have you. are some of the funny aspects that you've sort of seen, the intro, funny, interesting aspects that you've seen that really highlights the political gridlock and how it plays out? 

David Montani, CTA 

Well, it reflects that, you know, there's been a tendency over the years where, you know, politicians will oppose a reform idea from the other side simply because the other side put up the idea. No consideration whatsoever for whether, well, is it actually a good idea or not? And I, you know, I do sometimes hanker for a time's past when, you know, politicians argued over things they actually disagreed on. And the things that they did agree on will find you will do that. And let's just leave the political competition for the things we actually disagree on. now, uh, to me, the, the, the turning point was really the, it's going back a while now, like the 1993 federal election, which was a funny one because we had, so Paul Keating was prime minister, labor prime minister. And you had John Houston, who was the coalition opposition leader. And, uh, know, John Houston had his, his almost like now like sort of infamous fight back package which proposed the tax mix reform, introducing a GST, shifting the reliance from income tax, the usual shielding measures you have for low income earners. And he kind of got blindsided by Paul Keating's approach, which was to mount a, which ultimately was a very effective scare campaign against this, this very scary concept of this GST. Even though a mere eight years earlier, Paul Keating as treasurer went around the country for six months arguing with absolute fervor, the only way he does things in favor of a, was called a consumption tax back then, but it was the same concept. So it was recognised, you know, by Keating and this is in the Hawke government back then that this is the kind of reform we need. look, no doubt Keating would have been having conversations with his counterpart in New Zealand, Roger Douglas, who was gearing up for the very similar forms they enacted the following year. So he was all for it. He understood it, but it's almost a stuff of legend now in our circles. was the 1985 tax summit in July of that year. And basically the political manoeuvrings resulted in that tax switch for the consumption tax getting voted down. So we didn't get that. okay, Keating sort of accepted that. then, okay, eight years later, when the other side proposes it, he went all in and because of him basically, look, he's trying to win an election. he ended up being a bit too successful, he was more successful than everyone thought he would be. And so we did have a surprise result, but the problem is that that then entrenched one side of politics. And as I've described, it's like they painted themselves into a corner because ever since then, and both sides have done this, the example with Labour is that Labour today can't have a serious discussion about reforming the GST because to do so would essentially reveal that they've been scaring people over the tax years. It goes the other way as well. Again, this is the whole just opposing what the other side proposes simply because the other side opposes it. You know, on the coalition side, you know, they've got a stockpile of scare campaigns against things like negative gearing and taxing or better taxing of natural resources. And so both sides have sort of stockpiled these scare campaigns over time. But the irony of that is that it has become a self-defeating strategy. And the reason is that in order to genuinely and holistically reform our tax system the way we need to, that would require addressing matters that they cut across both sides, stockpiled instead of scare campaigns. Yes. Yes. So well, each side can't go there to the areas where they've entrenched their position against something. But they would need to if they were to do actually holistic reform and therefore the other side does anything. They're stuck. 

Scott Treatt, CEO  

So I guess the question is, do you think that these conversations that are cropping up around tax reform at the moment are the right conversations? we having the discussions we actually need to have to be able to shift the needle here or shift the focus of where we're going? 

David Montani, CTA 

In short, no, we're not having the right conversations, but that's why I wrote the book. The conversations that are being had are almost exclusively about what we should change in our tax system. For years, experts have been telling politicians what to change. How's that been working out? The solution is to be found through understanding why the politicians refuse to make any meaningful changes. And look, I'm sure for your listeners out there, I'm sure they will have wondered at some point. 

You know, yeah, why can't the politicians seem to bring themselves to make any kind of meaningful changes? You know, why do they dance around genuine tax reform and instead offer up isolated tinkering, which just seems to create the appearance of doing something meaningful? Well, you for a long time now, it's because of that stockpiling of scare campaigns, just opposing whatever the other side proposes. And yeah, that's what's led to this political gridlock where again, side of the glass, they're stuck in, I describe it that they painted themselves into these corners. They can't step out without saving face. And as a result, well, that's why we get these, these tinkering tidbits of changes. And so, so we need to understand all of that and how the screw block came about. And when we do, okay, then it becomes apparent that, okay, yes, we do need to shift the focus. We need firstly to move the conversation to how we can break the political gridlock. Now that's a very different conversation. And it's one that I have in the book. Now going back a few months, it was welcome when the treasurer included tax reform in the economic reform round table last August. However, look, the treasurer was always going to participate in that discussion with his feet firmly planted in his sides painted in corner and saying for the shadow treasurer, Ted O'Brien. So whether doing that was merely part of that dance to create the appearance of developing meaningful reform, I think we'll see come budget night in 2026. 

Scott Treatt, CEO 

Hey, it's interesting, but don't you think, like I get your point around the political discussion to be able to actually highlight that aspect of the why, but isn't there still the need to talk about the what? Like if we lose conversations of the what, do we risk the public losing perspective of the bigger picture of reform? And therefore, even if we start to unlock some of the political gridlock, we remain in that piecemeal tinkering at the edges aspect. 

David Montani, CTA 

I think when, people understand that we are in this gridlock and how it came about, okay. And that's why politicians won't engage in genuine reform. Um, you know, it's part of a process that then enables us more freely to then talk about the what. Because when you understand, again, I'm sure many people will wonder like, yeah, Labor has a position on GST. They've always had that. But when you understand that that's completely out of alignment with the rest of the world then you understand, okay, that's more of an inshiller issue in Australia. Similar on the other side, when you think of the coalition typically has a position on say negative gearing, for example, and then that we allow negative gearing. Again, in Australia, we are out of alignment with the rest of the world, but a lot of people don't know that. But when you have that broader perspective, then it's easier to have a conversation because that's when you've got people's attention. I understand why, and when people understand the why, It's a lot easier to talk about, okay, what can we do to make a change? What kinds of changes are actually going to help improve our country? 

Scott Treatt, CEO 

What else do you think needs to change here to be able to make tax reform possible? what are the steps we need to be taking in 2026 to actually start making tax reform a reality in Australia? 

David Montani, CTA 

I would say two things. Firstly, we need to educate people that a reform gridlock exists and the cause of that gridlock. That also includes educating the media so that they are better able to get to the heart of the matter. And secondly, we need to figure out how can we motivate the politicians to step out from their painted in corners. Now they are really stuck. They can't do it by themselves. I think the politicians must have absolute confidence that they can do this without losing face. And a big part of that would be knowing that organizations like the Tax Institute will publicly back any polly who decides to take that bold step. I think that's something we can start in 2026, but we have to play the long game here. And my book sets out how it could happen because, you know, I'd like to see us again become a wealthier, more compassionate and happier nation. 

Scott Treatt, CEO 

Look, we certainly need a system that's more sustainable as we look to the future. And David, I think we can probably leave it there. It's been great having you on and sharing some of these valuable insights. So I really appreciate you joining us here today and talking tax reform and to everyone listening to this episode of Tax Vibe. Thank you. And I've been chatting with David Montani, CTA, author of Tax Wars, available now in print and available early 2026 as an audiobook and ebook. Please head to The Tax Institute's website to pick up your copy. If you've enjoyed today's discussion, there's more just like it coming to TaxVibe in 2026. We're going to be discussing the pressing issues in tax, business, policy and more, such as the High Court Bendal decision, the impacting change of technology and AI on the profession, and of course, tax reform. Subscribe, rate and review Taxvibe wherever you listen to keep up with us. If you're interested in being at the centre of the tax conversation, a membership with The Tax Institute could be just what you need. Stay current and connected with tangible real-world benefits. Learn more at taxinstitute.com.au and thanks again. We'll see you back here in 2026.