Australian Financial Review, p39  Tax reform is one of the few free lunches in the economy.

But don't start the debate by talking about tax increases.

As a young McKinsey consultant in the mid905, I was lucky enough to work with some of the world's best From the outset I learnt a simple lesson about driving change: spend as much time discussing and explaining the problem as coming up with the answer.

Done well, the solutions become obvious and acceptable.

Recent economic debates have taught us the same lesson - explain the problem clearly before you offer the solutions.

Nowhere is this truer than the esoteric world of tax reform, where Labor's hamfisted attempts at reform were an unmitigated disaster.

The place to start is not to say that we need higher taxes, which is the last thing we want Instead we need to explain the significant problems we face that a better tax system will address.

Australians have become used to rising incomes, rising real wages and lots of good jobs. Our prosperity has been broadly based. High real wages have underpinned fairness in income distribution that is the envy of the world. Fast growing incomes benefit young Australians the most because they have more years ahead to benefit .

We now face new headwinds. The salad days of the terms of trade and credit booms are over. We have become dangerously uncompetitive, and productivity gains (which drive real wages) have been lacklustre. Budget deficits are stubbornly persistent .

We need to make some serious changes if this broad-based prosperity is to continue at even close to the pace of the past Only increasing productivity and participation can deliver rising incomes. Fundamentally, this means creating strong incentives to innovate, invest and work hard.

Policymakers have few levers to drive prosperity, but tax reform is one of the best Martin Parkinson observes that we have a tax system from the 1950s in a 21st century economy. Bad taxes discourage work, innovation, investment and thrift .

KPMG tells us that every dollar of corporate tax and payroll tax discourages around 40 of economic activity, which is a massive brake on the economy. Taxes on labour are similarly punitive, costing 24 of lost activity for every dollar levied. By contrast the least-punitive taxes, including the GST, cost less than 10 for every dollar levied.

Some of the best companies and most innovative people will leave Australia if tax rates are punitive. In a global world where many of the many valuable assets are intangible (like Google's intellectual property or Coca Cola's brands) mobility can hurt We should do our best to hold onto these revenues but our company tax base is eroding, and relatively high personal tax rates drive entrepreneurs - the most important job creators in any economy offshore or into retirement .

Meanwhile, our federation has become deeply dysfunctional. The federal government raises money while the states spend it The finger pointing, blame shifting and lack of accountability is paralysing our increasingly important health and education systems - with few productivity gains in sight Despite desperate need for improvement of these critical services, states regularly shirk the hard yakka necessary to deliver more with less.

Our tax system is ridiculously complex, with 10 (out of 124) taxes generating 90 per cent of the revenue. Growth in revenue depends on insidious increases in personal tax rates applied to middle Australia through 'bracket creep'. This quagmire of taxes creates myriad loopholes and unfair treatments. For instance, the personal taxation of term deposits is deeply unfair in comparison to alternatives like property investment Our government has begun reducing company tax, in line with competing countries. Broadening and simplifying our most efficient taxes will allow us to scale back or eliminate the more punitive ones.

One simple example is to reduce the GST threshold on offshore purchases, which unfairly hurts Australian retailers.

Good tax reforms deliver the economy a 'free lunch': a lower overall tax burden, more sustainable revenues and greater prosperity with money left over for the vulnerable.

If we are to bring along the Australian people and the states, better confront a cantankerous Senate and pre-empt the inevitable Labor scare campaigns, we must start explaining these benefits now.

Angus Taylor is the Liberal member for Hume. He was formerly a partner at McKinsey &Co. and a director of Port Jackson Partners.