The Henry Review released in May last year provided the Commonwealth and state governments with a wealth of good ideas for reform, yet so far the political processes have failed to deliver reforms.
Why? History reminds us that significant reform is infrequent and then a major political event.
The major role of previous comprehensive reviews such as the Henry Review, and its predecessor, 1975’s Asprey Review, is to provide a benchmark of informed analysis and ideas to guide the community and political debate.
In May 2008 the Treasurer, Wayne Swan, announced then Treasury Secretary Ken Henry would oversee a fairly comprehensive review of Australia’s tax and transfer system to examine current arrangements and to design a structure positioning Australia to deal with emerging challenges in demographic, social, economic and environmental challenges over the 21st century.
The terms of reference were wide-sweeping to include state and local government taxes along with commonwealth taxes, and the social security system.
However, for no good reason they explicitly excluded consideration of the Goods and Services Tax and the taxation of superannuation benefits at their withdrawal.
The Henry Review focused on criticisms of the current arrangements, and then primarily on reform options which would simplify the system and which would promote a more productive economy.
Importantly, the review saw its recommendations as providing a more informed basis for policy discussions over the next few years and decades, rather than a blueprint for policy changes by current governments. A 1100 page report was submitted to the Treasurer in December 2009, and in May 2010 it was released.
In May 2010 the Rudd government picked up one of the recommendations to change both the method of taxation of state-owned natural resources used by the mining and energy industry from a royalty system or production tax to an economic rent tax, and to raise the revenue collected, the resource super profits tax (RSPT). But, only some of the revenue gain was to be allocated to a lower corporate tax rate, as proposed by the Henry Review.
Following extensive and very public lobbying by the mining industry, the RSPT was changed by the Gillard government in July 2010. The revised proposal remains controversial today, both in terms of its economic merit and its political acceptability.
The May 2010 commonwealth government budget partially adopted recommendations to lower the effective tax burden on some forms of income on personal savings. But, contrary to the Henry Review, these were limited and means tested, and they did not include restricting the current large tax expenditures associated with the concessions on the taxation of investments in property.
So, to date, the Henry Review has had no positive effect on policy regarding taxation and the social security system. But, it provides an excellent background for designing reforms in the future.
Arguments for Reform
Just focussing on the Henry Review’s arguments to simplify the tax and social security systems and to make changes that would facilitate a more productive economy offers a rich menu of opportunity, even when constrained to be approximate aggregate revenue neutral and with a similar overall vertical equity redistribution.
More radical reform options would include those which collect more or less revenue and which result in a more or less equity.
The current systems are both unnecessarily complex and fail to fully utilise modern information and communications technology. Consider some examples noted by the Henry Review.
Assistance to families includes the baby bonus, paid parental leave, family tax benefit A, family tax benefit B, and education allowances where a single payment, and especially with a single coherent means testing structure, would suffice.
In 2007-08, 72.1% of Australians used the services of professional advisors to complete their personal income tax form each year, a share much higher than other countries, and a cost of over $1.7 billion.
The Henry Review proposed that the Australian Tax Office make use of modern technology to provide a one stop portal for taxpayers to obtain all information. This includes data on their past record of tax payments and social security receipts, their likely transactions for the current year, and to ask what if questions such as the implications of changed employment status and marriage/divorce.
Reforms to simplify and make more transparent current arrangements will release scarce resources now allocated to taxpayer compliance and government collection costs to more productive uses, some people who miss legitimate benefits will receive their entitlements, and greater confidence in integrity and equity of the system will follow.
Numerous examples are given in the Henry Review of reforms which would facilitate a more productive economy. The almost ad-hoc interactions of the current income tax system, the many allowances such as the Low Income Tax Offset, and means testing the withdrawal of social security benefits result in many low income employees, and particularly women with children and the mature aged, facing effective marginal tax rates above 50 per cent which deter entry to the workforce and/or working more hours.
Very different effective tax rates on savings placed in bank deposits, owner occupied homes, other real estate, shares and superannuation distort the mix of investment and reduce the aggregate return to the nation’s scarce aggregate savings.
As Australia becomes more and more integrated into the global economy, the Henry Review argues that there are large productivity gains for Australian workers and their take-home pay by reducing the tax burden on the internationally mobile input capital and shifting the initial tax burden to immobile land and other natural resources, and to a lesser extent labour and consumption.
Replacing highly distorting stamp duties on the transfer of property and on insurance with land taxes and a broad based consumption tax, respectively, would improve productivity. The current set of simple revenue raising taxes on motor vehicles and transport, and on alcohol, are targeted for reform to explicitly correct market failures.
There is disagreement about the priority list of desirable tax reforms and their effects. Uncertainty, the need for further analysis, and the reality of different views are clearly recognised by the Henry Review. In addition there are other challenges facing political will and ability for reform.
Why Reform is a Political Challenge
The tax and social security systems are quasi-constitutional and affect long term decisions of individuals and businesses. Either the current system has to be demonstrable broken, or a compelling case on the advantages of reform is required.
Arguably the 1985 reforms, including the introduction of taxes on capital gains and on fringe benefits sugar coated with a package of lower tax rates, fitted the “fix what is broken” argument. By contrast, the current system is not perceived as broken.
Considerable political capital and effort was allocated by the Hawke-Keating government to convince the electorate of the virtues of the imputation system for taxing companies introduced in 1987.
Similarly, the Howard-Costello government led the debate to introduce the goods and services tax to replace existing distorting wholesale and state indirect taxes, and as a change in the tax mix from income to consumption, as a means of raising national productivity in the 2000 A New Tax System (ANTS) reform package. And even then, gaining parliamentary approval required a lesser version.
By contrast, the Rudd and Gillard governments so far have failed to articulately explain and advocate a change in the taxation of mining in 2010 and today as a worthwhile reform.
Inevitably, reform of the tax and social security systems create some losers as well as winners. Politically, the losers tend to be more organised and vocal than the winners.
Reforms which are sugar-coated with a net increment of dollar returns to the electorate and sold as a gain for everyone, and the associated increase in the budget deficit, such as the ANTS package, have a greater chance of widespread political support. The present government with its target of a return to budget surplus by 2013 has seriously restricted such an option.