Tax Review and the Big Picture

Contemplating current events, historians, I suspect, often feel ‘This is where I came in’. Having cut my teeth on David Lloyd George’s ‘People’s Budget’ in 1909, his land tax campaign in 1913, and the aborted attempt at reform of local government taxation in the United Kingdom in 1914, the Henry tax review appears like déjà vu. Once again there is a government which came to power on a wave of popular support for major reforms to domestic (in this case Australian) institutions and manifest inequities in the social and economic systems after a long period of conservative rule. But, by the end of the parliamentary term, the impetus for reform no longer quite matches the opportunities and forthcoming elections at federal and state level undermine any plans for bold reform measures.

Lloyd George’s land campaign was eerily similar in underlying intent to the resources rent tax advocated in the Henry report and picked up by Kevin Rudd. The Welsh wizard’s idea was that the value of land, particularly in and around urban areas, was rising as a result of the demands of society and improvements in social and economic infrastructure, rather than the actions of landowners. Some of that increment in value, therefore, should be creamed off by taxation for the general benefit. In British Liberal eyes such a tax avoided hitting manufacturing or trade and showed that ‘free trade finance’ could work. Their conservative opponents, particularly the Liberal Unionist wing under Joseph Chamberlain, preferred introducing tariffs as some of the rapidly industrialising competitors to Britain had done.

Australian history does not throw up too many examples of major investigations into broad structural issues in the economy, but the Vernon report, published in 1965, was a very comprehensive review of the contemporary state of Australia’s economic development and ways to encourage growth in the future. Its recommendation that an independent economic advisory body be set up was scotched by Sir Robert Menzies, probably at Treasury insistence, but bore fruit nearly twenty years later in Bob Hawke’s National Economic Summit and the subsequent Economic Planning Advisory Council, revived later as a Commission by Paul Keating. The timescale is interesting and maybe we should not hold our breath for the full implementation of Henry’s ideas.

It is not very often that a country undertakes a major review of its whole tax structure as Australia has done in the last two years. The risk with such a fundamental exercise is that the results which flow from it in the short run will always seem like a very small return and can be portrayed as a waste of resources. Treasury Secretary Ken Henry and his committee have produced a blockbuster of a review and report. Even the overview runs to 214 pages while the supporting argument takes the total well over 1,000 pages. That does not include earlier reports by the committee, such as the one on retirement incomes released last year.

The Henry inquiry has, quite rightly, taken the long view. As they say:
Economic, social and environmental change over the next 40 years is expected to have a profound impact on the tax and transfer system, but will evolve gradually. The significant reforms required to respond to these changes will take time to implement and will require further adaptation over time.

Nevertheless, the contrast in the television pictures between Ken Henry’s stony face and the Prime Minister’s plastic smile as he tried to portray the government’s cherry picking of the report as a major reform of the tax system was very interesting.

One of the great strengths of the review is that it always tries to set Australian experience and practice in the context of global changes in the world economy and international tax systems. What might seem sensible to us in domestic terms may harm all of us in the future because of international implications. Setting a high rate of company tax to generate resources for social purposes, for example, could well discourage international investment and hence employment.

It is in this context that the headline-grabbing resources rent tax, which the Rudd government has rushed to adopt, should be seen. In 2001–02 about 55 per cent of profits from natural resources exploitation was taken in tax. In 2008–09 that share had fallen to 17 per cent. So the mining and extractive industries have gained significantly, contributing to the current boom. The new tax would recoup some of that income stream on behalf of all Australians, but it would not put the industry as a whole at a competitive disadvantage, especially given some of the associated allowances for expenses and losses. Politically, of course, it should be a winner since the mining industry has relatively few votes, though it has a powerful industry lobby. The lobby already has hit the media with a campaign which will test Rudd’s fortitude in the lead-up to the election. Given the angst in Western Australia over losing part of its share of GST to join the Rudd health plan, the resource tax might encourage the secessionist movement in that state, while Queensland’s special interests in new gas resources has provoked special pleading by the Labor Premier!

Henry and his colleagues have spent much time examining the inefficiencies in the current tax system and its complexity. For example, they point out that ten taxes provide 90 per cent of the total revenue of governments, while there are 115 others supplying the remaining ten per cent. Personal income tax, company tax and GST account for well over half the revenue raised. Though some of the small yielding taxes have specific social goals in mind, such as those on cigarettes, the committee thinks we should be trying to reduce the number of these inefficient taxes. Inefficient here means that it costs a lot to raise relatively little and causes a greater burden to fall on the taxpayer than is necessary.

In the case of superannuation, the emphasis in the report also is on reducing complexity and improving equity. The sharp rise in the superannuation contribution from nine to 12 per cent was not one of the committee’s recommendations. Again this will be electorally popular, but some of the underlying problems with superannuation will have to be addressed sooner rather than later.

The government has made great play with a long list of things it will not do, now or ever. They include road usage and congestion taxation to replace the current raft of excise duties on fuel, registration and stamp duties and the like. A simpler and fairer land taxation system, reduction or abolition of negative gearing, and changes to capital gains tax are other items which will come back on to the agenda once the election is out of the way and whatever government is then in power.

I began with the historical similarities, but there are never exact parallels. For example, there are different relations between layers of government. There were no states in the UK until devolution in the 1990s. The Liberal episode was brought to an end by the First World War, so I hope there is not too close a correspondence between 1906-14 and 2010.

Citation: Roy Hay, Tax Review and the Big Picture. Australian Policy and History. May 2010.