Largely because of the budgetary impact of the global financial crisis, we missed the opportunity a decade ago to fix the Australian tax and transfer systems.
The reform pathways identified in our review stand out even more clearly today. The system was not in crisis then, but urgent and comprehensive action is now required, at a national level.
Ten years ago, the tax review panel that I had the privilege to lead had finalised its two-year holistic review of Australia’s tax, transfer and retirement incomes systems.
We were grappling with a large number of challenges, arising from multiple trends: population ageing, with serious implications for workforce participation; changes in the structure of the labour market; deteriorating housing affordability; increasing urban congestion; worsening access to high quality education at all levels; increasing globalisation, most notably connected with the rise of Asia; the possibility of further international financial volatility post-GFC; transformational technological developments; and growing environmental pressures, including the accelerative impact of climate change on long term trends of land degradation, loss of ecosystems, species decline and unsustainable water use.
Most of these challenges have become even more pressing over the past decade and, in addition, today’s policy makers are struggling to find solutions to what has turned out to be a long period of poor productivity performance and many years of weak wages growth.
Ten years ago, we concluded that if we were going to be able to deal effectively with those many challenges, we would need a complete overhaul of our tax and transfer systems. Against that imperative, we observed that our systems were characterised by multiple, often conflicting, objectives; increasing complexity; very high compliance costs; base erosion; and low levels of consistency, amongst State jurisdictions and over time.
The purpose of taxation is simply to raise revenue to fund government spending on a sustainable basis. The tax system should be capable of generating sufficient revenue to meet evolving budgetary requirements, without unacceptable consequences for economic efficiency, fairness, risk and system complexity. Our tax system is not.
Notwithstanding what our politicians would have you believe, the size of government has grown since the commissioning of our review. At the Commonwealth level, payments were 23.1 per cent of GDP in 2007-08. They had risen to 23.9 per cent of GDP by 2012-13 and are estimated to be 24.6 per cent of GDP in the 2019-20 budget year. More revenue has had to be raised, and the personal income tax system has had to do most of the heavy lifting, through the stealthy operation of fiscal drag.
The most recent Commonwealth budget projects that tax receipts will rise from 21.3 per cent of GDP in 2012-13 to 23.3 per cent of GDP in 2019-20, with the proportion of the tax take contributed by personal income tax rising from 44.3 per cent in 2007-08 to 48.1 per cent in 2012-13, 49 per cent in 2019-20 and continuing to increase over the forward estimates.
Our broadest indirect tax, the GST, is suffering base erosion. It used to cover almost two-thirds of household consumption, but now applies to about half. The Howard Government’s promise of the States having access to a ‘growth tax’ has not been delivered.
So the States have had to rely, increasingly, on some of the worst tax bases in the federation. Stamp duties and resource royalties, in particular, have exposed State budgets to considerable volatility. The volatility of resource royalty revenues, especially in Western Australia, was foreseen by our review team. The failure to implement our recommendations in this area has led to quite unnecessary angst and avoidable ad hoc adjustments to the system of horizontal fiscal equalization.
And the reliance of State budgets on insurance taxes and levies is especially perverse in these times of significantly elevated risk of drought, fire and flood; with terrible consequences for human and ecosystem wellbeing.
It is time our leaders admitted that these things are unsustainable.
Had our report been implemented in full, things would be very different today. We would have a broad-based cash flow tax replacing the GST, payroll taxes and all bad State consumption taxes such as those on insurance. We would have a uniform national resource rent tax replacing all state-based resource royalties, with more predictable revenue streams to support the budgets of resource-rich states. We would have a 25 per cent company tax rate, for all companies. Stamp duties on property transfers would have been replaced by progressive land taxes. Cost based, comprehensive road user charges would have replaced fuel excises, stamp duties on motor vehicles, luxury car tax and vehicle registration taxes. We would have a comprehensive carbon emissions trading scheme instead of various renewable energy targets and a growing assortment of ad hoc measures designed to achieve greenhouse gas abatement. Capital income and expense would have symmetrical tax treatment, with a common discount applying to capital gains, interest and rent, going a long way to dealing with the distortions created by negative gearing of rental property. Scholarships, pensions, allowances and other transfer payments would be exempt from tax. And we would have a much simpler and more progressive two rate personal income tax, with no Medicare Levy, and most people facing the lower of the two marginal rates. System progressivity would be enhanced by taxing fringe benefits and employer-provided superannuation contributions at individual marginal rates, in the latter case with a flat refundable 20 per cent tax credit.
The Commonwealth’s tax system is struggling. The budget is placing increasing reliance upon fiscal drag and a set of narrowly based and economically damaging bases. And things are considerably worse at the level of State government.
Invariably, when a change is proposed to any feature of the tax system to improve its resilience, concerns are expressed about its equity implications. We have got it into our heads that tax system robustness and integrity disadvantages the less well-off. But this is the opposite of the truth. A fragile tax system undermines the ability of government to deliver to the citizens most heavily dependent upon government transfer payments and services. There is plenty of evidence of this already.
Largely because of the budgetary impact of the GFC, we missed the chance to secure generational reform a decade ago. The tax system was not in crisis then, though ominous pressures were building. Against that background, our review set out pathways for reform to guide policy development over a medium to long-term horizon. With all of the pressures we identified having intensified in the past ten years, those pathways stand out even more clearly today. Some progress has been made. But the pace of reform needs to accelerate, rapidly.
Ken Henry was Secretary to the Treasury from 2001 to 2011 and chaired the Rudd Government’s review of the tax and transfer systems published 10 years ago.
Ken Henry was Secretary to the Treasury from 2001 to 2011.
Comments
9 responses to “KEN HENRY. Tax reform in 2020.”
The higher paid are experiencing the best result from tax changes. The Howard introduction of the GST was designed to secretly tax the low paid and pensioners at a high rate. On a wage of $37,000 the tax is about 7% of gross income. On a wage of about $70,000 the secret tax is only about 2.4% of income. Pensioner couples who now get about $37,000 a year are being secretly taxed at the 7% and pension increases tend to be at the lower value of the cost of living figures. Politics has become a method of sending us back to the SERF AGE, while they get better advantages.
Great to have a national figure enumerating what ‘could be’ for Australia if only we had a political class that put national welfare and future before their parties.
But just one point:
Land Tax does not need to be ‘progressive’ nor should it be grouped with other taxes; it is unique in that there is a moral, ethical basis for levying Land Value Taxes – and the simpler the better!
If you need a piece of Australia for your own use and benefit then it is proper that you pay us for our loss of amenity – it is ‘our’ country; and it is ‘our’ endeavours and expenditure that gives and maintains the value of your piece of Australia, so your payment should be just proportional to its value. There should be no caps and minimal exceptions so that we all accept and understand the legitimacy and fairness of land taxes we would be paying.
Such would need to be introduced at a very low rate with planned increments over at least ten years because LVT properly applied would generate fundamental changes in our society, economy and relationship to land.
I recognise the chances of this happening are next door to zero for it would mean the very land-rich citizens would be paying the proper share – so maybe we should just settle for the Henry package – with its progressive land taxes!
Ken I have great respect for your technical knowledge about taxation, but I think you are behind the eighth ball when it comes to current day macroeconomics. Your statement: “The purpose of taxation is simply to raise revenue to fund government spending on a sustainable basis. The tax system should be capable of generating sufficient revenue to meet evolving budgetary requirements,” doesn’t reflect current macroeconomic monetary reality. I was taught what you were taught that revenue actually funded budgetary expenditures. This is a mainstream economic public finance myth that has been busted by modern monetary theory (MMT). Australian economist, Bill Mitchell from Newcastle Uni has been a lone voice crying out in the wilderness for many years, trying to get us to see this fallacy, but unfortunately we were blinded by our mainstream economic training which is greatly flawed. Bill and other MMT colleagues have now unequivocally been proven right and this opens up a whole new vista for fiscal federalism. We all now need to have massive rethink when it comes to taxation. Malcolm Crouts’s above link to Bill’s site is priceless!
Don’t forget that the Australian Federal Government is monetary sovereign. It has monopoly control over its currency. That means it can never go bankrupt[save by act of parliament] and can always meet its financial obligations in its own currency. It has zero need to save or borrow its own currency. It also does not use tax money for revenue. If taxes amounted to zero it would be of little consequence to its ability to buy its debts. The federal budget has tax on the cost side[as it is withdrawn from circulation] and deficit spending on the revenue side, the creation of the currency. You cannot have tax as revenue as it is wrong for the budget. It is an accounting identity.
I have no doubt all this is true.
Here’s a suggestion. Issue some government bonds, priced affordably, for rebuilding differently. Brand them Fire Sale or Survivors’ Bonds or something.
Thank you, Ken Henry, for the reminder that our Federal and State tax systems are a mishmash and a mess, reflecting unflatteringly upon our political systems.
One category to which you need to give greater prominence in your pleadings for reform, is the taxation of very big businesses earning large revenues in Australia. According to the Michael West Media blog, in which are listed the top forty corporate “tax dodgers”: Quote: “ExxonMobil Australia has racked up total income of $42.3 billion over the past five years of available Tax Office data. Yet it paid not one cent in income tax in this country”.. . . . . “Exxon’s peer Chevron too paid zero tax over five years, notwithstanding its $15.8 billion in total income.”
How is this OK? My understanding is that France has proposed to implement upon big foreign corporations a small percentage tax or royalty on the basis of gross revenue so that the well-worn stratagems of transfer-pricing which reduce corporate taxable income have no relevance and cannot be used. These corporations have all over the world used large and generally incontestable internally-determined charges many purportedly representing intellectual property in order to direct profits to low-tax or no-tax jurisdictions. Now there is a reform worth pondering for Australia!
Perhaps the prevalence of these unconscionable transfer-pricing accounting practices underlay the rejection by the Australian Parliament of the lower company taxes for big companies.
If one has a good look at the list in Michael West Media of “tax dodgers” one can understand why many Australians have it in their heads that reforms to the tax system typically disadvantage the less well-off. Of course this is not necessarily so, but most “reforms” called for by lobby groups are regressive. We would do well to remember that Adam Smith argued for progressive taxes.
Another real concern, particularly for budgetary discipline, is the extraordinary large amounts committed to military expenditures, such as the submarines, the Joint Strike Fighters (a long running saga), and a host of others. These all seem to have been justified on the flimsiest of logic, and motivated through a toxic mix of first, our politicians’ grandiosity and second, pressures from the military/industrial complex of the USA via current and retired high-ranking defense personnel. When one tots up the totals of these, they constitute an extraordinary charge on future budgets. Where has been the informed public discussion? The informed Parliamentary discussion? It has been very limited. There are certainly other paradigms for the defence of Australia than using yesterday’s approaches. We are planning to employ a small number of very large, expensive and vulnerable pieces of military hardware, when they are eventually delivered. Good strategy?
Pardon my cynicism, but in the light of the multiple failures in Australia of trying to implement Federal/State legislation in areas of complex, competing demands – the Murray Darling Basin agreements have failed horribly – then your contention that a proposal for a uniform national resource rent tax replacing all state-based resource royalties would ever be agreed and implemented seems very unlikely. It was always thus. We should simplify the Federal tax system as the main priority.
Thank you for your informative article, agree the GFC created the biggest headache for the newly elected Labor Government, not seen since World War 11, the loss of opportunity to implement/change to the unsustainable policies that the Howard Government engineered as a matter of Liberal Ideology over the Australian population is as shameful as not to give constitutional voice to our First Nations People. It is clear no notice was taken from the founding farther 0f Singapore Lee Yuan Yew when he warn if Governments do not get public policy setting correct, Australia would risk becoming the “White Trash of Asia” 30 years later his words of wisdom are now on the horizon and as a country we had better prepare ourselves for more social dislocation and Third World Status on many of our pubic policy settings.
I cannot think of any good reason why you would want to restrict a progressive tax scale to two rates.
“The purpose of taxation is simply to raise revenue to fund government spending on a sustainable basis. ”
This is fundamentally incorrect at the most elemental macroeconomic level.
http://bilbo.economicoutlook.net/blog/?p=9281