Saturday, January 23, 2010

Guess what? Henry examined the evidence

A funny thing happened on the way to preparing the biggest-ever review of Australia's system of tax and government handouts.

The answers changed from under the committee.



The final report of the Henry Review, with the government since December, is 10 centremetres thick printed on A-4 paper. It'll look neater when it is bound and printed.

It would have also looked very different had it reflected the thinking of Ken Henry and his four-person team nearer the time they were appointed.

Back then in May 2008 Lehman Brothers hadn't collapsed, countries with low corporate tax rates such as Ireland and Iceland were seen as success stories... and Australia looked certain to face growing competition from ever-lower company tax rates as the next decade unfolded.

But by December 2009 Ireland and Iceland had lost their glamour and it had become clear that for the next decade international tax rates would be going up, not down, as governments attempted to pay down their debts.

The Committee that had placed considerable importance on lower corporate tax rates no longer cared as much.

Its research had suggested that Australia ideal corporate tax rate was somewhere between the present 30 per cent and a lower bound of 25 per cent. It had been inclined to recommend a cut toward the lower bound. Its final report is more lukewarm.

That's how it was for much of the Review itself. The committee would ask first what an ideal tax and transfer system would look like, as if it was starting with a blank slate. Then it would discover that in many areas what Australia already had looked surprisingly close to ideal, or - in areas such as the tax treatment of the family home - what Australia had was too entrenched to change.

But it wanted to go on the journey. And it was continually frustrated that the people who wrote to it would not. Submission after submission was about protecting or only slightly changing the system as it was; sometimes to protect vested interests, sometimes because of a lack of imagination. The National Tax and Accountants Association for example opposed the idea of removing the requirement for Australians to file tax returns. The committee recommended it anyway.

To get an idea of what ordinary Australians thought it held public meetings in all the cities and in Wagga Wagga and Geelong and found huge concerns about paperwork and complexity as well as a thread of unease about whether they would be properly looked after when they got old.

Aging turned out to be the dominant theme behind the committee's work, along with the globalisation of financial flows and the husbanding Australia's resources. That's why the opening chapter of the Review is in the form of a narrative that takes a broad sweep through the issues facing Australia in the decades ahead and the things that must be done to prepare for them.

One of those themes, perhaps not expected by the business figures who proposed the review at the 2020 Summit, is that the tax system needs to be geared to raise more money. The challenges of aging are not properly met and are going to get bigger.

One way to raise more money in the present environment is to grab a bigger share of the profits from the mineral wealth leaving Australia. The Review found the Minerals Council surprisingly receptive to the idea of a profits tax, to be called a Resource Rent Tax, at an indicative rate of 40 per cent. This is because over time it would replace the complex web of existing royalty charges levied mainly by the governments of Queensland, Western Australia and NSW, some by the volume of material exported, some on the income brought in and some on the "value added". A profits tax suits the industry better because it is only levied when there is a profit, and after all exploration and other expenses have been accounted for. At times it would bring in less money than the existing system of royalties and at those times would keep struggling mines open. But in the last financial year alone it would have brought in an extra $7 billion to $8 billion, more than enough to allow Canberra to compensate the states for losing royalties and about enough to fund Australia's universities.

This is one of the ideas in the Henry Review likely to get fast-tracked. Information about it has already been put before the Cabinet. But it's likely to face opposition from state governments, particularly Western Australia's, who would rather keep control of their own revenue, and from mining companies concerned about the transition. Would it apply only to future projects, as the miners want, or would it replace the existing state taxes immediately as the Treasury wants? The Henry Review has kick-started a debate that will get political.

That we are living longer concerned the committee so much it used the term "longevity risk" in its report to describe the unpleasant situation facing retirees around the age of 90 who discover that their super payments have run out. Private firms have largely deserted the field of providing income until death because increasing lifespans means they can no longer work out when death will be. They've pushed up premiums to the point where about the only people still trying to buy all of life cover are those likely to live especially long, forcing the insurers to push up premiums further. The Henry Review is attracted to the idea of the government offering all-of-life insurance in exchange for lump sum super payouts and has investigated the idea of it being made compulsory.

It is worried too about the prospect that 2.3 million of us will disabled by 2030. A Productivity Commission inquiry is underway and the parliamentary secretary for community services Bill Shorten is investigating a Medicare-style tax levy of about 0.4 per cent to provide the care and support we are likely to need. The Henry Review backs the idea, but deals with it in only a few paragraphs,deferring to the Productivity Commission's inquiry.

It finds no case for lifting super compulsory contributions as favoured by several government ministers, concluding that 9 per cent will be enough to give most Australians "a substantial replacement of their income, well above that provided by the age pension" when a complete generation has been through the system.

While lower-income earners might still have to rely on the pension, any increase beyond 9 per cent runs the risk of damaging their working incomes.

If it had its way it withhold access to superannuation until we reached the age of 67 to keep more of us in work. But the government ruled out that idea when the review floated it in May, although it adopted it for access to the pension.

That's left the review looking for other ways to keep us working longer. One, suggested by Treasury boss Ken Henry this week is a cut in the rate of income tax as Australians age. The committee is also very keen to cut the effective tax rate applying to mothers considering reentering the workforce. Part of doing that would be to kill Family Tax Benefit Part B. With the proportion of Australians of working age shrinking the committee wants nothing to stand in the way of Australians able to work and wavering.

The committee has persuaded Treasurer Wayne Swan that the tax concessions for super are a mess. Because contributions are taxed at a flat rate of 15 per cent a very high income earner on $180,000 gets a concession on income tax worth 31.5 per cent. Middle earners get 24.5 per cent and low income earners just 1.5 per cent.

Superannuation will however retain its tax-preferred status. Speculation that the review will tax all savings in the same way is wrong. But it will move in that direction. It finds that savings in banks face a real effective tax rate of around 50 per cent. By contrast savings in the form of property face a tax rate of around zero, and savings in the form of superannuation a negative tax rate.

The review recommends that all savings be tax preferred compared to wages and that the effective tax rates of different types of savings move closer together.

This will mean a lessening of the 50 per cent concessional rate applying to capital gains, but it will not mean as reported a return to indexation of capital gains for tax purposes.

The generous tax treatment afforded the family home will remain in place but in order to help compensate for that so too will stamp duty when homes are bought. Reports the committee has recommended replacing stamp duty with a land tax are wrong.

Stamp duty on insurance is set for the chop, the committee believing that insurance is a good thing and should not be discouraged.

Payroll tax, also despised in many quarters, would stay but be made more uniform with fewer exemptions. The committee finds that it's a good revenue raiser, one of the few the states have, and it's the exemptions that cause problems.

Other taxes are screaming out to be made more uniform. Alcohol is taxed differently according to whether it is in the form of wine or beer or spirits. In a blow to the relatively lightly-taxed wine industry the committee recommends a uniform tax per unit of alcohol.

Fringe Benefit Tax is applied to some employers but not others, with charities and churches able to pay their employees generously in cash that is not taxed. The review finds no logic in continuing the concession and says the government should support charities directly if it feels they need help. Dr Henry broached the topic this week asking "who on earth would think it sensible to levy tax on a worker whose bank balance is enhanced by the receipt from her employer of a payment called a wage, but to not levy tax on a worker whose bank balance benefits from the receipt of something called an expense?"

Another less-obvious example of a taxes screaming out to be made uniform are the charges for driving. At the moment we are charged at the pump and with registration whether or not we drive when roads are contested. But its only our driving when roads are congested that seriously costs money, both by delaying other drivers and adding to pressure to build new roads. The committee believes that in the same way that charging for using electricity removes the need to keep building new power stations, and charging more for peak power makes better use of the power stations we have, charging for road use when roads are clogged would drastically cut the need to spend billions building more roads.

The committee also knows that cars may soon no longer be powered by petrol. When that happens petrol excise revenue will collapse. The obvious replacement is revenue from actual road use and the technology to do it is within sight.

The unifying theme of the report now with the Treasurer is that taxes should make sense and ideally not get in the way of the things we want like foreign capital and Australians prepared to work. It's recommendations run into the hundreds but they shouldn't obscure the review's most important findings - that the bulk of the system we have works well and that in time it will be asked to do more.

Published in today's SMH and Age


Related Posts

. Ken Henry narrows his options

. Henry: "states could vary the rates of centrally administered taxes"

. Ken Henry's guiding principles



4 comments:

Anonymous said...

Great scoop Peter well done.
Ian

Wil said...

good summary.

And now we see how the politicians deal with it. We can be sure that the oppsition Finance and Yreasury spokespersons will treat this responsibly, as an issue above politics. *snort*

Abe said...

Nice work.

One thing the GFC DID reveal was that the contingent liability that is the pension scheme has not been extinguished to the extent it ought to have been by the introduction of compulsory superannuation.

The financial planning industry has a lot to answer for, given the level of risk that they had encouraged their clients as a whole to take on via their super.

It's almost as if they were saying, "Here take on this high risk, high reward, high commission (thanks) product and if everything goes pear shaped, then good old Gen X can pick up the pieces via the pension."

I haven't read it yet, but does it say anything about removing the capacity for people to excuse themselves from the tax system at age 60 through judicious management of their super??

Adam S said...

Thanks very much Peter, that was a good summary. I don't have too many gripes with what's being put forward except for my old bugbear of payroll tax. In what universe does it still make sense to tax employers for employing people? I'm also continually annoyed by the ludicrously high rate of stamp duty we pay on houses here.

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