Monday, May 12, 2008

Overdue. An inquiry into Australia's tax system.

The inquiry is overdue. It might fix up disasters, like this, and this.

The critics of the new tax inquiry are wrong.

It's being headed by the right person.

Within months of joining the Treasury in 1984 the present Treasury head Ken Henry started work on the Hawke-Keating Labor government's draft White Paper on Tax Reform – the one that recommended a Goods and Services Tax.

In 1985 the resulting tax summit rejected the GST but adopted two more important and far reaching changes – the Fringe Benefits and Capital Gains Tax. It is now impossible to imagine a tax system without them.

Also working on the 1985 Tax Summit was another Treasury official Greg Smith who later designed Australia's special system of taxing company profits known as dividend imputation.

He will be working with Ken Henry on the new tax inquiry.

In the late 1990's both helped introduce the GST for the Coalition as part of the New Tax System adopted in 2000.

Significantly neither Henry nor Smith was a driver of the only really disastrous tax change in recent decades...

– the 1999 halving of the headline rate of capital gains tax.

The Treasurer Peter Costello froze his department out of the review that recommended it and constructed terms of reference that virtually guaranteed a cut in the rate of capital gains tax and the asset price inflation that followed.

Henry and Smith are already up to speed on what is wrong and what is right about Australia's tax system and they have had the courage to suggest far-reaching changes before.

The notion that Dr Henry is the wrong person to head the inquiry because he is employed by the government he will be reporting to ignores recent history.

In 2006 John Howard appointed the head of his own department Peter Shergold to head his inquiry into emissions trading.

As it happened Ken Henry was on that inquiry to.

Critics expected the inquiry to be whitewash - “a joke,” they said at the time.

But Henry and Shergold went beyond their limited terms of reference and examined what really needed to be done.

Wayne Swan and Kevin Rudd have made the terms of reference for the new taxation inquiry restrictive as well. They have said it can't examine the rate of the GST or the tax breaks for superannuation.

There's a very good chance that Ken Henry and Greg Smith will go beyond their limited terms of reference again and examine what really needs to be done.