Thursday, November 13, 2008

Ken Henry's tax revolution

Think big. Think really big. Dr Henry has set out to dash prevailing low expectations by indicating that everything is up for grabs in his Tax Review and that not even the international financial crisis will stand in the way of a total reshaping of Australia's tax system.

He was working on drafts of the Review's discussion paper during his now infamous mid-winter break caring for what may be the last 115 endangered northern hairy nosed wombats in central Queensland.

An expert in tax - he helped give birth to both the goods and services tax and the capital gains tax, it was a revelation to him to discover that Australia has 125 different taxes - "more than there are northern hairy nosed wombats".

This complexity is incredibly costly...

Some 70% of us use tax agents. In New Zealand it's 30%. "It diverts resources from more valuable uses; many high-achieving tax agents could be school teachers, for example. It wastes time that people could spend with their family, volunteering in their community, relaxing with friends and, of course, caring for northern hairy nosed wombats."

As our population ages, finding good - rather than pointless - uses for increasingly scarce Australians of working age is the best shot we will have for increasing and maintaining our living standards.

Dr Henry and his review team including the Australian Industry Group's Heather Ridout and academics Greg Smith and John Piggott have once chance of setting us up for the future, and they've no intention of wasting it, which is what merely tinkering with our existing tax system would do.

In order to sketch out the scale of his vision Dr Henry - "without endorsing it" - said his review would consider replacing almost everything with 'cash flow' tax. We would be taxed on what we earned minus what we saved. In effect, we would be taxed only on our spending.

It's hard to know how his team could examine that without also examining the goods and services tax, which its terms of reference forbid.

It's hard to know how he could wean us off tax agents, without getting rid of those petty (but much loved) income tax deductions that make things so complex.

It's hard to know how he could cut taxes on capital, as he implies he wants to do, without further neutering the capital gains tax that he helped introduce while helping draft the then Treasurer Paul Keating's white paper on tax in the mid-1980s.

He's talking about a revolution.