Saturday, December 13, 2008

TAXING TIMES: What do you mean we can't increase the GST?

The impeccably polite Treasury Secretary is straining at the leash.

Asked this week about the requirement that his tax review "reflect government policy not to increase the rate or broaden the base of the goods and services tax" Ken Henry replied carefully that in his long years in public life he had learned to pay attention to guidance.

Asked again, he conceded that the no-go zone wasn't ideal.

"We would look at that particular term of reference and say that's a constraint, it's a constraint on our thinking," he said. "Is it a constraint that is likely to cause us any great difficulties? I'm not sure that it is."

Dr Henry was releasing the consultation paper that sets out the review's thinking about tax problems and solutions and invites comments.

The biggest, set out in the first substantive chapter, is "the revenue mix"...

There are only three broad types of revenue - taxes on labour, taxes on capital and taxes on consumption.

The committee suspects that taxes on capital will have to become less important in the mix (although it is less strong on this point than the Treasury was in the tax architecture paper which kicked off the review in August).

The argument is that as other nations cut their company and capital gains taxes in order to compete for footloose capital Australia will have to as well.

Taxes on labour will probably also have to become less important as we age and a smaller proportion of us work.

That leaves what the committee describes as "an increased reliance on consumption taxes", and a cleverly worded Question 3.4 that it will be putting to the groups it consults with.

It question reads: "Assuming no increase in the rate or base of the GST, what principles should guide the future development of other consumption taxes in Australia, and is there a need to change the role and structure of such taxes?"

That's right. The committee is being forced to look at new consumption taxes, rather than increase the rate of the broad-based and effective consumption tax that we already have. As PricewaterhouseCoopers tax partner Tim Cox puts it, "it's like trying to design a world-class tax system which is going to survive into the next century with your hand tied behind your back."

And its not as if the new consumption taxes would be particularly good at raising revenue. While Dr Henry protested Wednesday that there were other "other instruments" available available from the GST , a look at the consultation paper suggests that many are "sin taxes" designed to change behaviour - volumetric alcohol taxes that would end the cheap status of wine, a "higher polluting" car tax and so on.

The problem with such taxes is that the more they succeed in changing behaviour, the less they raise. As the committee asks:"can the competing potential objectives of alcohol taxation, including revenue raising, health policy and industry assistance be resolved?"

When it reports next December the review is likely to either recommend some particularly innovative (and hopefully good) new consumption taxes, or gently argue with its terms of reference. It wouldn't be the first time.

Dr Henry served on the previous Prime Minister's task group on emissions trading. Its terms of reference required it to advise on a "global" trading system. They didn't stop the group also advising on a standalone system.

As it happens the term of reference constraining the Henry Review is already out of date. Set out at budget time in May it listed 3 constraints. The review was to "reflect the Government’s policy not to increase the rate or broaden the base of the GST", preserve tax-free superannuation payments for the over 60s, and reflect "the announced aspirational personal income tax goals".

The third constraint is now history. In November the Finance Minister Lindsay Tanner indefinitely postponed the aspirational personal tax cuts, declaring: "look, where things are heading, we just have to leave that aside for the time being".

The committee's forced search for extra consumption taxes sits badly with the other terms of reference that require it to simplify the tax system and minimise complexity. Adding new taxes makes it harder to cut the number we have.

Away from the GST roadblock, many of its tasks seem straightforward. It reports almost universal detestation of stamp duties on property transactions and sees wisdom in the more sensible alternative of annual taxes on property values. It is far from convinced by the opponents of payroll taxes noting arguments to extend and harmonise them. And it sees complete wisdom in taxing fringe benefits in the hands of the employees who actually enjoy them rather than their companies.

The hard work will be figuring out how to increase consumption taxes without increasing the overarching one, how far to cut company taxes in order to keep Australia competitive, and how to treat saving and capital gains.

It wants ideas before May. Its asking the right questions.