Friday, January 22, 2010

Prepare to pay more tax

Not now, but soon: Ken Henry

Treasury boss Ken Henry has dashed expectations that his tax review will pave the way for lower tax declaring that over time Australians will have to pay more.

Addressing the annual conference of the Australasian Tax Teachers Association Dr Henry said the tax system had to be prepared for the probability that "in order to finance the government-provided goods and services demanded by the community, revenue needs will grow strongly in the longer term".

"Generally, older people demand a lot more from governments especially in health and aged care services," he told the conference.

"Sure, policy reforms that improve the productivity of service delivery in age-sensitive sectors would ameliorate some of these expenses. But it would be prudent to plan on the basis that the tax system will, over time, have to generate revenues to meet substantially larger fiscal costs."

The Treasury Secretary's comments spell an end to seven years of back-to-back personal income tax cuts and suggest that much of his review is focused on strengthening the tax system so it can raise more...

However he said there was a case for cutting the tax rates applying to older workers on the ground that they otherwise mightn't work at at all.

"In theory, marginal tax rates should be lower where there are more people whose participation is most responsive to tax rates," he said. "Older people are less likely to be in the workforce due to retirement or working less hours."

As an example of the extra costs now facing government he said that in the two decades leading up to 1990 Australia's spending on pharmaceuticals stayed steady in real terms at $210 per head. Since then a new wave of "blockbuster drugs" has pushed the cost per head up to $678 with no sign of it slowing.

In a hint that his review has considered big and unsettling tax changes Dr Henry warned against the tax educators to be on guard against "vested interests" who he said had a history of "dressing up" their objections as concerns for exports and jobs.

"Consider, for example, our peculiar but long-standing acceptance of a monstrous challenge confronting our gold miners that justified extraordinary policy protection. Many of you probably wouldn’t remember that income from gold mining was fully tax exempt in Australia until 1991."

"The exemption lasted nearly 70 years, despite its having absolutely no support in tax theory. Even so, its removal was highly controversial.""

"Consider the intense opposition to the rather innocuous proposition that a worker should pay tax on his or her remuneration even if it is not labelled 'wages' or 'salary'. Who on earth would consider it sensible that an executive who receives some part of his remuneration in the form of a Porsche and a holiday apartment should not be required to pay tax on that income?"

"The fact is that until September 1985 all of Australia’s governments had, apparently, thought these things sensible. Indeed, even after the Fringe Benefits Tax had been legislated, the then Opposition went to the 1987 election campaigning for its repeal."

"Even though I had a deep personal involvement in the development of the FBT and its subsequent negotiation through the Parliament, I still find it hard to believe the intensity of the opposition to this rather obvious requirement of tax system fairness and integrity. Looking back, it seems incredible to me now that the Hawke Government was told by both the motor vehicle industry and its own industry department the FBT would lead to a complete shutdown of domestic production and the loss of hundreds of thousands of jobs. I find it incredible that such claims were made, yet I know it’s true that they were."

Dr Henry delivered his tax report to the Treasurer in December.

Published in today's SMH and Age

Changing Taxes for Changing Times - Ken Henry

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