Thursday, February 04, 2010

Unveiling... recommendations of the Coalition's Henry Review

The government is sitting on the recommendations of the Ken Henry tax review.

The Opposition is sitting on the recommendations of the Henry Ergas tax review:

While attacking the government for not releasing the Henry Tax Review the Coalition has for 13 months been sitting on a report from its own tax review that recommends taxing the family home, extending payroll tax and cutting income tax to 20 per cent.

The so-called "Other Henry Review" was commissioned in early 2008 by then shadow Treasurer Malcolm Turnbull from economic consultant Henry Ergas as a means of "developing further tax policies which we will take to the next election".

Delivered to the Coalition in a number of drafts between August and December 2008 and labeled "Options Paper" it has never been released.

Revealing its contents for the first time Dr Ergas told the Herald it set out only broad directions for tax reform on the understanding that it would be followed by a second more detailed report after the release of the government's Henry Tax Review.

Dr Ergas said he had hadn't heard from the new Opposition Leader Tony Abbott since his elevation and believed the "intellectual property" in the unreleased report belonged to him rather than the Coalition.

At the report's core is a flat income tax rate of 20 per cent...

Low income earners would be exempt from income tax as they are now and the bottom 10 percent of earners would receive either tax credits or a "negative income tax payment" that would gradually phase out making the impact less flat but "as close to flat as one could reasonably get".

Company tax would be modeled on the Resource Rent Tax at present in place for offshore petroleum which the government's Henry Review recommends extending onshore.

"There are significant benefits to the Resource Rent Tax approach because it tries to quarantine tax to economic rents," Dr Ergas told the Herald. "You would tax only above a normal rate of return, but it is difficult to work out what a normal rate of return should be and the transition would be a problem."

The Ergas report proposes an annual land tax that would extend to the family home and would be used to fund the abolition of real estate stamp duty. "It would be obvious nonsense to exclude the family home." Dr Ergas told the Herald. "It would create an unbearably low base."

Payroll tax would be extended rather than abolished because it is a "reasonably efficient", if complicated by exemptions.

States would also be encouraged to impose their own income and consumption taxes on top of the Commonwealth taxes in order to better fund their operations.

Many of the proposals would be difficult to sell, among them an investigation that Dr Ergas believes would result in lower taxes on alcohol and tobacco and congestion charges for road use along the lines of those recommended by the government's review.

The Coalition's current Treasury spokesman Joe Hockey yesterday called on the governement to "stop the spin and speculation and release the Henry report".

Finance spokesman Barnaby Joyce asked at the Press Club,"Why aren't they tabling it? What's the problem with it? Is there something in it they don't want you to know about?"

Mr Hockey told the Age/Herald the Ergas Tax Review was not a public document. It was private advice paid for by the Coalition which would be an input into the policies it would unveil before the election.

Published in today's SMH and Age

Ergas Review

Thursday Column

"Keep up the pressure," Joe Hockey told me late yesterday. "We want to see the Henry Tax Review."

He was talking about the Ken Henry Tax Review commissioned by the government and with it since December.

When it came to his own Henry Tax Review, commissioned by his predecessor as shadow Treasurer Malcolm Turnbull, conducted by the esteemed economist Henry Ergas and with the Coalition for 13 months, he was less keen on pressure.

"Mate the only people calling for the release of that tax review are you and the government," he said.

"It was private advice prepared in the private sector and paid for by the Coalition as an input into its policies. We are not the government."

Until this morning's revelations that Ergas invited the Coalition consider taxing the family home, extending payroll tax and cutting income tax to 20 per cent, there probably was little interest in what his report had to say.

But there should be. His findings are genuinely independent, in the same way that the Henry Review's are independent. It would be wrong to attribute them to the Coalition just as it would be wrong to attribute the findings of Ken Henry's panel to the government that appointed it.

So in the interest of the "open transparent debate about tax" that the Coalition says it craves, here's what Ergas told it.

He likes flat income taxes. Not completely flat, because that would be too hard on very low wage earners. By setting the flat rate at 20 per cent and by retaining a tax-free threshold and also making "negative income tax payments" to low income earners the system would become somewhat progressive but also "as close to flat as one could reasonably get".

It would also be simple. All manner of deductions and exemptions would go.

And probably unsalable. The former Treasurer Peter Costello said he avoided cutting the top marginal income tax rate because as soon as he did someone would calculate the size of the gift to multi-million dollar earners.

Savings would be taxed at an (even) lower rate than income earned by the sweat of the brow, as is also recommended in the government's unreleased Henry Tax Review.

But some savings would be taxed more highly as part of an evening-out of tax on savings.

Superannuation in particular would lose some of its preferred status.

"I still believe there is a compelling case for encouraging of long-term age-related retirement income saving," Dr Ergas told The Age, "The right tax rate for super is probably low, but is it as low as at present? I don't think so."

Capital gains tax would remain "in order to minimise tax avoidance".

"That's the strongest conceptual argument because othersise there isn't a strong conceptual argument," Dr Ergas told The Age.

"If you don't tax capital gains or have unduely preferential rates you build complexity into tax administration because you have to try to ensure that people don't use the loophole of converting other forms of income into capital gains."

Company tax would be very different. As "an ideal" Dr Ergas would like to see the model used for resource rent tax applied to all businesses. The authorities would calculate an expected rate of return on capital and then tax only the excess profits made on top of that.

"But its hard to calculate the right returns for each industry, and the transition issues would be difficult," he says.

Payroll tax would stay and the exemptions be removed in order to strengthen state taxing powers and the states would be invited to impose their own income and consumption taxes on top of the Commonwealth's. States that charged too much would suffer from tax competition. States that charge too little would offer inadequate services.

Stamp duty on real estate transactions would be go and be replaced by a low annual land tax imposed on all landowners including home owners, an idea the government's Henry Review baulked at.

Dr Ergas concedes there would be problems with "credit constrained" homeowners unable to stump up the cash for the annual payments but says they could be overcome with smoothing and postponement options.

Sin taxes would have to be justified. Dr Ergas thinks smokers more than pay for the costs they impose on other people, and he doesn't believe they should be taxed to prevent them harming themselves. But he would want good evidence on the costs before acting.

He is a fan of the idea of road congestion taxes proposed by Henry and opposed by the National Party, although he would like them linked to actual spending on roads to ensure the states, "monopoly providers of roads" don't under invest.

And he prefers "direct environmental pricing" to petrol and diesel taxes, an input that's probably inconvenient to Tony Abbott right now.

They are serious if bold ideas from a thinker every bit as serious as the five members of the Henry Tax Review.

It'd be a shame if the Ergas Tax Review didn't find a place in the sun alongside its better-known cousin.

Published in today's Age

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