Friday, August 13, 2010

We've a tax debate. Sort of.

At last we've the makings of a tax debate. But the leaders are trying to keep the differences blurred.

Tony Abbott exhumed the corpse of the Henry Review at his Sunday policy launch saying Labor should have addressed more than just a few of its 135 recommendations.

"Some of Henry's recommendations are impractical and a few wrong-headed," he said. "But some, such as his recommendations for lower, simpler, fairer personal income taxes and an end to the money-go-round that traps people in poverty should be the foundation of Australia’s next round of tax reform."

It was a declaration that Abbott was minded to go with recommendation 2 - a personal income tax system with an extraordinarily high tax-free threshold (the report suggests $25,000) and a rate beyond that "constant for most people".

It is easy to see the idea as a flat-tax of the kind promoted by former Queensland Premier Joh Bjelke-Petersen as part of his failed "Joh for Canberra" push in the late 1980s.

But whereas that would have taxed everything earned above $5000 at either 24 or 25 cents in the dollar and actually been fairly flat, Henry's plan would make the system progressive.

The trick is in the very high threshold. For the first $25,000 earned there would be no tax. Some people would also receive benefits, but these would usually be withdrawn before income climbed to $25,000, putting an end to most of the complex overlap between tax and welfare.

Although every dollar earned beyond $25,000 would be taxed at 35 cents right up until $180,000, the high threshold means the total tax rate would climb smoothly, leaving our system about as progressive as it is now.

It's easy to see why if you consider someone earning $35,000... Paying nothing up until the threshold and then tax on the $10,000 beyond it makes that person's total rate 10 per cent. But someone on $90,000 would pay tax on the $65,000 beyond the threshold making her total tax rate 25 per cent.

Beyond $180,000 the marginal rate would jump to 45 cents, an impost the review says would only touch 3 per cent of taxpayers.

Labor has attacked he idea on the assumption that the Coalition would use Henry's indicative scales, complaining that some Australians would pay more, some less - which isn't surprising given that the graph of Australia's present effective rates resembles a pockmarked road.

Within its first 12 months of office the Coalition will use Henry's recommendations to produce a green paper (outlining what it is considering doing) followed by white paper (outlining what it proposes to do). It will take the proposals to the next election.

For the moment, like Labor, it is clearer about what it won't do.

Labor listed 19 "nasties" when releasing the Henry review, saying they were things it would never do. Among them were including the family home in means tests, cutting back tax breaks for landlords and charities and rationalising the taxation of alcohol.

The Coalition's 25-point list, issued Thursday, look's remarkably similar to Labor's.

The key point of difference is that the Coalition will abandon Labor's "great big new tax on mining". As a consequence it has to also rule out two generous measures that were to be funded by it.

It's thinking about mining is a bit of a mystery. Abbott's Treasury spokesman Joe Hockey was asked at the Press Club Monday why he planned to give away $10.5 billion worth of revenue "when the mining companies are prepared to give it".

Australia's big three miners signed an accord with the government agreeing to pay the extra tax.

Hockey's reply was that other miners hadn't signed the accord and that in any event he didn't want to hold the mining industry back.

That one extremely expensive act of generosity forced Abbott and Hockey to oppose Labor's promise to halve the tax charged on interest earned in bank accounts, and also Labor's promise to give everyone a standard minimum tax deduction of $500 climbing later to $1000.

It may be that the Coalition approves of these measures and will feed them into its green and white papers later, but it says it can't afford them now because it does not approve of the measure that was to fund them.

The Henry Review paints them as an integrated part of the income tax reforms the Coalition likes. Labor will bring them in over the next two years.

Both sides will cut company tax from mid 2013, Labor by 1 percentage point from 30 to 29, and the Coalition by 1.5 points. But for big businesses the Coalition's cut will be offset by a 1.5 point increase to fund parental leave. Worse for those businesses, it will start one year earlier than the cut it offsets, pushing up their total rate to 31.5 per cent for one year only.

Labor - billions richer than the Coalition as a result of the mining tax - will cut the rate for small businesses a year early, in 2012.

Neither side should pay any attention to anything the other says about company tax pushing up prices. As retailing king Gerry Harvey has been happy to point out during the campaign, taxes on profits are not taxes on prices.

"That’s 100 per cent crap,' he told Sky News. "We are trying to make a profit before tax. Even if the tax rate went to 40 per cent, the price of your groceries won’t go up."

The Coalition has put Harvey on its website, perhaps unaware he not only undercuts Labor's attack on its parental leave tax but also its attack on Labor's mining tax.

Neither side will introduce further tax reform before the next election. Wayne Swan has hinted that like Abbott he too might take some ideas to the next poll if reelected, but it isn't a promise.

For the moment the Coalition looks more ready to embrace the rest of Henry than Labor. It is also keen to improve the look of tax, yesterday distributing a dummy "tax receipt" that it would send out with to each taxpayer showing where the money was going.

Left on the table for it to pick up along with the new income tax system are Henry's plans to tax compulsory super contributions and fringe benefits as if they were income, to halve the tax rate on superannuation earnings, to radically simplify welfare payments and to charge for using roads.

We've a tax debate. Sort of.



- $10.5 billion mining tax
- Halve tax on bank interest (up to $1000)
- Standard tax deduction of $500, later $1000
- Cut company tax to 29% from 2013
- Early cut for small business from 2012
- No further reform next term


- No mining tax
- No tax break for savings
- No standard income tax deduction
- Cut company tax to 28.5% from 2013
- 1.5% parental tax levy on big companies
- Revisit Henry within 12 months
- Attracted to simple, low personal tax

Published in today's SMH and Age

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