Sunday, September 26, 2010

Henry reviews his review - and the answer is no

...for now. Weird.

Henry has said no to Henry. In a bizarre twist that endangers the coming tax summit Treasury boss Ken Henry has advised the incoming government it can't afford to introduce the personal tax system he recommended when he headed the Henry Tax Review.

Endorsed by Tony Abbott during the election campaign, the revolutionary system would tax almost all Australians at one simple flat rate - most likely 35 per cent - after exempting from tax the first $25,000 earned.

The very high tax-free threshold would eliminate most of the entanglements between the tax and welfare systems and ensure that low earners paid little.

Labor has pledged to put the plan up for discussion at the July tax summit and Tony Abbott commended it as as a plan "for lower, simpler, fairer personal taxes and an end to the money-go-round that traps people in poverty".

But in the so-called Blue Book prepared for the Coalition in the event it took office released under freedom of information laws Treasury says the plan now "may not be possible in the short term given tight fiscal circumstances".

The Henry scale now merely "provides a guide to movements in the right direction"... consistent with the Coalition's desire for lower and flatter taxes.

The Henry Scale
In for the moment rejecting his own idea Dr Henry is following a well-worn path. The TV series Yes Minister is said to be inspired by a British politician who rejected a petition he helped organise. As Shadow Finance Minister Lindsay Tanner introduced a private members bill to reform the Charter of Budget Honesty that he failed to proceed with as Finance Minister.

Dr Henry has bluntly told both sides in their incoming government briefings that giveaways - even well-intentioned ones - can no longer be afforded.

"When we briefed you shortly after the 2007 election we were forecasting a fiscal position that provided considerable scope for purchasing a number of difficult reforms," his briefing to Labor says. "Today, in very different fiscal circumstances, it is clear reforms will have to be largely budget-neutral."

In order to emphasise that in a budget-neutral world tax and other changes will be difficult if not impossible, Dr Henry says "budget-neutral reform is never easy, in large part because it more obviously involves losers as well as winners".

What we have now
A graph of Australia's present effective marginal tax rates resembles a series of staircases and bumps, meaning that many Australians at many points on the tax scale would stand to lose from a simpler flatter system unless the overall tax take was cut.

Dr Henry advises that some changes may now "only be possible when there is a stronger financial situation," but says the legwork should be done just in case.

So concerned is Dr Henry about Australia's financial situation he says there is a "real risk" events overseas could hit tax receipts "delaying or even eliminating the prospect of a return to surplus".

Needing urgent attention was Australia's superannuation system which "is increasingly leaking revenue, with self-managed super funds now the tax minimisation vehicle of choice".

Published in today's SMH and Age

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