Wednesday, May 18, 2011

Wednesday column: Henry's not dead, not resting.

Ken Henry had a good budget. The wombat-loving bureaucrat turned nomad spent some of that week at the Sydney caravan and camping show, his thoughts road miles away from the process that used to consume him.

In his Treasury office amid half-packed cardboard boxes as he was preparing to leave he told me he didn’t know what he would do with the rest of his life.

Aged 53, he had never previously not had another job to move to.

It was a good budget because it confirmed the painstaking work he put in with colleagues Heather Ridout, Greg Smith, John Piggott and Jeff Harmer wasn’t wasted.

Henry never expected his recommendations to pass into law from day one.

Australia’s only previous broad tax review, conducted by Kenneth Asprey as the Whitlam government was falling apart in the leadup to 1975 didn’t have all of its big recommendations written into law until the end of the century - a generation later.

Treasurer Paul Keating, advised by Ken Henry and Greg Smith, won the battle for fringe benefits tax and capital gains tax in 1985, a decade on.

John Howard and Peter Costello, also advised by Ken Henry, gave us a goods and services tax in the 2000, 25 years after Asprey lit the way.

Asprey won, years after his death as it turned out, because ideas once committed to paper are powerful things... They lie on the shelf, waiting to be picked up.

John Maynard Keynes famously observed that “the ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood”.

“Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist.”

They are the slaves of long-dead economists because economics is not their specialty. They are often politicians - busy, under pressure and when looking for ideas forced to reach for ones alreayd on the shelf.

Wayne Swan did it again in this year’s budget.

One year on from adopting Henry’s recommendations for a mining tax and a lower company tax rate, he breathed life into a further 12 of Henry’s recommendations dealing with the design of the fringe benefits tax, the anachronistic tax offsets for dependent spouses, proper support for families with children aged 16 to 19 and defining what is and what is not a charity.

Sure, he could have done more. But at this rate Ken Henry won’t have to wait a generation to see his package come to pass. He certainly won’t have to wait until he is long dead.

The October tax summit (it’s okay to call it a summit now, the Treasurer did so - twice - in his post-budget address at the press club before correcting himself and using his preferred term “forum”) won’t make decisions that that will be implemented straight away.

Neither did Henry, for most part.

It’ll do something more important - refine ideas and test Henry’s package in a way that will add to a sense of inevitability.

Henry’s biggest recommendation, his first, has become the template for future changes.

Most taxes - the small ones - shouldn’t exist unless they improve social outcomes or market
efficiency through price signals.

Nuisance taxes that merely raise revenue should be abolished.

While naturally reluctant to give away income, state governments are already using this to guide their general thinking. It’s achieved that status of a Biblical ten commandment; always there, sometimes flouted, but an acknowledged enduring goal.

Henry wanted most of what was raised to come from just four broad simple taxes without exemptions; on personal income, on business income, on rents for the use of land or resources and on private consumption.

His second recommendation has already been claimed as an aspiration by both the government and the Coalition.

He wants the personal income tax system to be progressive, but not as a result of using the stepped system of different rates we have now.

All personal earners would pay no tax on their first, say, $25,000 of income after which they would face a flat 35 per cent rate of tax right up until, say, $180,000.

Tony Abbott gave a nod to it during his election policy launch. Wayne Swan has talked about it since. It’s developing the aura of an idea whose time is approaching.

Philosophically, tax should be paid by individuals rather than by couples as has become the creeping trend over recent decades. (Have you noticed how many times these days the questions on the tax form ask about your partner’s income in a way they never used to?) Labor took a move back toward individual tax in the May budget by moving to end the dependent spouse tax offset as recommended by Henry.

The Medicare levy and all of the tax offsets would go, replaced if necessary by direct untaxed government payments.

Swan is hastening slowly, but he is listening.

The only outright exception - Labor’s biggest blind spot - is superannuation where Henry would have taxed super contributions as income in the hands of the person who received them just as he would tax fringe benefits, at the taxpayer’s marginal rate. He’d have the government throw in a tax offset of up to $25,000 (indexed) to make sure noone paid too much tax on super contributions except the well off - the opposite of Labor’s approach.

Henry’s actuarial work suggested that the present compulsory 9 per cent of salary super contribution will be enough for most people. Those who wanted to pay more could, and those who could not afford to pay more should not be compelled to. It makes sense, but Labor and ever-increasing compulsory super contributions seem inseparable.

Elsewhere Labor has already moved towards taxing income from savings more lightly as recommended by Henry. It has moved in the direction of cutting company tax to 25 per cent - which was all Henry ever recommended, moving in that direction.

And it has taxed mining, the one-off removal of our natural resources, as recommended by Henry. Whatever the Opposition says, it’s safe to guess they will let the measure stand.

The fact that Henry hasn’t won every battle - yet - shouldn’t worry him in the least.

He’ll win in the long run, well before he ends his love affair with wombats and the great Australian open road.

Published in today's SMH and Age

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