How to take a grand vision and smother it

How to take a grand vision and smother it

WE are now witnessing the end of a broad-based economic reform agenda and its replacement by narrower and more intense political fights.

Kevin Rudd has set a national goal of lifting productivity growth. And the tax review, commissioned from Ken Henry out of the heady blush of Rudd’s 2020 ideas summit, provides a rational blueprint for doing this through wholesale tax reform.

Instead of embracing this, Rudd has now narrowed the tax reform agenda into a fight with the big miners, and BHP Billiton and Rio Tinto in particular.

That turns tax reform toward a zero-sum distributional stoush with the industry that, along with banking, helped save Australia from the global recession. Singled out, the mining industry has no alternative to fighting back, possibly by putting projects on hold.

The result is the opposite to the broad-based reform dynamic of the 1980s and 90s. That created losses for some groups. But these were more than compensated by overall wider efficiency gains. This reinforced the reform dynamic, encouraged investment and enterprise, and increased the size of the economic cake.

By itself, Rudd and Wayne Swan’s resource rent tax is potentially a worthy reform that could even boost mining activity by replacing state mining royalties, estimated to be the most inefficient taxes. Henry nominates Australia’s natural resources as one of the system’s four “robust and efficient tax bases” along with personal income, business income and private consumption.

Henry’s review estimates that the efficiency gains from improving the tax treatment of these tax bases could boost economic output by 3 per cent, or $40 billion, by reducing the tax disincentives to work, save and invest. Real wages could be lifted by 5 per cent.

The Henry agenda confronts globalisation (by cutting taxes on footloose capital), the budget costs of an ageing population (by reducing disincentives to work) and the digital age (through congestion charges on our roads).

And it confronts what Henry calls an “unsustainable tax structure” with “too many taxes and too many complicated ways of delivering multiple policy objectives”. Ninety per cent of national tax revenue is raised by 10 of 125 different taxes. The system has “overreached” in its complexity.

The ideas are big. For instance, Australia’s highly means-tested tax-transfer system targets welfare payments. But it also encourages welfare dependency as the combination of benefit withdrawal and income tax produces high “effective marginal tax rates”.

Henry would partly deal with the problem by exempting individuals from paying taxes until they earn $25,000 as part of a much flatter tax rate system based on a 35 per cent marginal tax rate for 97 per cent of taxpayers.

The Henry review says such recommendations provide a unique opportunity for reform. It has not offered a one-off big bang tax reform package. But it also is “by no means advocating a slow boat to reform”. Its proposals are broadly revenue neutral.

Yet, rather than using the Henry review to break through political impediments to reform, Rudd and Swan are smothering its politically uncomfortable results. The review headed by its own Treasury secretary is an “independent” exercise that has merely “informed” the government’s agenda. Henry cut a mute figure at Sunday’s press conference, barred from publicly contributing to Swan and Rudd’s “mature” tax reform debate.

The 40 per cent Resource Super Profits Tax, which funds a small cut to the company tax rate, increased superannuation subsidies and some modest infrastructure spending is supposedly the “first wave” of Labor’s tax reform agenda. But Rudd and Swan provided no in-principle support to the thrust of the Henry report and its call for “a robust approach to an ongoing reform agenda”. Swan says Henry’s proposed two-rate personal income scale — 35 per cent above $25,000 and 45 per cent above $180,000 “is not on our agenda for the next term”.

Rudd and Swan politically package their super profit mining tax as “stronger, fairer, simpler”. Henry calls for a “fairer, more efficient and simpler” tax system. The government avoids the rhetoric of efficiency, except when batting off mining company attacks on its resource rent tax. Yet efficiency is the key for Henry.

The distinction becomes clear from the list of Henry recommendations that Rudd and Swan won’t adopt “at any stage”. Take the luxury car tax Swan hiked to 33 per cent in his 2008 budget before being forced into messy special treatment for farmers, tourism operators and for fuel-efficient cars.

Amid the wreckage, Swan referred the tax to the Henry review, which finds that: “a tax on luxury cars is not a desirable means of raising revenue. It discriminates against a particular group of people because of their tastes. It is not an effective way of redistributing income from rich to poor. Its design is complex and becoming more complex over time.” Moreover, its special treatment of fuel-efficient luxury cars “is a costly and ineffective way of limiting greenhouse emissions”. Yet Labor dismisses Henry’s call to abolish a tax that is not efficient, or fair or simple.

It gets worse with Rudd and Swan’s immature vow to “never increase the rate or broaden the base of the GST”.

The Henry review finds that consumption is one of Australia’s “most efficient and sustainable tax bases”, that John Howard’s GST made the tax system more efficient and that taxing consumption more and income less would make it even more efficient. Yet the $5bn exemption for food makes the GST more complicated without improving its fairness. One-third of the GST food exemption goes to the top 20 per cent of income earners.

But the Henry review also suggests that the GST is operationally complex because of its reliance on mountains of debit and credit invoices more suited to the business practices of the 1960s.

It suggests that a more efficient business cash-flow consumption tax could replace state payroll tax. This would tax the difference between business cash purchases (excluding wages) and cash sales (excluding exports). Small businesses could use a single bank account to allow their cash-flow tax liability to be calculated automatically, without the need for invoices. It could be a simpler, more comprehensive and single-rate replacement for the GST.

This potentially could break the political logjam to more efficient taxing of the economy’s consumption base. But it took a quarter of a century to implement the key tax reforms, including the GST, recommended by the 1975 Asprey report. This slow boat tax reform took far too long to arrive. Rudd and Swan’s politically narrow approach to tax reform won’t help the Henry boat dock any earlier.

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