Risky approach to Henry tax report

THE Government has been holding back the report of the Henry Tax Review for a month now. It is an unusual piece of media-policy-agenda manipulation. The more astonishing thing is that nothing much has leaked from it, except a few pronouncements by Ken Henry himself.

Taking the cynical view, tax requires much more media and opinion management than most other policies because, as Treasurer Wayne Swan, said a month ago when he received the report, “The one thing you know about tax is that everybody’s got a view.”

A survey by the “progressive” think tank Per Capita released this week shows just how difficult the Government’s task is. The survey reveals a highly demanding, contradictory, and quite ignorant public. People want a simpler system, but they want more action on evasion and avoidance. They want to pay less tax but want more public services yet they have little idea of how much the Government spends on various items in the Budget.

For example, on average they think the Government spends about nine times more on foreign aid than it actually spends and more than four times what it does on defence – as a percentage of government spending.

They think that high-income earners and big business pay too little tax. Even high-income earners think that, though most say that they personally do not pay too little tax.

So Joe Public thinks the solution is to tax the rich and give more to health and education. And to have a much simpler system.

It is a recipe for disappointment. The trouble is that there are not enough high income earners for tax increases on them to make much difference. Income earners are distributed in a bell curve with many more in the middle than at the ends. It means that tax cuts for middle income earners affect the government bottom line more and so are harder to give.

Increasing taxes at the top end has it difficulties. The higher the tax rate the harder people work at avoidance – and the rich have greater access to the advice which they can afford to do it. Very high tax rates can cause businesses to go off-shore.

The best way to increase tax paid by high income earners is, however, politically out of bounds, that is to increase the GST. When the GST was introduced, opponents said it would make every business a tax collection agency for the Government. Well, what efficient effective tax collectors they are. If the rich want to spend their riches, they at least have to pay the GST, however good they might be at avoiding income tax.

As for simplicity, you cannot tackle avoidance without a lot of complicated rules.

Another difficulty for the Government will be to remove all the inefficient subsidies, social-security allowances and tax breaks mainly for people over 60 and self-funded retirees. The Howard-Costello Government introduced many of these and the Rudd Government appears unable politically to do much about them: family allowances; no tax on superannuation pay-outs if you are over 60; the Medicare safety net; the health insurance deduction; and the co-payment for spouse’s superannuation payments. The last three seem to be there to help middle and lower income earners, but they are disproportionately used by the better off.

Any move to change any of these will result in loud squeals of protest. That is the trouble with changing the tax system: you will inevitably produce some losers who will be likely to change their vote over it – witness the sharp fall in the Coalition vote in the 1998 election after John Howard proposed a GST.

So far, the Government’s treatment of the Henry Tax Review has been out of character. Usually, Governments allow reviews to go public to test reaction before putting out their response or even draft response.

They do this to weed out any proposal that gets a toxic reaction from the public. Then the Government can quickly disown the proposal and say it is, after all, just a proposal from an inquiry and not a fixed government position. The Government is not accused of a “backdown” by the media – and we all know that the media likes a good “backdown”.

Another reason for floating the inquiry’s findings first is to take the news sting out of any contentious proposal. The Howard Government would often let an inquiry propose something, or even propose something in broad terms itself. It would then fob off media concern with “wait for the details”. Yet when the nasty detail was published the Government would say, “This is all old hat and not worth examination.”

So the Rudd Government’s approach is quite unusual. Its interim response will come at the same time as the publication of the review itself. The response will drown the review.

It would be unfortunate if the Government prematurely rejected worthwhile proposals through fear of poor reaction. It would have been better to have a wide debate first – not just an ideological fight between the Government and the Opposition, but a debate in which the public, academics, think tanks and commentators take part.

Often they can point out things not seen by the initial review.

A month’s jump is not just unfair to the Opposition but also to the public if the Government adopts a position (even if interim) before the proposals are subjected to wider debate.

You might think it is also a bit unfair on Ken Henry, who has spent 18 month on this review (while still serving as Secretary to the Treasury), to have parts of his review ruled in or out before the public gets a chance to digest his recommendations. But he has stated he is taking the long view.

He cited the 1975 Asprey tax inquiry. At the time all his significant recommendations were rejected as too hard, yet nearly all of them were put in place in the next two decades: fringe benefits and capital gains taxes, a GST, share dividend imputation and so on.

Perhaps the real lesson is that the Government should take the tough decisions early. If the Asprey report had been acted on sooner, the Australian economy would have come out of its Rip van Winkle years a lot earlier. Let’s hope we don’t have to wait two decades for the best of the Henry report to be enacted.

Let’s hope the Government has not used the past month to find excuses not to do the economically sensible because it is politically difficult.
This article was first published in The Canberra Times on 23 January 2010.

2 thoughts on “Risky approach to Henry tax report”

  1. Hi Crispin, you appear to have forgotten another (possibly more taboo) component of wealth and potential tax base than income and expenditure (GST). That is Assets (whether cash or property). At the moment this is in the hands of State government – but perhaps ALL revenue collection (Federal, State and Local) should be in the hands of one body rather than duplicating infrastructure at the federal, state and local government levels. My pet peeve is that foreign owners of our country’s assets often only pay local taxes and do not pay their fair share toward establishment and maintenance of state or federal infrastructure that enhances and preserves the value of those assets (eg federal road contributions, defence). I would have liked to have seen more of a breakdown of spending than just a statement that most people are misguided as to where our taxes go. As well as this perhaps a cursory analysis of what proportion of that spending would be more relevant to either a high, middle or low income earner. I also think that we do not need to prostitute our country to encourage foreign investment for investment sake – a practice that could actually cost us more than it gains in the longer term (eg are we artificially increasing our property prices just so we can borrow foreign money to fund our mortgages ?).

  2. Hi Crispin, I think there is a serious flaw in your argument whre you state in this article that “Income is ditributed in a bell curve” – it is a very skewed bell curve – “Stark inequalities of wealth in Australia are documented by the University of Melbourne’s Melbourne Institute of Applied Economic and Social Research in the first significant study of individual wealth holdings since World War 1.
    Among the Melbourne Institute’s findings is that the ‘bottom half’ of Australia’s population owns less than 10 per cent of total household net worth, while the wealthiest 10 per cent owns 45 per cent.”, in other words the top earners certainly can afford to pay more tax (or less aviodance).

Leave a Reply

Your email address will not be published. Required fields are marked *