The Henry Review is an ambitious document, conceived early in the life of a new government at a time when budget surpluses stretched as far as the eye could see, surpluses which could be used to ease the tensions between winners and losers that are the inevitable consequence of any tax reforms worthy of the name.
Hence the Review aspires to a tax system which ‘is oriented towards supporting strong and sustainable economic growth’, one which has regard to the pressure which strong population and economic growth will put on our ‘increasingly fragile ecosystems’, and one which ‘fully exploits the opportunities of the new digital age’.
More specifically, it proposes that Australia’s tax system should rely primarily on four revenue sources – personal income, business income, private consumption, and ‘economic rents’ from natural resources and land – with all of these tax bases being as broad and comprehensive as possible. Apart from taxes which ‘efficiently address social or economic costs’ (such as those on tobacco, alcohol and gambling, environmental taxes and ‘efficient road user charges’), it suggests that other taxes (including payroll and insurance taxes, and stamp duties) should be abolished. And it recommends that all pensions and benefits should be comprehensively means-tested, but tax-free.
In contrast, the Government’s response to the Henry Review comes at a time when those budget surpluses have disappeared, and when, with around six months (at most) until the next election, vaulting ambitions inevitably take second place to ‘political realities’.
Indeed the Government has given no indication as to whether it embraces the Henry Review’s broad vision of what Australia’s tax system should look like in the future. Rather, its initial response has been to implement less than a handful of the Review’s 138 recommendations – and some of those only partially.
It has, to be sure, left the door open to changes ‘in a number of other areas’ in its second term, should it get one. But it has also explicitly rejected 27 other recommendations, as well as two further propositions which the Review would almost certainly have recommended (increasing the rate or broadening the base of the GST, and reversing the tax-free status of superannuation payments to the over 60s) had it not been specifically precluded from doing so in its terms of reference.
The ‘headline news’ in the Government’s response is the proposed introduction of a resource rent tax – which, consistent with its penchant for acronyms, it is calling an RSPT (for ‘Resources Super Profits Tax’), and which (net of rebating state-based royalties and a new exploration rebate) will pay for a 2 percentage point reduction in the company tax rate, instant write-offs for capital expenditures by small businesses, additional infrastructure spending (especially in the resource-rich States), and further government support for superannuation contributions. (Note that the 3 percentage point increase in compulsory superannuation contributions, to be phased in over the next nine years, will be paid for by employers, not the Government).
A resource rent tax is, as the Henry Review says, a better way of ensuring that the Australian community receives ‘an appropriate return on its non-renewable resources’ than the existing (predominantly output-based) royalties, which have collected a declining share of resources-related profits during a period in which the latter have increased substantially, and is consistent with the direction in which other advanced economies with significant resource endowments have been heading.
However the decision to give small businesses a two-year ‘head start’ on the proposed reduction in the company tax rate, and to give them (but not large businesses) an instant write-off for asset purchases, appears to be motivated primarily by tactical political considerations and runs counter to the Henry Review’s vision of a comprehensive and non-distorting business income tax base.
The immediate response of both political parties to the Henry Review suggests that a calm, measured, and mature debate over either its vision or its detail between now and the next election would represent a triumph of hope over recent experience. However it would be heartening to think that the Review will eventually provide a template for more far-reaching reform over the lives of the next two or three parliaments.
(This article was originally published in the Melbourne Age on 3rd May 2010)