Yes folks, it’s on again! Well it’s probably not on, but someone wants me to pontificate on tax reform as one of a range of issues in some ‘vision’ pieces. I get to paint my own picture. But I wanted to throw things out to the crowd. What things did Henry get right, what wrong?
Just rereading the executive summary, I think it’s a very impressive document and it will be a useful blueprint for the future. (As an aside, the whole cockamamie idea of an 18 month review to be served up six months before an election beggars belief for political ineptitude. The motivating idea of some comprehensive (root and branch – yada yada) review is not much closer to reality either.
Tax policy is always and everywhere a matter of profoundly difficult political management. So while some basic architecture is important for people to know where they’re going and how things fit in, a great deal of the task is known in advance and broadly able to be quarantined into parcels – land tax is better than stamp duty, there either is or is not a strong case for abolishing dividend imputation and lowering company tax. GST input taxation on finance either should be replaced with some sector specific tax (as recommended in Henry) or it should not. That’s not to mention a whole host of rats and mice that should always be bubbling up, and infact bubble up much too little. Henry had some of these – like removing duty free concessions on international travel for tobacco. None of this requires a comprehensive review.
Personally I’d favour the Treasury continually putting work into such a blueprint so that it can progressively feed it into budget considerations as they roll around and so that it’s ready for the next crisis. Sadly it’s mainly crises which create the opportunity (indeed, the ‘window’) in which governments are alive to the fact that they have to choose between one kind of political pain and another. Most of the time they (wrongly) imagine that they can avoid political pain altogether. It is sad that such insightful periods are as rare as they are but when they occur we want wise advice being whispered into the ear of the prince.
Things that stand out for me are:
- There was a strange, unsatisfactory and ultimately arbitrary way that the Henry Review chose to play its political cards. It decided that it would hold its fire on some things. Things like death duties. So it held off on a formal recommendation on them, but drew attention to its own liking for them and proposed, as prominently as in any recommendation, that there be community debate about such things. I think this is silly. Neither Ken Henry, nor anyone else on the panel were politicians. So since they weren’t equipped or asked to provide any political advice, they should have made recommendations and let the politicians make the call.
- The Henry Review did something similar on dividend imputation. It seemed quite sympathetic to the views I’ve promoted that dividend imputation is a wasteful anachronistic monument to Paul Keating’s views about his dad’s family business. Paul was brought up to think that double taxation was evil (it is evil, but only relatively speaking – genocide is far worse and it turns out that dividend imputation is a waste of money. This makes the evil of having it, a lesser evil than not having it). Careful thought suggests it would be very difficult to think of any way of foregoing over $20 billion each year in capital tax revenue without lowering the cost of capital, but dividend imputation manages to do it. It should have been scrapped, and with a resource rent tax and an undistributed profits tax we could have reduced our company tax rate to 15 percent or below. Further this would not be at the expense of equity as it involves a swing away from favouring domestic over foreign capital (which is regressive amongst Australian taxpayers), towards favouring foreign capital which will respond with a substantial increase in investment. This and the RRT would make the changes more progressive as would the introduction of undistributed profits which would eliminate a substantial and growing avenue of tax minimisation. (As an aside a really big cut in the company rate might have crystallised the thinking of the two million odd businesses that stood to gain from the RRT at the expense of the 3,000 odd – now 200 odd – that would lose)
- Henry seems to have thrown that old chestnut of aligning the company and top personal tax rates out the window. Good riddance to bad rubbish. But if we’re to watch these rates deviate further – and Henry has it in mind that they end up around 20 percentage points out of whack (or should that be WACC?) shouldn’t some thought be given to the problem of avoidance that this widening of the gap exacerbates? I can’t find it, or any discussion of the wisdom or otherwise of the obvious anti-avoidance measure – undistributed profits taxation. A mystery.
- I agree with Henry that land tax is a good idea and should displace stamp duty. But there’s not much chance of that politically. It’s intriguing that the panel felt at liberty to formally recommend this, but not death duties. If I were a politician I’d much rather sell death duties – they’re very fair and one can combine them with a generous tax free threshold (say levy it on estates over $5 million) and complementary income tax cuts. Of course despite its manifest fairness and efficiency, it might not be easy. But you’d have a much better chance of getting there than replacing stamp duty on homes with a broad based land tax. (Those who’d recently paid a lot of stamp duty and didn’t plan on doing any more for a good while would be seriously displeased). [Postscript: someone from the bureaucracy has drawn my attention to page 269, Vol 1 of the Review where a range of transitional arrangements are discussed which I think address this difficulty to a substantial extent though the more palatable they were electorally, the more revenue they would give up.]
- Henry also recommends that “[t]he personal tax structure should be the sole means of delivering progressivity in the tax system, supporting the even more direct distributional role of the transfer system”. On that basis the panel recommends abolishing the luxury car tax. I’m in favour of broadening the base over which progressivity is delivered, and thus of what used to be called ‘sumptuary’ taxes. It’s called the politics of envy by some, but I wouldn’t call Adam Smith, Alfred Marshall, Cecil Pigou and Maynard Keynes the envious type. I’d call it the politics of modest consumption or the politics of taxing conspicuous consumption. I’m happy if people want a fancy Merc or indeed a mansion costing, say more than a couple of million for there to be some sumptuary taxation in addition to progressive income taxation. That’s partly just the fact that along with the great men I’ve just mentioned I have a heart heavy with envy, but it’s also because it broadens the base of the effort to deliver equity. We’re living in a new gilded age and we need taxation to do more work delivering equity than we did when the incomes of the wealthy were less out of kilter with the rest of the community. In other words, given how much more effort would go into avoidance if we increased the top marginal tax rate, it makes more sense to share the burden and certainly not to abolish existing sumptuary taxes like the luxury car tax.
- It was great that Henry focused on the taxation of rents, including resource rent, congestion costs and environmental Pigou taxation. Perhaps he could have added TV licences!
- Where am I wrong and why? (Trolls, take it easy)
- What have I left out. What else should be here?