Major Parties Fail On Tax Reform

[Rorschach]

Lethal intervention on the demise of political rationality and integrity
The Australian
12:00AM March 2, 2018
Paul Kelly

In a lethal intervention documenting the demise of rationality and integrity in our politics, former Treasury chief Ken Henry declares corporate tax cuts an obvious “no option” reform, damns the futile debate about the issue and calls for real tax reform.

The essential question Henry puts to the country today is: how much shame, craven self-interest and sabotage of the national interest will our political system tolerate?

In an interview with The Australian and in his speech, Henry says cutting the company tax rate is but “a small part” of a sweeping tax system restructuring that Australia needs. He warns that political failure has led to a “lost decade” on tax reform.

The burden being placed on the personal income tax system was “unsustainable”.

While Henry signs up to the established Treasury orthodox — that much of the corporate tax-cut benefit will flow to employees and higher wages — he shatters the tax myths fondly cherished on both sides of politics.

Henry puts these propositions: the current tax system cannot finance current government spending through the economic cycle; it cannot deliver a balanced budget over the cycle; given these realities the total tax share is too low “as a simple fact”; and the system is too narrowly based on taxes, such as company tax, that are subject to international competition and must be cut over time.

He attacks the magnitude of denial in politics and calls for the business community to get serious “about the social purpose of business”, thereby playing a greater role in public debate.

Henry laments how politics has generated a huge debate about a strictly limited reform, as the nation obsesses about when and how far to cut company taxes. In a sharp warning to politicians he says “countries don’t get to choose their own company tax rate in ­perpetuity”.

His message is that the nation needs comprehensive tax reform. That means a more broadly based tax model that is simpler, funds world-class education and health systems, meets the needs of the fastest-growing population in the developed world, can manage the congestion crisis in our cities and reduces the weight on personal income tax.

Nearly a decade since his ­comprehensive and largely non-­implemented report into the tax system, Henry says his recommendations are “even more relevant today”. He says the existing system “cannot manage the challenges we identified a decade ago”.

The biggest jolt comes when Henry outlines how today’s tax system would look had his report been implemented a decade ago — a broadbased cashflow tax replacing the GST and payroll taxes; a 25 per cent company tax rate for all companies; a simple and progressive two-rate personal income tax system; land taxes instead of stamp duties and property transfers; a carbon emissions trading scheme, road-user charges replacing fuel excises and vehicle registration taxes; and a resources rent tax replacing royalties.

In short, the renewable energy targets, the Medicare levy, the ­“invoice-and-credit” GST and a litany of small taxes would have been abolished.

His speech highlights the ­“significant” increase in the size of government over the past decade — a reference to Labor’s vast new spending projects in office, largely accepted by the Turnbull government. “That will have to be paid for,” Henry says.

“It is also evident that the personal income tax system is being called upon to generate an increasing share of revenue continuing to be propelled by fiscal drag. That is unsustainable.”

On company tax, Henry says there is “good reason” to think a lower rate “will drive a faster rate of investment and labour productivity” leading to higher wages over time.

Henry is tapping into the most sensitive area in economic policy: the fiscal and tax consequences flowing from the legacy of the Rudd-Gillard years and the determination of the Senate post-2013 to decline to engage in deep spending reductions.

He says Australia is caught with an unsustainable tax structure. It is defined by multiple, often conflicting objectives, base erosion, very high compliance costs and complexity with 10 taxes raising 90 per cent of revenue and the remaining 10 per cent funded by more than 100 other taxes.

The nation needs a 10-year plan for tax reform built upon a new narrative as called for by ­former Reserve Bank board member Heather Ridout, a member of the Henry tax review committee a decade ago.

“Australia will get no progress on tax reform unless the ­community sees vested interest make way for the national interest,” Henry says.

He has a sharp message for business — it must accept responsibility “for the social and environmental outcomes of our activities.” Unless business can transcend the mere maximisation of profits then it will struggle to win community trust and respect.

Henry wants to see the business sector play a bigger and more influential role in the national debate. But the necessary precondition is establishing its legitimacy in public debate. That means both accepting its wider responsibility to the community and forming a consensus on an ambitious role for government.

His chief concern is that ­Australia is failing to rise to the contemporary challenges — a growing and ageing population, rising expectations about living standards amid falling education performance, and increasing pressures from globalisation, the environment and technological transformation.

[Rorschach]

Taxes to abolish and replace, all in the national interest
Ken Henry
The Australian
12:00AM March 2, 2018

When business is challenged to explain our activities we often say we are simply going about our business. We say it is for government to determine whether any of our activities have negative social or environmental consequences and it is for it, not us, to do something about it.

If that’s the best we can do, then we shouldn’t wonder that we find it so difficult to occupy positions of trust and respect in society. ­Neither should we wonder that politicians of all political colours have such an uneasy relationship with us. So what should we do?

One of the more important things we in business can do at this time is accept responsibility for the social and environmental outcomes of our activities. Not unreasonably, this is what the community expects.

In the past couple of years, we at National Australia Bank have spent a lot of time reflecting on the purpose of our business.

We were not surprised to find that our bankers are motivated strongly by the contribution they make to the lives of others; ­especially those who have the courage, who are bold enough, to take on calculated risks in the ­pursuit of a better future for their families, their businesses and their communities. We have framed our purpose in these terms: back the bold who move Australia forward.

Different businesses will articulate their social purpose in different ways. But there should be a common thread. I would hope that all of us in business would be motivated by a purpose that contributes to improving the wellbeing of our community.

And government? When business commits to improving community wellbeing, it creates room for government to pursue a higher ambition. We should want our political leaders to be motivated to ensure that all Australians have the opportunity to choose lives of real value, and that future generations have no lesser opportunity. I know numerous community groups in Australia share a similar purpose.

It is with this backdrop that we need to set a course for tax reform, with a shared purpose to guide us away from an unsustainable path.

It’s almost 10 years since my colleagues Jeff Harmer, John Piggott, Heather Ridout, Greg Smith and 50 tax policy professionals in the Treasury, led by Rob Heferen, and I were commissioned to conduct a comprehensive review of Australia’s tax and transfer ­systems. So what would Australia’s tax system look like today had our recommendations and findings been implemented in full? The following would have been abolished:

• The complex “invoice-and-credit” GST, payroll taxes and all state taxes on consumption, including taxes on insurance.

• Resource royalties.

• Stamp duties on property transfers and motor vehicles.

• Fuel excise and vehicle registration taxes.

• Luxury car tax.

• The Medicare levy.

• Taxes applying to scholarships, pensions, allowances and other transfer payments.

• Renewable energy targets and all other ad hoc schemes designed to achieve greenhouse gas abatement.

With those things abolished, today’s tax system would have the following principal features:

• A broad-based cashflow tax replacing the GST and payroll taxes and all inefficient state consumption taxes such as those on insurance.

• A uniform national resource rent tax.

• A 25 per cent company tax rate, for all companies.

• Progressive land taxes replacing stamp duties on property transfers.

• Cost-based, comprehensive road-user charges replacing fuel excises, stamp duties on motor vehicles, luxury car tax and vehicle registration taxes.

• A carbon emissions trading scheme.

• A much simpler and more progressive two-rate personal income tax system, with most people facing the lower of the two marginal rates.

Obviously, those engaging in today’s tax debates don’t see themselves delivering that sort of tax system.

Their debates concern a small set of very narrowly cast propositions, such as when, by how much and how broadly should company tax rates be reduced.

Of course we will have to cut our company tax rate; in a world of mobile capital, countries don’t get to choose their own company tax rate in perpetuity.

There is good reason to think that a lower company tax rate will drive a faster rate of investment and labour productivity growth, and that should support higher wages growth over time.

However, cutting the company tax rate is only a small part of a required restructuring of our tax system, and that in turn is only a small part of the policy reform program that will be required if we are to ensure that all Australians have the opportunity to choose a life of real value.

I’ve talked in the past about the need for the nation’s leaders — across business, community and government — to frame a compelling and unifying narrative that motivates and supports national development.

It must present a realistic assessment of where we are — but also an ambitious, clear vision for our future.

And it must detail the strategies that will secure that ­vision against many challenges.

Australia will see no progress on tax reform unless the community sees vested interest make way for the national interest.

Ken Henry is chairman of the National Australia Bank. This is the edited text of an address he will deliver today to the AICD Governance Summit in Melbourne.

[Rorschach]

Ken Henry’s prescription for nation’s taxing times
The Australian
12:00AM March 2, 2018

Australians would be better off in many ways today had the Rudd, Gillard, Abbott, Turnbull and assorted state governments had the courage to implement and follow through on the thrust of Ken Henry’s tax review commissioned a decade ago under former treasurer Wayne Swan. In a powerful speech to the Australian Institute of Company Directors today, Dr Henry, the National Australia Bank chairman, will outline how different our tax system would be. A raft of complex, inefficient state taxes would be gone, on payrolls, insurance, property transfers and vehicle registrations. In their place would be a broad-based cashflow tax replacing the GST in its current form; progressive land taxes; cost-based, comprehensive road-user charges; and a simpler personal income tax system, with most people paying the lower of two marginal rates.

Proponents of Malcolm Turnbull’s corporate tax cuts will highlight Dr Henry’s support for a uniform 25 per cent rate. In a world of mobile capital, as he said, a lower rate would “drive a faster rate of investment and labour productivity growth, and that should support higher wages growth over time”. After a long reform hiatus, however, restructuring of the tax system is just one aspect of the policy overhaul the economy needs.

One of Dr Henry’s most important observations is that the overall tax take is too low to support the government spending to which both sides of politics are committed: “It simply doesn’t have the buoyancy to generate enough revenue to achieve a balanced budget on average over the cycle. And its robustness is deteriorating.” Far from providing an excuse for the states and commonwealth to raise taxes further, governments must face facts. Current welfare, health, education and other programs funded largely on borrowed money are beyond taxpayers’ means. If budgets are to be repaired, debt repaid, and surpluses and sovereign wealth funds rebuilt as a standby for weathering future economic crises, meaningful spending cuts are unavoidable. The longer they are delayed, the more painful the fallout will be. The Turnbull government is making headway, curbing spending on the Disability Support Pension, which accounts for 10 per cent of the welfare bill, saving $4.8 billion across 10 years. The commonwealth-state tax transfer system needs built-in financial incentives to encourage states to be frugal and efficient.

As Dr Henry says, the tax system is too narrow and complex. Businesses waste hours on compliance. The fact only half of households are net taxpayers after welfare churn does not promote hard work. As well as being fairer, a broadening of the GST base and/or a lift in the rate of up to 15 per cent would allow for state taxes, earmarked for the chop when John Howard introduced the GST, finally to be abolished. Good debate, factoring in the economic realities of an ageing population, is essential. Dr Henry’s speech should be a catalyst for governments to rekindle reform in the national interest. Australia may not remain sufficiently wealthy to indulge the present populist, self-centred and dysfunctional political culture.