Updated December 23, 2019 08:33:38

Ten years ago to this day, Ken Henry handed then-treasurer Wayne Swan a wish list of tax reforms to set Australia up for the 21st century.

That's right, two days out from Christmas — when most people were thinking about lunch, cricket and the beach — the then-Treasury secretary's gift to his boss was a 783-page tax tome.

No wonder the Rudd government's response to the review took months to come out.

A decade later, the Henry Tax Review still sits gathering dust.

Precious few of its 138 recommendations have been implemented, with those that have often bastardised beyond recognition.

The near-total lack of reform has left the architect of the review shocked.

"I am today absolutely stunned that so little has actually been implemented," Dr Henry told The Business in an exclusive interview marking a decade since his review.

Not that Dr Henry expected all of his recommendations to be acted upon immediately back in 2009.

"I did expect that it would take some decades," he said.

Instead of a single tax reform package designed to be implemented at once, the review panel decided midway through to propose "ambitious pathways of reform" for the future.

The reason? Between the Rudd government commissioning the review in May 2008 and the completion of the report at the end of 2009, the global financial crisis washed away the surpluses Dr Henry had hoped would be the spoonful of sugar to sweeten some bitter medicine.

"For a tax reformer that's the great weapon to have, the ability to provide overcompensation. That's the sell," he said.

Without the money to sell some of the more difficult reforms, the Rudd government decided to proceed with one large tax change that would raise much-needed revenue but target only a small group — the Resource Super Profits Tax.

What it didn't count on was the mining industry's financial resources mounting a ferocious PR campaign that struck fear into the heart of the electorate ahead of a looming election.

The result was a new prime minister leading a minority Labor government, and a much-amended mining tax negotiated with the big industry players.

The other major tax reform of the Gillard government — a carbon tax — also departed from the Henry Review.

That's because the Rudd government's original carbon pollution reduction scheme (CPRS) was still on the table when Dr Henry and his panel were writing their report, so they didn't examine the area.

But, despite being different from the review's recommendations, Dr Henry says Australia is much worse-off from the repeal of those two taxes.

"Both have cost Australia enormously," he lamented.

Dr Henry is particularly frustrated by the blocking of the Rudd government's CPRS "for political reasons", despite the concept of emissions trading having had tri-partisan support from Labor, the Coalition and the Greens.

"Since then we have not had a coherent climate change policy in Australia and, as a consequence, we've not had a coherent energy policy in Australia," he observed.

After the repeal of the Gillard government's emissions trading scheme by the Abbott government, Dr Henry is not confident Australia will ever put a price on carbon.

"I'm not sure that we will — I certainly hope that we will, we desperately need it," he said.

When asked if Australia had any hope of meeting its carbon emissions reduction targets without a carbon price, Dr Henry scoffed.

"Well, it could be done, but it would be much more economically damaging than with a carbon price."

Workers paying the price for lack of tax reform

Even in the two areas where there have been substantial tax changes — personal and corporate income — Dr Henry believes there is a need for much more substantial reform.

The Coalition Government did succeed in edging company tax rates down to 25 per cent, as recommended by Dr Henry, but only for small and medium companies, with tax breaks for large firms rejected by the Senate.

By 2024-25, the Coalition's legislated personal income tax cuts will see the 37 per cent tax bracket eliminated, leaving only three rates: 19 per cent, 30 per cent and 45 per cent.

In some ways that fits with recommendation two of the Henry Tax Review, to simplify tax rates so that most taxpayers have a constant tax rate on extra dollars earned — what economists call their "marginal tax rate".

But lower-income earners will be the ones hit most by the transition from 19 per cent to 30 per cent tax rates for every dollar they earn above $41,000 — often the people who are working part time and also stand to lose government benefits or incur extra childcare costs for extra hours worked.

Overall, the biggest beneficiaries of the tax cuts are unambiguously higher-income earners.

In Dr Henry's view, the tax system now is worse overall than it was when he undertook his review a decade ago.

On the measures of policy consistency and revenue sustainability, Dr Henry says it is "unambiguously worse".

But it is not a lack of personal income tax that is the problem Dr Henry is concerned about, despite the recent tax cuts. Quite the opposite.

From 44.5 per cent of Commonwealth tax collections in 2007-08, he says personal income taxes have risen to be 49 per cent now, and will be above 50 per cent next year and beyond, despite the tax cuts.

"Does anybody seriously consider that's sustainable?

"It cannot be sustainable. I can't imagine the electorate putting up with it."

Aside from the politics of higher income taxes, Dr Henry says they are holding back key drivers of economic growth.

"We cannot continue to put increasing reliance on the personal income tax system — not if we want to pursue a productivity-enhancing agenda and also an agenda which enhances workforce participation."

The benefits of the tax cuts are not evenly distributed either.

According to modelling by the Grattan Institute, the only group who can expect to see their income tax payments as a percentage of their total earnings fall by the end of next decade are higher-income earners — people on average to lower incomes will be the ones who end up paying more, due to bracket creep.

GST increase 'will have to happen'

However, while Dr Henry argues income tax must fall further, he also believes the Commonwealth and states will need to increase their revenue to fund the rising cost of services for an ageing population with fewer workers.

So what are the alternatives?

Although it was specifically excluded from his tax review by the Rudd government, Dr Henry says a broader GST "will have to happen".

That's because the things we spend our money on have changed dramatically since the GST was introduced in 2000.

Over the past two decades, we're spending relatively less on buying goods and much more on services, many of which are exempt from GST, such as health, education and child care.

From covering around two thirds of Australians' spending, the tax now only applies to about half, and state revenues are suffering as a result.

Professor Miranda Stewart from Melbourne University Law School, who is also a fellow at ANU's Tax and Transfer Policy Institute, told The Money that Australia may need a higher rate of GST as well as a broader base.

"If we look comparatively at other jurisdictions, and of course every country is different, our rate of 10 per cent is relatively low," she observed.

"It's high relative to some Asia-Pacific countries, but New Zealand is 15 per cent, in Europe it's close to 20, so the rate is low."

Professor John Freebairn, who was a consultant to the Henry Tax Review, told The Money that both the base and rate of the GST needed to be expanded.

"The way to do it is just to copy the New Zealand model. They tax everything that we spend money on and they have a 15 per cent rate," he argued.

"Now, what you would need to do as part of that package is recycle a key part of it for people who were on various social security payments, so that their purchasing power is maintained.

"And then most, the rest, would be allocated to reducing personal income tax rates."

Corporate tax down but capital gains tax up

Though he doesn't think it will happen, Dr Henry said an emissions trading scheme would still benefit the economy, as well as the environment.

"An emissions trading scheme would provide much-enhanced certainty for investment decision-making in the energy sector," he explained.

The former Treasury head and recently retired NAB chairman still maintains that a company tax cut to 25 per cent across the board would boost business investment, productivity and economic growth.

It's a move that obviously has support from big business, but also from current Treasury bureaucrats and many tax experts.

"There's massive global tax competition ongoing internationally, the average headline corporate tax rate around the world now is close to 20 per cent, and in our region even lower, and the tax rates on intangible income, innovation, intellectual property, digital income are much lower globally," Professor Stewart said.

"So, companies that face the 30 per cent corporate tax rate, in my view, it does push up the cost of capital relative to the world, and that's a problem for Australia in the longer term."

Another move Dr Henry thinks might enhance investment in productive areas of the economy is a reduction in the capital gains tax discount and negative gearing benefits.

"We also proposed that there be symmetrical tax treatment of interest and rent and capital gains to deal with, in part what we've seen, money going into negatively geared rental property rather than going in to finance productive business investment."

Land tax to replace 'diabolical' stamp duties

Dr Henry said another reform that would enhance the allocation of resources would be replacing property transfer stamp duties with a broad-based land tax.

Like almost all economists, Dr Henry has nothing but scorn for stamp duty, describing it as "a diabolical tax".

"This is a terrible tax, property stamp duties, it's completely indefensible and it can be replaced, we know how to replace it," Dr Henry said, referring to the ACT's move to phase out stamp duties in favour of land taxes over two decades.

"It would be a good reform for all of the states and all of the territories, it would deal with a lot of the volatility in their budgets but it would also be a productivity-enhancing reform."

The director of ANU's Tax and Transfer Policy Institute, Professor Bob Breunig, recently explained to RN's The Money exactly why stamp duties are so "diabolical".

"Taxing them is going to reduce the number of transactions. We want people to be able to transact houses," he argued.

"We want older people to be able to downsize. We want younger people with kids to be able to move into bigger houses in neighbourhoods with schools and we want people who change jobs to be able to move houses and be able to get a new job."

In contrast, Professor Breunig said "land taxes are very efficient".

"If you're a corporation and I tax you, you might move your corporate headquarters to Singapore [which has lower tax rates]," he explained.

"If you're an individual and I tax you, you might work less. Or you might try to hide some of your income in a scheme.

"If I tax the land, the land doesn't do anything. It doesn't move to Malaysia, it doesn't stop working hard.

"So, it's a tax in which there's very little negative economic consequences, so we think it's very efficient."

Tax reform will hurt, but 'everybody's going to lose' without it

Many of these reforms will be intensely unpopular — indeed, Labor lost the last election proposing a much less ambitious suite of tax changes.

Labor proposed restricting negative gearing on property to existing investments and newly built properties, while also halving the capital gains tax discount and limiting access to franking credit refunds on share investments.

While Ken Henry said Labor's proposals did not follow the recommendations from his tax review, he argued they were "well motivated" and they would have been "better than the present system".

There's still hope that Ken Henry's review will be dusted off.

The previous major Commonwealth review into tax was completed by another Ken, Asprey, back in 1975.

Many of its recommendations were only enacted by the Hawke government in the mid-1980s — a decade later.

Its recommended value added tax (VAT) took a quarter of a century to be realised, with the introduction of the GST by the Howard government in 2000.

But Ken Henry says Australia doesn't have much time to dither.

"People are going to lose out big time if we don't have tax reform. Really big time. Everybody's going to lose."

And he has a message that seems pointedly directed at older generations, many of whom rejected Labor's tax changes but also rely on public health spending and pensions.

"Those who would be losers from the particular tax reform package, if they don't get tax reform they're going to find governments incapable of financing their needs," Dr Henry warned.

"These tax systems, at both Commonwealth and the state level are simply unsustainable. We know that."

Topics: tax, economic-trends, australia

First posted December 23, 2019 05:26:56