New Australia

NewAustralia Response to the Henry Tax Review

Green Tax Shift  +  No Population Growth + More Transport & Health  +  Cost Effective Defence

Executive Summary

The following is copied directly from the Executive Summary of the Henry Tax Review with comments added by NewAustralia in the blue boxes.

NewAustralia supports many aspects of the Henry tax review but would have liked to see a shift to environmental taxes. We are still considering aspects of the report - the following is not final.

1. Concentrating revenue raising on four efficient tax bases

Australia has too many taxes and too many complicated ways of delivering multiple policy objectives through the tax and transfer systems. The capacity of the legislative and operating platforms of these systems, and their human users, to deal with the resulting complexity has been overreached. The tax and transfer architecture is overburdened and beginning to fail in dealing efficiently and effectively with multiplying policy goals and demands. Rationalisation of the tax and transfer architecture should now be a strategic priority.

Key directions

• Revenue raising should be concentrated on four robust and efficient tax bases:
  • personal income, assessed on a more comprehensive base;
  • business income, with more growth-oriented rates and base;
  • private consumption, through broad, simple taxes; and
  • economic rents from natural resources and land, on comprehensive bases, noting that revenue from rent taxes will likely be more volatile than from the existing resource royalties it will replace.
• Other taxes should be maintained only if they efficiently address social or economic costs - such as taxes on tobacco, alcohol, gambling and environmental costs, and efficient road user taxes or charges.
• In time the following taxes should be abolished and their revenues replaced by taxes applying to the four robust and efficient tax bases:
  • insurance taxes;
  • payroll tax;
  • property transfer taxes;
  • stamp duties on the purchase of motor vehicles;
  • resource royalties, replaced by the rent tax;
  • luxury car tax;
  • the tax on superannuation contributions in the fund;
  • income taxes on all government pensions, allowances and benefits; and
  • fuel and vehicle registration taxes, if replaced by more efficient road user charges.

Our key policy is to shift to environmental taxes, including a Carbon Tax. As part of this shift some of the taxes that this review targets for abolition can be removed. We already support abolition of payroll tax, Insurance taxes, vehicle registration & stamp duties on the purchase of motor vehicles. We are considering support for abolishion of the tax on superannuation contributions in the fund, income taxes on all government pensions, allowances and benefits. We do not support removing fuel taxes - fuel taxes are the only Carbon Tax we have! We may support replacement of property transfer taxes on purchase with property transfer taxes on sale - but not replacement with land taxes. The resource rent tax on "super" profits is supported but should be simplified, cut in at a much higher level than the long term bond rate and not rebate losses. We see no benefit in supporting mines that would otherwise be uneconomic.

2. Configuring taxes and transfers to support productivity, participation and growth

The continued strength of long-term economic growth is vital for Australia, and will determine future incomes and living standards at all levels. The reforms in this Report could potentially increase national output by around 2 to 3 per cent, or around $25 billion to $40 billion in 2010-11 values over the long term. Long-term growth is supported by increasing workforce participation and by increasing productivity, including through stronger investment. Both tax theory and research evidence strongly suggest that the architecture of taxes has a major impact on each of these. Workforce participation is strongly influenced by incentives in the tax and transfer system, and by the affordability of quality child care. Productivity is increased by more efficient tax bases, support for skill acquisition and ensuring the efficient and timely supply of infrastructure. Investment is particularly supported by lower company income tax rates. Higher economic growth promotes higher wage growth, and provides revenue growth to fund income transfers and community services. A number of other countries with strong social support policies have at the same time increasingly adopted strongly pro-growth tax structures. Accordingly, Australia should configure its tax and transfer architecture to promote stronger economic growth through participation and productivity.

Key directions

• Maintain the company income tax rate towards the lower end of the small to medium OECD economy average, with a reduction to 25 per cent over the medium term. This aims particularly to increase the level of business investment in Australia across all sectors, including foreign direct investment; promote more entrepreneurial activity; and reduce incentives for profit-shifting offshore.
  • A business-level expenditure tax could suit Australia in the future and is worthy of further consideration and debate, along with a reconsideration of dividend imputation's place in an internationally integrated economy.
• Promote higher workforce participation through:
  • improving support for quality child care;
  • building clear work incentives into the levels of income support payments; and
  • targeting means tests to facilitate higher workforce participation by groups with differing participation opportunities and expectations. Steeper means test withdrawal rates should anticipate full-time participation by those fully able to work, now or in the near future, but they should anticipate, through gentler withdrawal rates, part-time work for others, including pensioners and students.
• Within practical limits, lift productivity through more efficient and neutral taxes:
  • for business risk, an improved treatment of business losses, with a one-year carry-back of company losses;
  • for investment in productive assets, streamlined and enhanced capital allowance arrangements, including allowing low-value assets to be written off, with a high threshold for small business, and streamlined small business capital gains tax rules; and
  • for investment of personal savings in the presence of inflation, a common 40 per cent discount for interest, net residential rents and capital gains.
• Increase the efficiency of use and investment in roads by a program of road reforms that includes greater use of road user charges, including congestion charges.

We support the move towards a 25% company tax rate. This becomes more feasible with revenue from environmental taxation including a carbon tax. Child care subsidies should be limited to meet population control objectives. Congestion charges are expensive to establish on normal roads due to the large number of electronic toll points required. We prefer car pooling lanes in the inner city and fuel taxes.

3. An equitable, transparent and simplified personal income tax

The personal income tax system will remain Australia's largest source of tax revenues. The 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. Personal tax compliance has become inordinately complex, and complexity hides its policy intent from citizens. An opportunity exists to greatly simplify personal tax, to make its policy more transparent, and to use 21st century technologies to make it fairer, easier to comply with, and more robust. At the same time, personal tax can be better coordinated with the transfer system.

Key directions

• A much higher personal tax-free threshold, around $25,000, should replace the current complex array of thresholds and offsets.
• All pensions, allowances and other transfer payments should be tax-free.
• A simple transparent two-step tax scale should apply.
• Deductions and offsets should be rationalised - with most work-related deductions replaced by a standard rate of deduction linked to the level of income from work.
• Progressivity of the tax system should be enhanced by including all forms of work remuneration in personal tax returns - including employer superannuation contributions (see below for new concession framework) and the main fringe benefits.

These ideas are of interest to us and may well be adopted as policy.

4. A fair, adequate, and work supportive transfer system

The overall architecture of Australia's transfer system is well founded - it is focused on poverty alleviation, clear targeting and sustainability. The Pension Review developed adequacy benchmarks for age, disability and carer pensions paid to those where there is limited or no expectation of work. Adequacy benchmarks are also required for other government payments, but these must also address incentives to work. In the 21st century, given both changing social expectations and increasing age dependency, there will be a greater expectation that those who are able to support themselves through work will do so. This Review provides strategic directions for these arrangements, relating to income support, student assistance and assistance for children and parents. Once established, the adequacy of payments should be maintained by common indexation arrangements. While full integration of the tax and transfer systems is not practicable given their different objectives, better coordination between them is possible.

Key directions

• Three levels of primary support payment should be established - pensions for the aged, disabled and carers; lower-rate participation allowances for those of working age; and assistance payments for young people and students - each with means test withdrawal rates reflecting different work expectations.
• Once adequacy benchmarks are reached, they should be preserved by common indexation arrangements applied to each of the main payment types.
• Following the Pension Review changes, the relativity between single and couple payments should be improved across other payment types.
• The assets test should be abolished, and a comprehensive means test base established for the main pension and allowance payments (including for Rent Assistance to prevent additive withdrawal rates). Income from savings would take the form of deemed returns from assets.
• Family assistance should be paid through a single program principally based on the assessed additional costs of children, in general increasing with age, and means tested in accordance with family taxable income on the same base as for income tax.

These ideas are under consideration and some may well be adopted as policy. Family assistance should be limited to meet population control objectives.

5. Integrating consumption tax compliance with business systems

Consumption spending, if broadly defined, is potentially an efficient and robust tax base. The introduction of the GST made Australia's consumption tax base more efficient because it replaced a range of narrowly based Commonwealth and State taxes. However, the GST is itself an operationally complex tax, designed on tax invoice concepts more suited to the documentary standards of the 1960s than the digital potential of the 21st century. Moreover, Australia retains some other inefficient State taxes on consumption (such as insurance taxes) and a narrow payroll tax. It would be possible to replace the current narrow State taxes base (including payroll tax) with a low-rate, broad cash flow tax that exempts business export sales, more effectively utilising the consumption base. By using existing tax reporting mechanisms, the new tax could more readily be based on the automated systems increasingly used by businesses.

Key directions

• Inefficient State taxes (including the current payroll tax) could be replaced by a low-rate destination cash flow tax, with revenues allocated to fund State services.
• Replace the current inefficient input taxation of financial services under the GST with a more efficient financial services tax, developed in consultation with the industry.

We recommend replacing payroll tax with environmental taxes including a carbon tax. These GST reform ideas are good and may well be adopted as policy.

6. Efficient land and resource taxation

The returns to immobile factors of production constitute an efficient tax base. A rent-based tax would ensure the right levels of exploration and extraction and provide sufficient encouragement for private sector participation. A tax on high-value resource rents would on average over time likely raise higher revenues than existing output-based royalties. There are several alternative mechanisms for applying a rent-based tax, and transitional arrangements are critical.

A land tax is efficient if it is broadly based. Existing land taxes are quite inefficient because they are not broadly based, and rates vary according to land use and landholding aggregation rules. An efficient land tax would apply equally to all land uses and aggregate holdings, but could have a threshold and different rates based on the value per square metre of land. In practice this could mean that most land in lower-value use (including most agricultural land) would not face a land tax liability and the tax would apply moderate rates to most other land. Transitional rules will be critical in changing the basis of land taxes, to smooth valuation effects and to allow ample time for those affected to make adjustments to their investments in land.

Key directions

• Except for low-value commodities, existing resource royalties should be replaced by a project-based uniform resource rent tax set at 40 per cent.
  • Resource taxation should include a symmetric treatment of losses and be based on the capital allowance rather than cash flow method of assessment.
  • With appropriate transition rules, the new tax should apply to both new and existing projects.
  • The Australian and State governments should negotiate an appropriate allocation of the revenues and risks of the tax.
• Existing land tax arrangements should be replaced, subject to a long transition to slow valuation effects and facilitate landholding adjustments, by a land tax applying to all land regardless of use. The rate scale would be based on the value per square metre of land.
  • A unit value threshold would effectively exempt most land in agricultural use.
  • Most residential land could be subject to tax of about 1 per cent. A higher rate may apply to the highest value land (per square metre).
  • Land tax revenue would also replace stamp duties on land transfers.

The resource rent tax on "super" profits is supported but should be simplified, cut in at a much higher level than the long term bond rate and not rebate losses. A land tax could possibly replace local government rates and existing land tax. Revenue would need to flow back to State and Local governments.

7. Completing retirement income reform and securing aged care

The Review's interim report on retirement incomes was released in May 2009. It supported the basic framework of the current system, and made a range of recommendations for improvements. However, the Review did not address all issues because it wanted to consider many of these in the context of other proposals. There is scope to improve the equity and simplicity of the superannuation arrangements, and in doing so it is also possible to increase the effective rate of savings delivered by the superannuation system. The Review proposes that these changes be made and sees them as taking Australia's superannuation system towards its logical design conclusion - as a subsidised expenditure tax. This is important, because there has been concern that superannuation has undergone constant change.

Aged care is a major challenge for Australia with rapidly increasing demand. The Review proposes some reforms in this area. It notes that this may be an area requiring compulsory levies, on all taxpayers.

Key directions

• The tax on superannuation contributions in the fund should be abolished, increasing saving from currently taxed contributions by 17.5 per cent.
• Instead, employer superannuation contributions should be included in employee taxable income. Subject to annual limits, all contributions would attract a tax offset payable to contributors.
• All income and gains of superannuation funds should be taxed at a rate of 7.5 per cent, further increasing savings.
• The $50,000 transitional cap for contributors aged 50 or older should be continued indefinitely.
• Superannuation balances should be included in Age Pension means tests on the same basis as other savings.
• The development of longevity insurance products should be encouraged and the government should consider offering such products itself.
• Care services for the aged should in general be separated from accommodation choices and provided on a means tested basis - preferably, any future compulsory funding levies should apply to all personal taxpayers and not be linked only to the superannuation guarantee.

These ideas seem reasonable and should be considered by government.

8. Toward more affordable housing

Over the past decade, large parts of Australia have experienced worsening housing affordability problems. Rising housing prices have been underpinned mainly by rising residential land values (with high construction costs contributing in some cases, particularly in remote areas). While the overall demand for housing is increased by favourable tax and transfer provisions particularly for owner-occupied housing, these provisions are of very long standing and have deep community support. The sharp deterioration in affordability in recent times is more likely to reflect demand and supply factors such as high rates of immigration and household formation and government land use policies. The Review anticipates continued strong population growth and continued overall favourable tax-transfer treatment of owner-occupied housing. On that basis it has considered whether other features of the tax and transfer systems are appropriately configured to maintain fairness and efficiency in housing markets. It proposes a series of changes that would improve equity and market efficiency - but policy changes outside the tax and transfer systems will be necessary to better match aggregate housing supply and demand if overall housing price pressures are to be alleviated.

Key directions

• Maximum rates of Rent Assistance for income support recipients should be substantially increased and linked to movements in market rents.
• Subject to transition arrangements, public housing rent concessions should be replaced by Rent Assistance and a new form of assistance for high-needs tenants, to improve equity and work incentives.
• Over a long transition period, a land tax should be introduced on all land on a more efficient and uniform basis linked to unit land values, removing disincentives for institutional investment in rental property and integrated over time with property rate assessments.
• Over a similar period, transfer taxes on property should be reduced, and ultimately removed, with revenues replaced by efficient taxes, preferably annual land tax.
• Subject to transitional provisions, and following action to improve the current shortfall in housing supply, a more neutral personal income tax treatment of private residential rental investment should be introduced, with less volatile market effects, through a 40 per cent discount on all net residential rental income and losses, and capital gains.

We support phasing out of negative gearing and capital gains concessions for residential housing investments and abolition of rent assistance (which just inflates rents). The money saved should be spent on housing projects. A land tax could possibly replace local government rates and existing land tax. Revenue would need to flow back to State and Local governments. We do not support replacement of property transfer taxes with land taxation. Instead transfer taxes should be levied on sale, not purchase. Other suggestions here are under consideration.

9. A more open, understandable and responsive tax system

Both tax policy-making and administration should be as responsive as possible to problems experienced by taxpayers. This requires a more transparent and understandable system, with citizens having clear rights to information on the tax system and their experience with it. It also requires more effective mechanisms to respond to both policy and administrative issues as they arise. Further, it is critical that the integrity of the tax system be maintained and that threats be promptly dealt with as they emerge.

Key directions

• In time, citizens should be able to access, through a suitable choice of channels, comprehensive and timely information on their tax and transfer affairs, and be able to see and interpret how their tax and transfer outcomes have arisen and may be affected by choices they may make.
• The Board of Taxation should be empowered to initiate its own reviews of how current tax policies and laws are operating.
• A board should be established to advise the Commissioner of Taxation on the general organisation and management of the ATO.
• The government should ensure that sufficient resources are devoted to the Inspector-General of Taxation, the Australian National Audit Office and the Commonwealth Ombudsman, and clarify that the role of the Inspector-General of Taxation is to examine systemic tax administration issues that affect businesses.
• Governments should make available data and publish analyses of taxes and transfers to inform and encourage community debate about the performance of the tax and transfer system. High standards of transparency and accountability should apply to all taxes, transfers and government spending.

These ideas are supported.

Pathway to reform

This Review has aimed to set the strategic directions for the future architecture of the Australian tax and transfer system. It has not produced a one-off tax policy package, and it has not advanced the detailed design or timing of measures. Indeed, it is neither possible nor desirable to make all of these changes too quickly.

There are several reasons for this approach:

• First, taxes and transfers are instruments of government policy - they rarely provide a full expression of the underlying policy itself in isolation from other policies. There are critical links between tax and transfer policies and the other policies of government - mainly regulatory and expenditure policies. The future implementation of many tax and transfer policies depends on developments in this broader fabric of policy. For example:
  • retirement income policies must take account of expected future policies for funding the rapid escalation of costs of health and care for the aged;
• transfer system support for child care depends on the development of the capacity and regulation of the quality of child care services;
• the effectiveness of tax arrangements for housing, and of housing assistance transfers, depends critically on future land and housing regulatory policy;
• road tax and charging reform depends critically on reform to the institutional and reporting framework of road providers; and
• the best assignment of taxes by level of government depends on models for future funding of major programs in areas like health, education, welfare and transport.
• Second, as the Review has addressed a vast field of policy, it is inevitable that some changes will be timed differently than others. This creates the need for future policy-makers to ensure that desired balances are maintained on an ongoing basis, but it is not practical for the Review to anticipate or prescribe in advance all of those sequencing challenges.
• Third, policy reforms are usually aimed at changing market or other behaviours and outcomes, but such responses are rarely instantaneous. Markets, businesses and households need adjustment time. Many reforms will need further consideration closer to the time of implementation.
• Fourth, the Review has been asked to look at taxes and transfers at all levels of government. Clearly, implementation will require agreement at the intergovernmental level, and will require detailed assessment of financial implications - likely in more than one step.
• Fifth, tax reform should not be pursued independently of fiscal and macro-economic circumstances. Australia, and perhaps more importantly the rest of the world, is not currently experiencing typical economic times. Policies that suit the long run, which is the focus of the Review, may not necessarily be best implemented in these atypical times. Governments need the flexibility to pursue changes in accord with fiscal and other macroeconomic conditions, and the Review has not attempted to predict or anticipate that future pathway.
• Sixth, policy changes that affect the distribution of income and benefits always confront the fact that many people have arranged their affairs on the basis of prior or existing policies. Adjustment itself has costs and requires time, and sometimes help is essential. Where adjustment is costly for the welfare of those affected, other provision may need to be made. The Review has not attempted to define every one of these possibilities and recognises that future policy decision-making will need to take these issues into account.

In drawing attention to all of these issues, however, the Review is by no means advocating a slow boat to reform. A number of the recommendations in this Report, if they were to be implemented immediately and without compensating changes elsewhere, could be represented as leading to losses of real disposable incomes (or real wealth) for some people in the community. Recognising the implementation challenges posed by such recommendations, the Panel has nevertheless decided to state clearly its views on what a future tax and transfer system should look like. The Panel sees no value in ignoring those features of the present system it strongly believes have no place in a 21st century architecture, for no better reason than some Australians currently gain more than others from those features.

The Panel appreciates that reform packages constructed on its recommendations will take some account of static distributional impacts, but considers that such accounting should not result in a failure to implement recommendations that would produce a tax and transfer system of enhanced durability, integrity and equity.

Australia's future success depends vitally on a robust approach to an ongoing reform agenda, and this will rely on support from all sections of the community. To maintain strong forward momentum, the Review recommends that all governments, and institutions such as the Council of Australian Governments (COAG) and the Productivity Commission, should be charged with the task of pressing ahead with reform implementation on an open, transparent basis.

Summary: NewAustralia supports many aspects of the Henry Review. The main modifications would be: Addition of our Green Tax Shift to the reform. This would create a large revenue stream making the tax cuts proposed by Henry more feasible. We do not support abolition of fuel excise as this is a 'green' tax. We do not support replacement of property transfer taxes with land taxation. Instead transfer taxes should be levied on sale, not purchase. Family assistance and Child Care provisions should be limited to meet population control objectives.

Mining Tax Breaks

11^th May 2010: "Miners strangely silent on the billions they reap in tax credits." more...

No housing reform

11^th May 2010: "Australia's unlimited exemptions from capital gains tax, land tax and the pension means-test help to inflate house prices far beyond the reach of most younger Australians." more...

Review to radical

3^rd May 2010: "YOU could gauge the Rudd government's alarm at the breadth and radical nature of the Henry tax review by studying the recommendations that have been rejected, ignored, put into the too-hard basket or left to languish for an unspecified period." more...

No shocks in this response

3^rd May 2010: "THE government has made a pragmatic pitch to attract voters, bolster revenue and modestly burnish its economic reform credentials in its targeted response to the massively ambitious Henry tax review. And everything it has done is oh, so election year." more...