Expect Henry's report to strike a fair blow for tax simplicity
The Age
Saturday December 12, 2009
The Treasury secretary is concerned by tax law's growing complexity. DR KEN Henry's much-discussed review of the tax system is going to the Federal Government about now, but we're unlikely to be shown its contents until February or March next year. Even so, we have an idea of what to expect.The Treasury secretary's report will lay out a blueprint for the direction of reform over the next 25 years, to act as a guide to governments in their day-to-day decision-making. Would some particular decision move us towards or away from the ideal destination we are hoping to reach eventually?So although the report may include some popular proposals the Government could implement before the 2010 election, and some it could promise to implement in its second term, it will also contain controversial proposals the Government is likely to disavow.This was the initial fate of the Asprey report of 1975, which included such obviously politically impossible recommendations as the introduction of a capital gains tax, a fringe benefits tax, a dividend imputation scheme and even a goods and services tax. Henry is hoping to produce the next Asprey report.As always, the report will focus on improving the pursuit of the three objectives of good tax design: efficiency, equity (fairness) and simplicity. But it will be looking for reforms that, while increasing allocative efficiency, can also be advocated as increasing fairness.For instance, the 50 per cent discount on the tax on capital gains can be criticised as distorting taxpayer choices, but can also be criticised as unfair because such a high proportion of all capital gains are enjoyed by a handful of high-income earners.Often, simplicity is the objective that loses out in the effort to find better trade-offs between equity and efficiency. But not this time. Henry has long been concerned about the growing complexity of the tax law and the greater risks this generates for those (generally poorer) taxpayers who lack access to good advice.He is determined to strike a blow for simplicity, which he believes will also increase fairness. A major gain for simplicity would be achieved if, rather than continuing to have to pay a tax agent to prepare their annual tax returns, most people were able to submit a pre-filled return just with a few clicks of a mouse.The great workhorse of tax reform is the maxim: broaden the base to cut the rate. We can expect to see plenty of examples of the report proposing that exemptions and special deductions from a particular tax be reduced to finance a general reduction in the rate of the tax.Both sides of such a reform could be expected to reduce the tax's distortion of producers' and consumers' choices. One example could be rationalising rates of tax on different forms of alcohol, without that leading to any change in overall receipts from alcohol taxes.Until now, a guiding principle of tax reform has been the ideal of "comprehensive income taxation". This is the notion that a dollar of income is a dollar of income, so it should be taxed at the same rate regardless of how it is derived €” from work, profits, dividends, interest, rent or capital gain. Sometimes the comprehensive ideal is seen in terms of nominal income but it should be based on real income €” meaning that allowance should be made for the inflation-compensation component of interest income and capital gains.However, Henry has noted that the comprehensive income ideal has fallen out of favour with tax economists around the world, implying that it will be abandoned in the report in favour of a dual-tax system, where there is one rate scale for earned (work) income and a different one for investment income.In any case, the comprehensive income tax ideal has, in practice, been honoured in the breach. Income from the different ways of saving is taxed at radically different rates because of a multitude of special arrangements.I doubt if Henry would be pointing to these hugely anomalous results if he wasn't intending to propose that something be done about them.The report is likely to recognise the need to ensure Australia attracts sufficient foreign investment to meet its continuing investment needs, but seems likely to recommend only a small reduction in our present company tax rate of 30 per cent.On superannuation, where the present concessional taxing arrangement favours those on higher marginal tax rates (that is, those who already have the greatest capacity to save), the report is likely to recommend arrangements that redirect more of the tax benefit to those on lower marginal rates.It may also propose increasing the age at which people are able to access their super savings from the present 55 years to align with the recent decision to increase the age for age-pension eligibility to 67.With the cut-in point for the top personal income-tax rate of 46.5 per cent having been lifted to $180,000 a year €” so that now only 2 per cent of taxpayers are subject to the top rate €” the report is not likely to recommend the top rate be lowered.The report will also recommend reform of state taxes. It may propose that steps be taken to harmonise the tax bases (including tax-free thresholds and exemptions) and possibly rates between the states.It is unlikely to propose the abolition or reduction of payroll tax €” which is essentially similar in its effects to the goods and services tax €” although it may propose national harmonisation, with a lower tax-free threshold in exchange for a lower tax rate.The report may recommend the removal of stamp duty on insurance policies, but it won't recommend the removal of stamp duty on property conveyancing for as long as the family home remains exempt from capital gains tax.
© 2009 The Age
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