Tax forum demonstrates Labor has already failed

Even for tax policy fanatics it’s hard to get excited about the two-day tax forum, convening in Canberra today. The prospect of meaningful change is slim.

The government already has a comprehensive set of tax proposals sitting in front of it, the Henry review, most of which it has chosen to ignore or “rule out”. We can’t blame the hung parliament either; the government was just as timid when Kevin Rudd was at the helm.

The Treasurer routinely implies he has implemented 32 of the Henry review’s 138 recommendations. That’s simply not true.

First, the government’s own tax reform website, www.futuretax.gov.au, lists 28 of the Henry recommendations that are supposedly consistent with the government’s program, not 32. But my main quibble is that barely any of the claimed reforms do in fact reflect the relevant measures in Ken Henry’s report. They are merely related in some way.

Take the vaunted 50% tax discount on the first $500 of interest income that is set to begin next financial year. This is supposed to be “consistent” with recommendation 14a) in Henry.

Recommendation 14 is one of the most fundamental recommendations in the entire review. It proposes applying a 40%discount to all “savings” income — which includes net rental income, capital gains and interest income — before relevant tax rates apply. Applying a discount to a sliver of interest income alone makes a mockery of the recommendation, and will have practically none of the efficiency benefits of a consistently applied 40% discount.

The government also claims its Minerals Resource Rent Tax (MRRT) is “consistent” with recommendations 45, 46, 47 and 48, which pertain to taxation of Australia’s non-renewable resources. But these recommendations explicitly presume the Commonwealth government’s taxing arrangements replace existing state royalties, which is not occurring. Moreover, Henry envisaged a genuine rent tax, similar to the original Resource Super Profits Tax, not the welfare-destroying MRRT instead proposed.

But the most galling examples relate to superannuation. Not only is the government’s headline superannuation policy — lifting the guarantee from 9% to 12% by 2019 — a blatant contradiction of Henry, but the planned $500 superannuation rebate for workers on less than $37,000 has practically nothing to do with recommendation 18, which the government claims its reforms are “consistent” with.

Recommendation 18 is not a populist, perfunctory handout. It would introduce a fairer and more efficient system whereby superannuation guarantee contributions were taxed as ordinary income and then received a refundable tax rebate of 20 cents per dollar.

For instance, under Henry’s system people on a marginal tax rate of 15% would be paid an extra five cents for every dollar saved in superannuation. The existing system gives them no immediate tax benefit. This arrangement would encourage genuinely new savings and curb opportunities for tax rate shopping, which are rife under current existing arrangements.

I won’t go on further, but of Henry’s 138 recommendations I can only find three the government either has implemented or has proposed to implement in their entirety: increasing tobacco excise (recommendation 73), establishing an Australian charities and not-for-profits commission (41) and introducing a tax advisory board (115). Wow!

That’s why I’m not holding out much hope for the forum.

The British have just completed a wholesale review of their tax system by Sir James Mirrlees, a distinguished economist, and hardly one from the “right” side of politics either. Nevertheless, he argued that the base of Britain’s consumption tax (the VAT) could be broadened without reducing progressivity. The additional revenue could be used to cut income tax lower down the scale, for instance.

The disappointing aspect of Australia’s tax reform stasis is that the same reforms could be supported vociferously by the intellectual “left” and “right” (not the interest groups — they will bleat), even if for different reasons.

So used to being relentlessly slammed by much of Australia’s broadsheet press, the government should have used bold tax reform to bolster its popularity among elites. At least then it might have bolstered its popularity among one segment of Australian society, rather than none.

Adam Creighton is a Research Fellow at the Centre for Independent Studies