The public release of Australia’s Future Tax System—known as the Henry review—in May 2010 sparked an ongoing debate in Australia about the structure and efficiency of the country’s tax system. The review recommended substantial reforms be made to state and federal taxes, including dramatic simplification of income tax, wider use of rent and land taxes, and more consistent and appropriate treatment of income from capital gains and savings. The review was rightly well received—it offered a dramatically better vision for a national tax system than what we have now. But its recommendations are not above criticism. Beyond a desire for lower taxation and government spending in general, proponents of classical liberalism might raise four broad objections.
1. The review proposes too great a reliance on income tax compared to consumption tax. Consumption tax, broadly based and uniformly enforced, is less difficult to enforce and less damages work incentives.
2. State governments should take more initiative to reform their own tax bases, particularly by curtailing the use of transfer duties; the Commonwealth government should let states become more self-sufficient to foster the benefits of federalism.
3. The review leaves further scope to improve the transparency of the tax system, particularly by removing the ability to make tax deductions (provided the savings are used to cut income tax rates).
4. The proposal to apply a discount to income from savings could be simplified and improved by applying a flat rate to savings income regardless of the recipient (with some indexation relief for inflation).
A discussion of how tax systems should be assessed, from a broad liberal perspective, precedes these criticisms.
Adam Creighton is a Research Fellow at The Centre for Independent Studies.
