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Rudd/Swan squib on tax reform « Previous | |Next »
May 2, 2010

The Henry Review runs to over a thousand pages of detailed analysis and 140-odd recommendations on achieving a more efficient and fairer tax system. The objective was to lay out a blueprint for long-term tax reform. The Rudd Government's response. There is little relation between the two.


Rudd + Swan have squibbed on tax reform to make it fairer and more efficient in the context of the aging of the population, a growing shortage of workers, and increasing globalization. No surprise there, as this lack of courage and risk-taking is what we have come to expect on reform from the Rudd Government. Politics rules.

The "tax reform" package announced today by Treasurer Wayne Swan is really just a new resource rent tax that squeezes the miners plus the long-term increase of compulsory super contributions based on a 12% compulsory levy and accelerated depreciation for small business. Some of the super tax is going into the new infrastructure fund, which is about getting better road, rail and port facilities to help dig up our minerals and ship them out to booming Asian economies. There is zilch for the environment or climate change here. No surprises there either.

Of course, the politics is that Rudd 's main game is getting re-elected--political survival. Then in their second term the "we don't do brave" Rudd Government will address the next phrase of tax reform---that's the promise. It's a 10-year reform agenda. There is good coverage at TaxWatch.

The radical change to income tax, including a $25,000 threshold and a two-step tax scale, has gone into limbo, its fate left to much later. So have proposals for family-payments reform, because it's all inter-related.

Most of Henry's reform plans are either shelved or ruled out. Moreover, the 12 per cent target won't be achieved for nine years--the first increase is just 0.25 of a percentage point from July 1, 2013. Another 0.25 of a point will come from July 1, 2014. That is slow.

The core fairness issue is how to ensure that people living on low incomes, including those on income support, get a better deal out of the tax system; remove anomalies and poverty traps for people moving from welfare to work; and address the sustainability of social services, including how best to ensure adequacy and certainty of funding.

| Posted by Gary Sauer-Thompson at 11:30 PM | | Comments (8)


You cannot call this tax reform. It looks more like something that would be announced in the May budget. There is not even welfare reform to address the high levels of marginal tax rates for those earning money from casual work whilst on some form of pension.

Is it a pathway to tax reform? Even that is unclear. We will get some indication from the May budget. Will the decisions on personal income tax, personal benefits, pensions, housing, welfare and aged care be announced in the Budget on 11 May?

The argument is that the resources industry must be treated differently from other industries because companies are exploiting non-renewable resources owned by the nation. So you tax the resources not the profits.

No doubt the miners will run their usual fear campaign.

The mining companies have already begun their 'the jobs will move overseas' campaign, which is a bit hard to swallow when the resources are actually, like, here. Maybe they will dig up the mines and take them to Africa.

Will some marginally profitable mines not go ahead? Probably. Good outcome for the nation - it means future generations will still have some resources left to sell when all the low-hanging fruit has been picked.

The review seems to have been of a piece with the 2020 Summit: lots of dramatic announcements about fixing up the problems caused by 12 years of backward-looking Coalition misrule, followed by a few incremental changes they were going to do anyway. It was probably a good way to create the illusion of brand differentiation, but it's a trick that soon loses its effectiveness.

they could develop mines in alternative locations----eg., Papua New Guinea, Indonesia, Africa or Latin America. I don't know how realistic that is. What will probably happen is that the resources sector will consult with the Coalition so as oppose the Rudd government's money bills in the Senate.

Will the Coalition pull that trigger? They've started their fear campaign by saying that Labor will impose a land tax on the family home and introduce a congestion tax despite the explosive issue of imposing a Commonwealth land tax on family homes being taken off table by Swan.

The ten possible directions for tax reform in the Henry Review are:

1. Generate enough revenue for a growing and aging population
2. Make superannuation tax concessions fairer and less wasteful
3. Reduce tax avoidance through trusts and private companies
4 Reduce inflationary impacts of tax exemptions for luxury homes
5. Remove excess inducements for negative gearing
6. Strengthen and harmonise taxation of capital gains
7. Make tax assistance for families fairer and less wasteful
8. Remove wasteful tax breaks for international business transactions
9. Maintain the corporate income tax rate
10. Tighten fringe benefits concessions (especially for motor vehicles)

Rudd Labor hasn't scratched the surface.

True Gary, and that's what I was referring to in my second paragraph.

Many people still adopt the unthinking premise that we should exploit as much of our finite resources as quickly as we can. A more considered set of values might be that we should slow down the rate of exploitation so there'll be some left for our grandchildren, for whom in other circumstances people express such profound concern. The people of Nauru might be a lot better off now if they had rationed their superphosphate mining more carefully, just as many countries with lots of rainforest might live to regret the day they sold them off so cheaply just so one generation could get rich.

I mean from a social policy perspective, I question whether it's useful to keep sending cheap ore to China so it can make ever greater numbers of throwaway consumer goods to sell back to us. Have flatscreen televisions in every room really made us happier? Do our kids really benefit from a new mobile phone and laptop every year? Are mountains of disposable plastic packaging really a good use of diminishing hydrocarbons? Is a gangster's gold-plated coffin a suitable purpose for a rare metal? Ah to Hell with ethics and philosophy! Let the market decide!!

Funnily enough though, governments are more than happy to use tax policy to impose social values over more trivial matters. Uniform tax on alcohol? No way!

There is a vision of reform in Henry's review. It responds to globalisation by cutting taxes on footloose capital; addresses the budget costs of an ageing population by reducing disincentives to work; and begins to tackle environmental issues through congestion charges on our roads.

It's about increasing economic growth through better productivity, rather than shifting to a more sustainable society. It's about managing capitalism more effectively so that the goal of economic policy to promote growth in GDP is achieved.Therein lies the flaw of the Henry Review.

the miners are like Big Oil--they will do anything for money and to hell with the cost to the environment or to the people.