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May 1, 2010
Tax review time dawns as our two speed economy heats up and interest rates rise in an election year.
The Henry Review of the taxation system was given a mandate to make recommendations across the broad sweep of tax policy. Will the implementation of its proposals be limited to efficiency considerations: ie., a tidying up of anomalies (plugging tax holes, simplifying the tax system, broadening the tax base)? Or will there be fundamental reform?
If the latter, then how politically palatable are the proposals in an election year? The tax take is going to have to rise to pay for increasing budget costs driven by an ageing population and increased demand for health care. Is the Rudd Government genuinely interested in substantial tax reform? If so, what would it be since they have ruled out raising the GST rate and have shown little interest in a carbon tax (polluter pays). Will the Rudd government being more interested in the extra billions that will flow to Canberra rather than the task of reshaping the country’s tax system?
We know that the Henry Review covers a broad suite of taxation proposals that cover resources superannuation, savings and property and roads. Already the miners, who are opposed to an ETS to address climate change, are outraged at the suggestion of a resources rent tax on the cash flows of new resource projects once their capital costs have been paid off.
Amidst a resources boom and super profits the miners cry from Perth ("killing the golden goose") is that jobs and investment will be placed at risk. They are not interested in sharing the wealth, despite the resource industry requiring public investment in skills and transport infrastructure or those in the economic slow lane who are are expected to bear the brunt of the recovery with interest rates rising to "above normal" levels as the economy picks up pace.
Will the Rudd Government finally reduce the high effective marginal tax rate that still applies to to low-income people seeking to increase their earnings? Isn't that one way to address the skills shortage and reform the tax system ?
What will happen to the superannuation industry? Currently, the superannuation system is funded largely by employers and effectively offers major tax breaks to wealthy Australians able to divert their income into retirement accounts. Will there be a rise in tax on contributions? What will they do for lower income earners?
Update
The Australian has its own ideas. In an editorial it says:
Australia desperately needs a tax system that allows individuals, families and businesses to retain more of their earnings backed by a smaller, efficient government sector. In a global economy, Australia's long-term prosperity demands an attractive investment climate to encourage effort, investment and savings through competitive company taxes and a low personal tax regime.It's all about incentive.
They say that Australia's top tax rate of 45 per cent on income above $180,000 must be cut. So must company tax---it is also ripe for reform---by which they mean reducing the burden on companies.
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Don't hold your breath for major tax reform advocated by Ken Henry. This is an election year and the Rudd Government is easily spooked by the first whiff of grapeshot from special interest groups protecting their turf.
This is not a reforming government. Its conduct is more akin to political wimp-out as shown by ditching the ETS.