The Henry Tax Review

One of the things Kevin Rudd did early on after being elected was to initiate a root and branch review of the Australian taxation system. The review is being chaired by Ken Henry (Secretary to the Treasurer) and is open to submissions by the general public and any other interested entity. I sent in my submission a while ago, although too late to get included in the glossy December Consultation paper Summary that recently arrived in the mail. The summary does consider the 440 other submissions received up until 14 November 2008 of which 53% were from private individuals (as opposed to businesses, associations etc).

The two things I asked them to consider were;

i) a shift in corporate tax towards the Estonian model in which profits are taxed when paid as dividends rather than when first realised in accounting terms. If we want more jobs and strong economic growth I don’t think profitable and growing companies should be deprived of internally generated surpluses. Especially given how fickly profitability can be from year to year for some businesses.

ii) an indexing system for the tax free threshold to put a lid on the growth in the cost of government. If we are going to elliminate income tax then in my book the best way to do it is by regularily increasing the tax free threshold until there is no taxable income left. Of course you probably need to boil this frog slowly.

I could have asked for a lot more reform for our tax system however I figured brevity had it’s vitues. I wait with baited breath for their next summary installment so I can see my name in the credits.

If you would like to make a submission, and I hope lots of ALS readers have strong views about taxation that they are willing to email to the review team, then it needs to be done before 1 May 2009. Check out the details on how to make a submission at the following website:-

http://www.taxreview.treasury.gov.au

Feel free to mention things that I put in my submission if you wish. The more submissions they get on a given issue the more that issue may be on their mind when they write their final recommendations.

UPDATE

To make a submission email your views to: AFTSubmissions@treasury.gov.au

Email submissions must include your name, phone number and postal address. There are no other fixed requirements in terms of format or structure.

24 thoughts on “The Henry Tax Review

  1. We need to raise the TFT above the maximum welfare payment and scrap payroll tax. Let’s give people a chance to work before we start taxing them with GST and indirect costs of income taxes, shall we?

    There are certain desireable things with a tax system. But I say there are utterly imperative goals, like the above.

  2. Mark – make sure you put it in a submission. All it takes is an email with some personal details (name, address etc).

  3. I think it would be best if I left it to the economists. I have no real idea about tax reform, much less any formal qualifications 😦

  4. Stephen – if you pay taxes then you are “qualified”. If you have an opinion you ought to submit it. It is an enquiry into what the public thinks not an inquiry into what economic experts think. Even if you just tell them the tax rate is too high thats a fair and reasonable comment.

  5. Especially given how fickly profitability can be from year to year …

    I assume fickly is a term economists use. I know about lowly, highly, mediumly and not very muchly, but fickly is new.

  6. Yes it’s a very new word just out this week. It’s only available for use by a select few. I’m sure that in time others such as yourself will also be allowed to use it.

  7. The concept of a government review of proposed tax reform brings to mind a quote by French comedian/actor Jean Yanne – ‘Si il y avait un impôt sur la connerie, l’état s’autofinancerait’ (‘if stupidity was taxable, the State would be self-funding’)

  8. Indeed, it does sound like the police investigating the police.
    @Terje: I suppose I have my gripes with the lack of a tax free threshold on second jobs. That’s going to hit me hard this year

  9. Stephen – you get the money back when you do your tax return.

    Though I do remember it hitting me hard too when I was at uni and working as a waiter for about 4 different companies – it was a long wait till June 30th. It was a gamble picking which one would give me the most shifts, and was therefore best to claim the tax-free threshold on.

  10. Stephen – it is a good point. There is a presumption that you won’t paid them at the end of the year so they take more than their fair share now. I think it is worth an email to the commitee.

    I suppose a similar gripe for higher income earners is provisional tax. If your income increases relative to past years then they tax you an extra chunk for next year on the presumption that it will be higher also. People on steady incomes don’t get hit with it but if your income jumps around a lot it is a real pain. The same is true for small businesses.

  11. That last point about provisional tax is a notorious small business killer. Typically it goes like this:-

    – in the first year, the business is starting up and making little profit;

    – in the second year, the business gets on an even keel and makes a profit, which it pays tax on;

    – in the third year, the government throws a provisional tax demand on as well, and the business is quite likely to go under from cash flow problems.

    Over and above that, GST is only a consumption tax if it is paid in arrears and has all sorts of (high compliance) exemptions for acquisitions of fixed capital (operating assets). The way it’s really run, it is a production tax, hitting increases of both working and fixed capital, and provisional tax makes it even worse.

    Readers might be interested in “Nine economic options for Australia” that I put together in 2001 and which is still sound, although now I would suggest slightly different first steps in response to current problems. Many of those have teaser elements to appeal to Greenies etc., but the real benefits come from other areas and the teaser aspects would wash out over time. It’s really all about transitions.

    Of particular relevance to this thread, in options 7 and 9 I suggest “Apply selective Income Tax cuts by age, with over 55s to pay a simplified flat rate of 20%… Move back pensionable ages by one year for every two calendar years that pass, lowering the cutoff age for the Income Tax break to match actuarially in compensation”. That is my view of how best to start phasing out income tax. Other things like TerjeP’s suggestion of raising thresholds can come later. I didn’t think a zero rate after the cutoff age would be politically realistic straight away, let alone my personal preference of changing income tax to an SAYE system with a similarly age-related cap and with interest going to age pensions. With that people would eventually get their money back and could start taking it out once they reached the age-related cap, rather like a self-eliminating sinking fund.

    The other options address the issues Mark Hill raises, about “Let’s give people a chance to work before we start taxing them with GST and indirect costs of income taxes”.

    On corporation tax, I would prefer bypassing it altogether by removing the institutional bias towards corporate structures and allowing limited partnerships more space to flourish (in those, only inactive partners get limited liability), but I didn’t put that on my list as it’s less of a priority.

  12. – in the fourth year, if you’ve actually survived grown and managed to prosper a little bit, then then hit you with payroll tax and essentially confiscate any profit you would otherwise be making.

    Been there done that. The time line was more like ten years but I’m glad to be out of it. At least as a PAYE they just want to take your money and not your sanity also.

    PML – your submission to Ken Henry will need to be a little longer than mine.

  13. Well, seeing as we can’t propose anything too radical, like abolishing income tax or having a negative income tax whilst destroying all welfare payments, then maybe we can play around as follows.

    * Automatically index all tax brackets to CPI every year.

    * Abolish the top tax brackets. Bring the top tax rate down to 30% or at worst, 35%.

    * Remove the new 50% discount rule for capital gains on assets held for more than 12 months. Replace with a new discount – capital gains to be divided by the number of years an asset is held, rounded up. (i.e assets held for 13 months – divide gain by 2, assets held for 26 months, divide gain by 3).

    * Show people exactly how expensive (and not ‘free’) our public health system is. To do this, adjust medicare levy upwards from 1.5% to whatever it needs to be to actually cover the costs of operating the entire public system (somewhere over 5% of GDP) and increase tax free threshold to compensate so it is overall revenue neutral. Seeing as we are stuck with public health, let people see exactly how expensive it is.

    * Remove 1% medicare surcharge for high income earners without private health. This is a pointless tax. It suggests you place a bigger burden on the public system because you don’t have private health cover. What should be emphasized is that you tend to place a higher burden on the system if you don’t look after your health and stay fit.

    * Allow more flexibility with superannuation as a low tax option. Let people access their super funds to pay for medical procedures and children’s education costs.

  14. If we are to index the tax scales then I’d suggest that average wages growth figures are more relevant than CPI. If nominal wages double why shouldn’t the nominal tax thresholds also double.

    A transparent medicare levy would entail a rate of between 8% and 9% instead of 1.5%. I’d probably prefer that we just abolished the levy but an honest number would be better than the currently deceptive one.

    Your presumption that radical reforms can’t be proposed isn’t correct. I would hope that some people here, lots of people in fact, would write in and suggest that we abolish income tax and replace it with nothing. If you can’t think of a specific structural reform you would like then simply advocating less tax is in my book a most meaningful submission.

  15. So many rules, so many scenarios, so many indexations proposed in these posts …

    My suggestion: no more taxes, no more of the so-called redistribution, no more welfare payments, no more ‘stimulus’ payments, each and every person from this moment on is on his/her own.

    What’s more fair, more just than that? Any other alternative you may conceive will invariably include one portion of the population being spoliated in favour of another portion.

    Governments have two hands, they can’t give anything to anybody with the right hand that has not been previously gathered from someone else with the left hand. Governments do not create wealth, they merely distribute some of the wealth taken away from the taxpayers.

    ‘Need’ by itself is no source of rights. And it gets more disgusting when in order to satisfy those ‘rights’ those ‘necessities’ we need to deprive someone else of his rightful private property.

    Surely there are services that will have to remain in the public domain, and those should be financed by a single and simple income tax. No stupid rules about income taxable and not taxable, residence rules, exemptions, deductions allowed and not allowed, indexation, capital gains, and all those lengthy and good-for-nothing regulations. Plain and simple rules, black and white. No room for interpretations, no room for rulings.

    Idealistic? Certainly. But that’s what I’d like to see one day.

  16. Sergio, what is unfair about what you suggest is that it makes the music stop when some people are ahead and others are behind in all the tangle that governments have built up over the years. For instance, someone who had just retired would have paid out all his life in income tax and then wouldn’t get any age pension back – and he wouldn’t have the chance to earn and save for himself to provide for his retirement on the back of less income tax, because he would already be retired. Sure, it’s also unfair to pay him an age pension by taking it from other people, the way his payments went to others before him, but there are ways to phase it out so that the load reduces fairly evenly for everybody instead of being concentrated on a few. I go into this in one of my articles. Plus, of course, there’s the whole issue of selling reforms politically.

    Actually, if there do turn out to be services that belong in the public area, such things are most fairly funded by returns on a revenue yielding fund, an endowment. Any direct tax on natural persons is worse than indirect taxes, and those are worse than endowments – but it may turn out to be possible to phase everything out over time. That is, it may well be practical to remove any public activities from the state area and transfer them completely to unconnected and decentralised charitable handling funded in that endowment way, through low level institutions that aren’t connected with each other at all.

    Also, there’s no such animal as “No stupid rules about income taxable and not taxable, residence rules, exemptions, deductions allowed and not allowed, indexation, capital gains, and all those lengthy and good-for-nothing regulations. Plain and simple rules, black and white. No room for interpretations, no room for rulings.” Rules make regulators and laws make lawyers.

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  18. In many ways, pensions are poisonous. As PML describes above, financing is just wealth transfers from workers to old people. Also, the idea that one should be forced to retire is becoming an anachronism, as medicine and science keep pushing back the boundaries of lifespans. I think we should wean ourselves off pensions, and be prepared to work for our full, long, lives!

  19. Given that compulsory superannuation has been in place since the early 1990s it is time to start increasing the age at which the aged pension cuts in. Last time I checked this was LDP policy.

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  21. Guys don’t get your hopes up, this tax review is nothing at all like an open forum of ideas. It is the most narrowly constructed framework based on the status quo – just take a look at the Terms of Reference:

    http://www.taxreview.treasury.gov.au/content/Content.aspx?doc=html/reference.htm

    6. The review’s recommendations should not presume a smaller general government sector and should be consistent with the Government’s tax to GDP commitments;

    7. The review should take into account the relationships of the tax system with the transfer payments system and other social support payments, rules and concessions, with a view to improving incentives to work, reducing complexity and maintaining cohesion;

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  23. I’m hoping that lots of people have written submissions by now. Let us know what you said. And if you have not put in a submission just remember that time has not yet run out and it is as easy as sending an email. Feel free to pinch ideas from other people.

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