Ken Henry hits out at tax system ‘not fit for purpose’

A former Treasury secretary who chaired a major federal review of the nation’s taxation system has criticised inaction from political leaders on tax reform, saying the last decade has seen the country pushed into an unsustainable fiscal position.

Ken Henry warned Australia has been travelling in the opposite direction than it should have been since he completed his review in 2010 and tax reform is now urgent to ensure the nation can afford to fund critical services into the future without increasingly relying on taxing a shrinking proportion of working people.

Ken Henry has warned the nation’s tax system is no longer “fit for purpose”.Credit: Peter Rae

Speaking on Wednesday at an Australian National University event about the future of the nation’s tax, productivity and federation, the former NAB chairman was scathing about the lack of change in the tax system.

“Assessed against the benchmarks of our report, the Australian tax system is in a considerably worse place today. Indeed, the Australian tax system is in a parlous state,” Dr Henry said.

“It’s not capable of raising sufficient revenue to fund the activities of government. Not in any particular year nor on average over a run of years of any duration.

“Since that’s the purpose of taxation, there can be no avoiding the conclusion that the Australian tax system is not fit for purpose.”

He pointed out federal government spending is growing at a faster rate than economic growth.

“The only tax base in the federation that’s being relied on to produce revenue growth at a faster rate than GDP is personal income tax,” he said, adding fiscal drag – a situation where inflation or rising incomes shifts people into higher tax brackets – is the “sole instrument now being deployed” for budget repair.

“All other tax bases across the federation are fiscally unreliable,” he said.

He said the GST base is eroding, fuel excise is at risk due to the electrification of the vehicle fleet, stamp duties are volatile and company tax collections are dependent on iron ore prices.

He wants the government to place less reliance on traditionally Commonwealth-levied bases such as income tax and more focus on typically state-levied charges on consumption, road use, land and other natural resources.

“In many respects, we find ourselves back to where we were in the several decades following World War II. This was a period characterised by ill-disciplined public spending, only partly funded, with a heavy reliance on fiscal drag that punished innovation, enterprise and effort, that distorted the pattern of saving and which rewarded tax avoidance and evasion,” Dr Henry said.

“Relying on fiscal drag to work its magic when confronted with a mountain of public debt is understandable, but we should also understand that it’s dangerous.”

Failing to embark on reform would undermine economic growth, deny people opportunity, reduce available services and continue to drive intergenerational inequity, he said.

Australian Banking Association chief executive and former Queensland premier Anna Bligh, who was also speaking at the event, warned there were difficult political realities to overcome for reform to be achieved.

“You are always going to have ... a prime minister or a premier or more than one who has very little political capital even if they are a long way away from an election,” Ms Bligh said. “Their willingness to jump into something big or brave is always going to be constrained.”

She said considering mechanisms taking it out of the political cycles was critical and also urged reconsidering extending federal government’s three-year terms to four years. This would require a referendum. “If you want long-term thinking even that extra 12 months helps,” she said.

Treasury deputy secretary Maryanne Mrakovcic said successive governments had understood the issues of fiscal drag and acted to reduce the burden on workers.

“That’s why for the past 30 years as tax has risen as a share of GDP on the back of rising average tax rates successive governments have handed back fiscal drag to Australians in the form of tax cuts.

“And that’s a policy practice continued by the government through its recent personal income tax plan.”

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