Australia’s “extraordinary intergenerational inequity” in current tax system

Former Treasury boss Ken Henry has called for reforms to the tax system that currently ‘punishes innovation, denies people opportunity and undermines economic growth’.

Dr Henry, who ran the Treasury department from 2001 to 2011, said current tax systems were “fragile”.

Former National Australia Bank Chair and veteran public servant Ken Henry has called for a redesign of the tax system, backing the federal government’s tax ceiling on superannuation as a step to reforming the country’s expenditure problem.

Dr Henry, who led the landmark 2009 tax review, said the tax system was in need of a “big bang” set of reforms, noting governments had consistently failed to deal with fundamental inequities in the current system.

“Incrementalism cannot possibly address our budget and broader economic challenges,” he said.

Speaking at the Tax Institute’s Financial Services Conference, Dr Henry said the nation’s tax system should be redrawn, noting any review should look at “trends and risks in spending pressures at all levels of government”.

He said this may involve looking at constitutional issues, between the states and the federal government and identifying areas where taxes could be levied without affected economic growth.

Dr Henry, who ran the Treasury department from 2001 to 2011, said current tax systems were “fragile” leading to state and federal governments to derive most of their revenue tax income from workers’ wages and companies.

“That means examining the tax transfer retirement income systems in concert and then it should determine the allocation of taxing powers,” he said.

Dr Henry said the public had grown used to “seeing politicians avoiding responsibility” for addressing problems, with “blame shifting” and finger pointing between state and federal governments.

He said the interests of disadvantaged Australians were not being served by the tax system “that is punishing innovation, denying people opportunity, undermining economic growth, and denying the sustainability of government service provision”.

“There can be no ignoring the extraordinary intergenerational inequity inherent in the system,” Dr Henry said.

“The fairness of the system cannot and should not be assessed by examining things of each of its components in isolation. That is madness.”

Dr Henry said younger workers were being left to shoulder rapidly growing tax debts, repaying publics debts, and dealing with the cost of climate change while older Australians were “sitting on tax free capital gains in houses that are exempt from the pension assets test” and enjoying refundable franking credits on a blend of publicly funded and tax free private pensions.

“At some point, perhaps even already, the intergenerational social contract must surely fracture,” he said.

Dr Henry said the current debate about superannuation tax concessions showed the need for serious reform of tax handouts, warning those who opposed increasing tax risked sounding shrill.

“Right now, Commonwealth tax revenue should be at least 2 higher of GDP higher than what it is and that’s about $50bn in today’s money higher than what it is,” he said.

“We’re clearly going to have to raise the tax to GDP ratio even higher over the decades.”

But Dr Henry said incremental tax reform was vulnerable to failure, after being targeted by political opponents.

“If you give a lot of well armed people only one target to shoot, that target is going to take a pounding,” he said.

“Incrementalism sets up a single target on a battlefield occupied by well resourced attack forces.”

Mr Henry said incremental tax reforms ”cannot possibly address our budget and broader economic challenges”.

“No amount of incrementalism is going to meet our fiscal challenges.”

“There‘s no point in planting a seed in a desert when what’s needed is continental reforestation.”