Too many landmines on tax reform’s twisting road

Australia raises more company tax, as a share of its economy, than almost every other country.

Ken Henry’s observation that the tax system is incapable of financing the government over the medium term is shown by the continuing deficits in the relatively benign economic conditions of the past five years.

Some of the most important sources of revenue will fail to grow with the economy. GST is declining as a revenue base as people spend more on exempt health, education and food, while fuel excise will raise nothing from electric vehicles.

Australia raises more company tax, as a share of its economy, than any country except Norway, but this will be eroded by competition for capital from countries with lower tax rates.

Henry identifies the banality of debating whether we give ourselves a company tax cut or a personal income tax cut first, while the budget is still in deficit.

He voices a frustration that a decade after he embarked on his review of the tax system, 10 taxes still account for 90 per cent of revenue while the balance comes from more than 100 other taxes.

But many of the remedies that Henry proposed in his landmark report had problems that would have obstructed their implementation even in a less toxic political environment.

Henry was forbidden by the Rudd government from considering the GST but did so anyway, proposing that it be replaced, along with payroll taxes, with a cashflow tax. Companies would pay tax on the difference between the money they spent on goods and services and their sales receipts.

Business investment would be immediately deductible and, for start-up businesses that are in tax loss, the government would refund their negative cashflow in the expectation of getting positive tax later. The government would become a “silent equity partner”, similar to the role envisaged in the resource rent tax.

No other country has one, and it would have been subject to the same objections over its regressive nature that led to the exclusion of food, health and education from the GST. Broadening the base and raising the rate of GST would be a simpler reform but just as politically intractable.

The two big Henry tax recommendations that were implemented — the resource rent tax and an emissions trading scheme — both proved politically fatal. The conflict between state control over royalties and the federal rent tax was never resolved.

Similarly, replacing property stamp duty with a land tax involves conflicts with multiple tiers of government, with councils levying rates, states levying stamp duties and the commonwealth expected to compensate losers from the switch.

Political leadership on tax reform has certainly been lacking, but the remedies are not obvious and difficulties are legion.