Henry's closed mind a lesson for his political masters

KEVIN Rudd and Wayne Swan should have realised Ken Henry's limitations and sought a wider range of advice.

MEMBERS of the public not that interested in political debates could be forgiven for turning on the television and thinking Ken Henry is the assistant treasurer rather than the secretary of the Treasury when they hear him discuss the new super-profits tax on the mining industry.

He speaks about it as an advocate or a politician would, not as an impartial bureaucrat. It is his baby, his creation. Henry has for years been an advocate of a profits-based tax on the industry that is the engine room of the national economy. And why not. Despite his claims most of us are ignorant of the ins and outs of the new tax, the consensus is that some sort of profits-based tax is a good reform -- just not this model.

Highlighting how captured Henry is by his tax idea, he made the highly unlikely observation at the Senate Estimates Committee hearing last week that he learnt in high school about profits-based taxes (the comment was sarcastically shot back to a senator questioning him).

I know Henry has a PhD in economics, but unless he was in some sort of advanced program at high school, his memory must be failing him. If he is a hoarder of records I would like to see the curriculum back in the day to prove his claim. Politicians regularly let rhetorical flare get the better of them, but heads of departments shouldn't. It was a misstep.

At one level, Henry's sarcasm under nasty questioning from opposition senators is understandable. Bureaucrats are often treated appallingly at such hearings and, unlike politicians, they aren't supposed to fire back. Henry breaks that convention regularly and most of the public would probably cheer him on for doing so. But the troubling element of Henry's engagement with the debate over the super-profits tax on miners is his closed mind to even the prospect that his modelling and structuring of the tax might not be perfect.

But that is not his fault and it should not have mattered to this debate. His political masters should have realised his limitations and sought a wider ambit of input into the tax arrangements before announcing them and including them in the budget forecasts.

Henry was the head of the review into taxation that recommended the mining tax. He was the head of Treasury that thought it was an elegant proposal worth acting on. Where's the peer review in that?

Wayne Swan and others should have known that hand in hand with Henry's high-quality theoretical understanding about tax and public policy structuring is his limited experience in the real world of business. Let's be blunt -- Henry has never seriously worked in business, he has never worked in the mining sector, he has absolutely no feel for how the industry might be emotionally affected by his tax plans (in particular whether it would place sufficient value on the exploration rebates and risk-taking to offset the enormous tax hike of a 40 per cent profits tax).

Equally Henry has no nose for politics -- to realise that no government is going to be able to withstand the criticisms coming its way if it has to write out $400 million cheques from the taxman every time a $1 billion mining project goes belly-up. It was for government politicians to note that reality when approving the tax changes, thereby rejecting parts of Henry's proposal.

The government saw fit to reject 135 of the Henry review's 138 recommendations. It is hard to understand why it could not put the magnifying glass over the three it chose to accept.

Henry's strength is his ability to structure a pure regime for a profits tax as a scientist might do in a laboratory, and the fact that there is no chance of him being captured by special interests.

A strong government would be able to turn such strengths and weaknesses to its advantage, maximising the former, minimising the later. Get hold of Henry's purist review. Read it (more than Kevin Rudd did -- he admitted only glancing at the executive summary on Sydney radio earlier in the year) and know that it is the best academic summary of what to do to reform tax collection in the mining industry.

Importantly, then, put it out for consultation before deciding on pursuing it as policy. In other words, test the purist ideas against the industry's reaction.

No mining company wants to pay more tax, so the government would need a backbone against the inevitable criticisms of the proposal. But politically savvy leaders need to see past the ambit criticisms from industry and extract the valid ones for how to reform the purist scheme. That is what Bob Hawke and Paul Keating used to do.

Instead, this Labor government announced the policy without consulting industry or testing Henry's thesis. It attacked the industry as only out for itself, and continues to do so, as the debate degenerates into which side can spin the tax implications to their own advantage, in the process rejecting fair criticisms of the tax as well as fair compliments for aspects of it.

Labor has also earmarked $38.5m of taxpayers' dollars to sell its plan (despite Rudd pledging not to go down that path with government advertising at the last election campaign because it was a "cancer on democracy"). And it is unlikely Rudd will compromise now after conducting back-to-front consultations with industry because it would lose too much political capital were it to do so.

The rolling out of the super-profits tax on the mining industry is a lesson in how not to run a government. If mining companies ran their businesses as badly, we wouldn't even need to have this debate -- there wouldn't be any profits to divvy up in the first place.