Ken Henry’s prescription for nation’s taxing times

Australians would be better off in many ways today had the Rudd, Gillard, Abbott, Turnbull and assorted state governments had the courage to implement and follow through on the thrust of Ken Henry’s tax review commissioned a decade ago under former treasurer Wayne Swan. In a powerful speech to the Australian Institute of Company Directors today, Dr Henry, the National Australia Bank chairman, will outline how different our tax system would be. A raft of complex, inefficient state taxes would be gone, on payrolls, insurance, property transfers and vehicle registrations. In their place would be a broad-based cashflow tax replacing the GST in its current form; progressive land taxes; cost-based, comprehensive road-user charges; and a simpler personal income tax system, with most people paying the lower of two marginal rates.

Proponents of Malcolm Turnbull’s corporate tax cuts will highlight Dr Henry’s support for a uniform 25 per cent rate. In a world of mobile capital, as he said, a lower rate would “drive a faster rate of investment and labour productivity growth, and that should support higher wages growth over time”. After a long reform hiatus, however, restructuring of the tax system is just one aspect of the policy overhaul the economy needs.

One of Dr Henry’s most important observations is that the overall tax take is too low to support the government spending to which both sides of politics are committed: “It simply doesn’t have the buoyancy to generate enough revenue to achieve a balanced budget on average over the cycle. And its robustness is deteriorating.” Far from providing an excuse for the states and commonwealth to raise taxes further, governments must face facts. Current welfare, health, education and other programs funded largely on borrowed money are beyond taxpayers’ means. If budgets are to be repaired, debt repaid, and surpluses and sovereign wealth funds rebuilt as a standby for weathering future economic crises, meaningful spending cuts are unavoidable. The longer they are delayed, the more painful the fallout will be. The Turnbull government is making headway, curbing spending on the Disability Support Pension, which accounts for 10 per cent of the welfare bill, saving $4.8 billion across 10 years. The commonwealth-state tax transfer system needs built-in financial incentives to encourage states to be frugal and efficient.

As Dr Henry says, the tax system is too narrow and complex. Businesses waste hours on compliance. The fact only half of households are net taxpayers after welfare churn does not promote hard work. As well as being fairer, a broadening of the GST base and/or a lift in the rate of up to 15 per cent would allow for state taxes, earmarked for the chop when John Howard introduced the GST, finally to be abolished. Good debate, factoring in the economic realities of an ageing population, is essential. Dr Henry’s speech should be a catalyst for governments to rekindle reform in the national interest. Australia may not remain sufficiently wealthy to indulge the present populist, self-centred and dysfunctional political culture.