Ken Henry calls out a decade of ‘failure’ to implement reform

Ken Henry has blamed successive federal governments for failing to ­deliver meaningful tax reform.

Former Treasury secretary Ken Henry: ‘Australia will get no progress on tax reform unless the ­community sees vested interest make way for the national interest’. Picture: John Feder

Former Treasury secretary Ken Henry has blamed successive federal governments for presiding over a decade-long failure to ­deliver meaningful tax reform, leaving government unable to fund itself and average Australians shouldering an increasing income-tax burden to pay for it.

The National Australia Bank chairman has also delivered a blunt message to business that if it wants to be “taken seriously” in the debate over company tax cuts, it will have to adopt a new role in society that includes a social ­compact.

In his first expansive speech on tax reform since delivering a road map for tax reform to the Rudd government in 2010, Dr Henry will today warn that no progress on tax reform will be made if business and government fail to set a shared “social purpose”.

While backing the Turnbull government’s company tax cuts, he will say they constitute only a small part of the broader and more significant reforms needed to ensure economic growth and address structural fiscal realities.

With the government engaged in a furious campaign to win ­Senate support for the full implementation of its enterprise tax plan, Dr Henry has bought into the argument of a social compact, telling business leaders they are fooling themselves if they believe they can win public support without demonstrating a serious commitment to the community.

“Australia will get no progress on tax reform unless the ­community sees vested interest make way for the national interest,” Mr Henry says in a keynote speech to the Australian Board of Company Directors’ governance summit, provided to The Australian in advance.

“It is time we got really serious about the social purpose of business … we in business should not expect to be taken seriously in tax-reform debates until we demonstrate a serious commitment to a purpose that improves the wellbeing of Australians.

“Surely nobody needs to spell out why a business person motivated by nothing more than profit is going to have a hard time convincing anybody of the merits of a proposition to cut the rate of tax applying to profit.”

 

In a veiled indictment of previous Labor and Coalition governments, Dr Henry says tax reform has all but been abandoned and future generations will pay the price for the lost ­opportunity.

Very few of the nine broad recommendations delivered under the Henry review have been implemented. Dr Henry suggests his reform recommendations, delivered almost 10 years ago in a highly contested political environment and in the midst of the global ­financial crisis, were as relevant today as they were then.

“As you know, few of our recommendations have been implemented in full. We also made a very large number of ‘findings’, in addition to our recommendations,” Dr Henry says.

Had governments taken up the recommendations, Dr Henry says a range of taxes would have been abolished including: payroll taxes, property stamp duties, fuel excise and vehicle registration taxes, luxury car tax, the Medicare levy, renewable energy targets and all other “ad hoc schemes designed to achieve greenhouse gas abatement”.

The GST was quarantined from the Henry review in a political ­decision by the Rudd government when it commissioned it in 2008.

But Mr Henry said if the other taxes had been abolished, a broadbased cashflow tax would have replaced the GST and inefficient state consumption taxes while personal income tax would have been simplified to a more progressive two-rate system.

“Obviously, those engaging in today’s tax debates don’t see themselves delivering that sort of tax system,” Dr Henry says. “Their debates concern a small set of very narrowly cast propositions: such as when, by how much, and how broadly should company tax rates be reduced.”This has reduced the debate over company tax to a “polarising issue”, he argues.

“In respect of the company tax matter, I will simply say this. First, of course we will have to cut our company tax rate … there is good reason to think that a lower company tax rate will drive a faster rate of investment and labour productivity growth, and that should support higher wages growth over time,” he says.

“(but) … cutting the company tax rate is only a small part of a required restructuring of our tax system, and that in turn is only a small part of the policy reform program that will be required if we are to ensure that all Australians have the opportunity to choose a life of real value.

“One of the more important things we in business can do at this time is accept responsibility for the social and environmental outcomes of our activities.”

The fiscal implications of this failure to reform are profound, he says. “It is now evident that the size of government has grown significantly since the commissioning of the review,” Dr Henry says.

“That will have to be paid for. It is also evident that the personal income tax system is being called upon to generate an increasing share of revenue . . . That is unsustainable.

“When we were working on our review over the course of 18 months in 2008 and 2009, we assumed that future Australian governments would deliver on their bipartisan commitment to achieving a budget balance, or a small surplus, over the economic cycle. We avoided taking a position on the size of government, instead taking the view that the tax system should be designed such that it would be capable of generating sufficient revenue to meet evolving fiscal requirements, without unacceptably deleterious consequences for economic efficiency, fairness and system complexity.

“We noted that ‘increasing the revenue-raising capacity of the tax system would require a greater emphasis on broadbased taxes … our present tax system is not sufficiently robust to finance government spending on average through the economic cycle.

“It is not capable of supporting the medium-term fiscal strategy that both sides of politics have signed up to.”

“It simply doesn’t have the buoyancy to generate enough revenue to achieve a balanced budget on average over the cycle.”