In case you hadn’t noticed, this is an election year.
Treasurer Wayne Swan certainly has. His response to Treasury Secretary Ken Henry’s Tax Review — which he and the Prime Minister have painted as major reform — has been determinedly cautious. The result is a carefully tailored set of election-year policies targeted at some key Labor and Liberal constituencies.
There are two major new policies, both of them carefully flagged in strategic leaks before yesterday’s media lock-up and press conference. Big mining companies will be slugged with a special Resource Super Profit Tax (RSPT), which will have the effect of raising their company tax from 30 to 40 per cent. And superannuation will be boosted by raising the 9 per cent employer contribution to 12 per cent, phased in over a number of years.
The other changes are relatively minor. Using the approximately $9 billion the RSPT is expected to raise, the Government will lower company tax rates for non-resource companies to 28 per cent and give small business a simpler and more generous depreciation allowance. A token $700 million a year will be set aside for infrastructure. Retirement savings for low- and middle-income workers will be boosted through government contributions of $500 a year into their super accounts. Mining companies will be partially compensated by getting some exploration tax credits and by having their state-based mining royalties removed.
It’s piece-meal, incremental, small-scale reform — exactly what we’ve come to expect from the Rudd Government.
For all that, these are worthwhile reforms. The increase in the super contribution and the government contribution for lower-income workers will make a difference to the retirements of many poorer workers, particularly women, and build on Wayne Swan’s undoubted commitment to a more progressive tax and transfer system. Small businesses will certainly enjoy their new depreciation rules, which will act as a kind of deduction that will help them to invest in cheap but productive capital, such as laptops and utes. And the reduction in company tax will help non-resource companies compete with cashed-up big businesses in the resource sector, shaving some of the disparity between the so-called "two speeds" of the economy.
But compare the Government’s announcements to the Henry Review itself. Australia’s Future Tax System: Report to the Treasurer, is a massive three-volume report which examines each and every one of Australia’s 100-plus taxes, duties and imposts, and also looks at government payments to citizens like family benefits. The report contains 138 recommendations, some of them quite sweeping.
The take-home message of the review is modernisation and simplification. It recommends that all of Australia’s tax revenues be based around four basic categories of tax: personal income, business income, private consumption and natural resources. Everything else — stamp duties, insurance taxes, even the Medicare levy — should be abolished, or folded into existing taxes in these categories.
The scale of the review’s recommendations is vast. It really is, as Henry is reportedly telling colleagues, "five GSTs" worth of tax reform. Even a quick skim of his recommendations section reveals many interesting and politically controversial suggestions, such as introducing a comprehensive land tax across "all land", including the family home (recommendations 51, 52 and 53). For every big picture reform such as this one, there are also smaller and more easily implemented changes, like the recommendation to raise the tax-free threshold to $25,000, but remove the current, complex matrix of low-income tax offsets (recommendation 2). The report recommends Australia move to a much simpler and flatter personal tax regime, with only two brackets of 35 and 45 per cent.
Another important reform that Henry recommends is a consistent, universal volumetric alcohol tax that taxes all types of alcohol at the same rate, according to how alcoholic they are. This change would reap huge efficiencies, remove distortions in the beer and wine industries and have public health benefits by taxing cheaper wines and ports more effectively.
There is a slew of other recommendations that warrant careful reading, and which will provide fruitful discussion for policy wonks and tax nerds into the future. In time, they may or may not be taken up by a future government, even a future Rudd government. But for now they seem destined to be ignored by both major parties, in favour of pre-election positioning, rhetoric and spin.
In short, the Government’s response to the report is notable chiefly for what it has ignored. In fact, Labor’s spin doctors went so far as to publish an "attachment" (pdf) at the end of Kevin Rudd and Wayne Swan’s media release, containing a long list of the recommendations the Government will not be implementing.
For example, the Government has ruled out means-testing the family home (recommendation 88), the land tax recommendations (52 and 53), changes to rent assistance (103), removing fringe-benefits tax perks for the charity and not-for-profit sector (9, 13, 41, 43 and 44) and the defence force (6, 8 and 9), capital gains tax reforms (14 and 17), the Medicare levy (5), reduced indexation of the age pension (84), death duties (25) or changes to alcohol tax (71).
Instead, the Government has taken the time-honoured approach of taxing big business and using the proceeds for electoral bribes to key interest groups. It’s hard to distinguish this approach from John Howard and Peter Costello — except that Howard and Costello can rightly claim the GST was a much bigger reform than the announcements made yesterday.
There are huge areas of Australia’s taxation system that have now been left without any reasonable prospect of reform under this government. A levy on carbon pollution has already been postponed. Road pricing and congestion taxes have been ignored. So have the massive perks and concessions available to those lucky enough to own, rather than rent, their homes.
Even the super changes, which Labor is championing as evidence of its historic commitment to providing for the retirement savings of workers, are in reality a huge disappointment. The Henry review did not recommend raising the super contribution by employers to 12 per cent, instead arguing that the current distortions and inequities in the system be ironed out. We should remember that currently, tax expenditures on superannuation are tremendously regressive, accruing disproportionately to those with the most super and the best financial advice — in other words, the very well-off.
Labor has left these tax concessions (worth tens of billions) in place, instead choosing merely to compensate lower-income workers with some chump change. As Macquarie University’s Ben Spies-Butcher told newmatilda.com, "This does nothing to address the real problem for many with low super, their marginal attachment to labour markets, especially for women who have caring responsibilities."
Of course, low-income workers are unlikely to complain or even care about tax reform. The same cannot be said for the big mining companies, which have already proved themselves ruthlessly effective lobbyists during the emissions trading debate. Can we be sure this Government can resist sustained pressure from the Minerals Council and the big miners? The "Resource Super Profit Tax" will almost certainly be modified before it is signed into law.
Ultimately, the response to the Henry review is in keeping with the record of the Rudd Government’s first term. This is not a government of bold reforms, but rather, incremental tweaks. Whether you think this is a good or a bad thing depends on your point of view. Some commentators seem to want it both ways: many of those who hanker for the big picture reforms of the Hawke-Keating era are the same ones who viciously attacked the Government’s emissions trading scheme from the right.
Voters, on the other hand, still seem to be giving Kevin Rudd their majority support. With a major announcement like this to be followed by the budget in a week’s time, informed opinion is beginning to coalesce around the prediction of an August election.
One final point: don’t believe the spin from the mining lobby that extra tax will somehow "kill the golden goose", as Fortescue’s Andrew Forrest and others have been saying (although we’re pretty sure they mean the goose that laid the golden egg). Companies like BHP Billiton and Rio Tinto can easily pay more tax. BHP, for instance, paid $3.16 billion in tax to Australia in its last full year of operations, on revenues of $50 billion and profits before tax of $11.6 billion. Rio paid around $2 billion on revenues of $44 billion and underlying earnings of $6.3 billion. Bear in mind that exploration and operations costs are before tax expenditures. I can assure you that these geese are still laying golden eggs.
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