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Expert warns Australia’s tax system is worse than it was 15 years ago

Australia’s tax system is in a worse position than it was 15 years ago and young people are paying the price, former Treasury secretary Ken Henry has warned.

He says policymakers have allowed intergenerational unfairness to become embedded in the system, and housing, the state of climate policy, and the commonwealth’s over-reliance on taxing workers’ incomes are three areas of major policy failure.

Dr Henry was the last person to subject Australia’s tax system to a root-and-branch review, back in 2008-09.

The final report from his tax review was published in 2010, and it made 138 recommendations — a wishlist of tax reforms to set Australia up for the 21st century  — but few were implemented.

Now, the former Treasury boss says the state of the tax system has deteriorated to the point that he’s worried about Australia’s “social compact” holding together.

“We’re in a worse position now than we were 15 years ago when we were writing the review,” Dr Henry told the ABC.

“It’s an intergenerational tragedy that we have allowed this to happen.”

We have to take tax pressure off workers

Dr Henry said the Albanese government’s recent changes to the stage 3 tax cuts were an example of how the quality of our national conversation about tax had deteriorated this century.

He said the government had sold the tax cuts to voters by saying they were necessary to relieve cost-of-living pressures, and that’s indicative of a larger problem.

“You do not do tax reform based on pandering to people’s concerns about immediate cost-of-living pressure,” he said.

He said many of the cost-of-living pressures people were feeling today were the consequence of a lack of genuine tax reform over the last 15 years, so handing back some revenue from bracket creep to voters as “tax cuts” does nothing to address the deeper problems in the tax system that have created today’s pressures.

He said workers were shouldering far more of the tax burden than they were 15 years ago because other forms of taxes had been generating less revenue over time as the economy has evolved and governments have failed to modernise the system.

“The only commonwealth tax that is growing as a share of gross domestic product (GDP) is personal income tax,” Dr Henry said.

“If you strip mining out, company tax is broadly flat as a proportion of GDP … GST is falling as a share of GDP, excises are falling, all of them as a share of GDP, including the fuel excise, are falling.”

He said the attempt in the late 1990s to shift the “tax mix” away from a heavy reliance on personal income tax to more broad-based indirect taxes has now been “completely undone”.

“In the 20 years following the introduction of the GST in 1999, by the end of 2019, it’s completely undone — indirect taxes, including GST, as a proportion of GDP, are right back to where they were in 1997,” he said.

Composition of tax receipts
In the absence of policy change, personal income tax receipts are projected to keep growing as a proportion of total tax receipts in coming decades. (Source: Intergenerational Report 2023: Australia’s future to 2063, pg. 194.)

Dr Henry said younger Australians needed “political champions” on both sides of politics who understood how serious the problem had become, and how the tax system wasn’t just plagued with inefficiencies — it was plagued by inequity.

“We’re going to have to take a lot of the tax pressure off workers,” he said.

“In simple terms, that’s it. The equity and efficiency points are now tied very closely together.

“There’s some interest in this discussion, particularly among the crossbenchers … they get it, of course they’ve got a political reason to look for something different, I understand that,” he said.

What do we need to do?

Dr Henry said when you boiled the problem down there weren’t that many sources of taxation.

He said we tax labour income, capital income, consumption, land and natural resources, economic rents, and environmental externalities.

“But then we’ve got, I don’t know, something like 120 different taxes across the federation that apply to those half dozen bases in extraordinary complexity overlapping here, there, and everywhere, twisted in their design because of short-term political considerations,” he said.

He said that complicated layer of taxes had to be reconfigured.

“Looking at those half dozen bases, what do we need to do? Well, over time we’ve got to place less reliance on personal income tax, and company tax, and payroll tax. So, less reliance on taxes on labour income and part of capital income,” he said.

“For the rest of capital income, which is interest, rent, and capital gains, we’ve got to do a much better job of getting similar tax treatment across those various forms of capital income.

“Consumption tax, we need to fix up the mess. We thought we fixed it in 2000, but we didn’t get as far as we wanted to get. In particular, we’ve got to get rid of all of those bloody transaction taxes, like stamp duties on insurance.

“And we’ve got to abolish fuel excise … and figure out a comprehensive road-user charging scheme,” he said.

Dr Henry said land was another big one, and he’d like to see stamp duties on land abolished and replaced “with a decent property tax”.

“I still think that in cutting the company tax rate, which we need to do, we also have to find a way at the same time of getting more revenue out of the country’s exhaustible natural resources, particularly fossil fuels.

“And then climate change, well you know, we’re going to have to do a lot of things there because we’ve ruled out the best options,” he said.

“We’ve got [climate] targets that we’re committed to meeting, and we seem to be trying to find the worst possible means of meeting those targets.

“As a country, and I’m not blaming the present government because they’re trying to work with what they were given, but over many years we seem to have ended up in a place where we can only look at the worst possible instruments for meeting our targets.

“We need to be better than that. At some stage we’re going to have to figure out how this all fits together in some coherent package, and that is going to involve either taxation or trading in marketable instruments at a scale that is not presently under contemplation — I’m talking about a massive expansion in Australian carbon credits basically,” he said.

Dr Henry is a director of a not-for-profit company called Accounting for Nature that has developed a methodology and scientifically-based framework for environmental accounting, which supports trading activity in carbon markets.

This week, respected economists Ross Garnaut and Rod Sims unveiled a new idea, suggesting Australia should impose a “carbon solutions levy” on its fossil fuel extraction sites.

They said such a levy would raise over $100 billion in revenue a year, declining slowly as fossil fuels exited Australia’s economy over time, and the money could be used to underwrite Australia’s renewable energy transition while over-compensating households, slashing electricity bills by $440 a year and removing all petrol and diesel excise, and significantly lowering the Consumer Price Index by more than 1.5 percentage points.

Housing, and lobbyists opposing change

Dr Henry said housing was another area that needed genuine reform in Australia and younger people knew that better than anyone.

“Replacing stamp duty with an annual property tax is part of it, but we also need to deal with a more uniform taxation treatment of various forms of capital income, other than company tax,” he told the ABC.

“What we proposed in the review, and this was just one example, we said you could change the capital gains tax discount from 50 per cent to 40 per cent, do the same with interest, give it a 40 per cent discount, same with property rent, but the quid pro quo is you only get 60 per cent interest deduction, right?

“The rental property sector in Australia is not a net tax payer. The deductions actually exceed the income. So that particular policy mix would increase revenue from rental income.

“And you could go further. An alternative that [Professor] Bob Bruenig and others been talking about, and we canvassed it in the tax review as another option, is you could go to a Scandinavian model where you have unified tax treatment of capital income, you just say all capital income, whatever its source, is subject to a flat, I don’t know, 25 per cent tax rate. That’s it. And you do the same with interest deductions to unify it,” he said.

“So, a 25 per cent tax, the deduction’s only worth 25 per cent, you can’t offset it against other income, or if you do the only benefit you get is 25 per cent. You could do that. That’s probably the simpler way of going … I guess if I was writing the review today I would recommend that as the best way of doing it.”

Dr Henry said vested interests will always lobby against tax reform because they’re benefiting from the way things are right now, but that’s something politicians had to deal with.

He said the “big problem” for tax reformers was finding the right transitional arrangements — how to transition the tax system from situation A to situation B — that would be supported by voters.

“Some people will say, ‘Oh I’ve just bought a property on the assumption that I’ll be able to deduct all the nominal interest and never pay capital gains tax and blah, blah, blah, and now look what you’ve done to me’,” he said.

“Grandfathering’s a huge issue, it requires some political energy, and ingenuity, and skills, all of the skills I think, that one. But it’s the most important one,” he said.

Do you think the tax system is fair? Is it punishing young people? Why not share your opinion in the comments section below?

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