06/05/2010 - 00:00

Rudd tax plan fails objective tests

06/05/2010 - 00:00


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The debate over tax reform has failed to pay regard to the increase in overall tax collections.

TAXES, as the old saying goes, are one of life’s certainties. We all pay them, but how much should we pay? And what is the most efficient and equitable way to pay those taxes?

These are the fundamental questions that should underpin any debate over the tax system.

This week’s debate has been piecemeal, like the federal government’s response to the Henry tax review.

As many commentators have noted, the Henry review had 138 recommendations, and the government has implemented only a few of them.

Moreover, some of the recommendations have been implemented only partially and others, such as the increase in the superannuation guarantee to 12 per cent, are contrary to the report.

Before discussing detailed tax reform proposals let’s consider the issue of how much tax we pay overall.

Kevin Rudd’s Labor government is a big-spending government.

We have the same situation closer to home. Colin Barnett’s Liberal-National government is also a big-spending government, having presided over large increases in expenditure since winning office.

These track records force both governments to make tough choices – lift borrowings or lift taxes to pay for the high spending.

The best kind of tax reform is the one that delivers lower taxes overall. That is only possible when governments become more efficient at delivering services.

The Rudd government shows little interest in pursuing that goal, preferring instead to boast about how increased spending saved Australia from recession.

For its part, the Barnett government has invested a lot of store in its Economic Audit Committee report, but Troy Buswell’s exit from the Treasury will make it even harder to get traction on that front.

In the absence of tax reductions, we need to design the best possible tax system.

The key to good tax reform has always been about developing a package, so that any new measures are offset by savings elsewhere.

The proponents of change also need to demonstrate the new package will be more efficient and equitable. For instance, what will be the cost of administering the new taxes? And will people or businesses more able to afford the expense be paying them?

The Rudd government has performed poorly on these objective measures.

It has cherry picked the Henry review’s recommendations and, not surprisingly, the focus is on the new tax on resource sector ‘super profits’.

This concept has some merit. It is based on the theory that ‘rent’, or super profits, are over and above the return needed to support investment decisions.

A similar tax already operates in the petroleum sector and has not caused the upheaval feared by the mining industry.

It also contrasts with the state government’s mining royalties, which are based on production volumes rather than profits and therefore bear no relation to the ability of mining companies to pay.

The federal government has created a big problem for itself by failing to define exactly how its new tax will apply, creating uncertainty about just what constitutes a super profit, and changing the goalposts without adequate notice.

Kevin Rudd’s rhetoric has done nothing to ease industry concerns.

He has resorted to divisive, old-style, left-wing rhetoric, claiming that the tax will be paid by rich foreign-owned multinationals for the benefit of working families.

Whatever happened to BHP being the Big Australian?

Presumably Mr Rudd believes this will go down well with families in suburban Sydney and Melbourne.

It certainly won’t go down well with businesses such as BHP Billiton and Rio Tinto that make multi-billion dollar investments in the resources sector, contributing enormously to national prosperity.

The planned increase in the superannuation guarantee sounds like another populist measure designed to appeal to middle Australia.

But what will be the impact of this large cost increase on employment, and will higher super contributions be at the expense of wage and salary increases?

The proposed tax changes include some positives, none more so than the exploration spending rebate.

Overall, though, the federal government’s plans are disappointing, especially against the high expectations it set when it commissioned Treasury secretary Ken Henry to oversee a ‘root and branch’ review of the tax system.




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