Henry Tax Review

The Henry Tax Review is supposed to be released tomorrow. Since that might warrant a blog post, and possibly even some criticism, I thought it might be interesting to note down some criteria beforehand to remove one avenue for bias.

One issue for regulatory reform is whether changes make the entire system simpler or more complex — more complex regulation potentially handles trickier situations more “fairly”, but at the same time forces everyone to incur the cost of understanding all the complications, even if only to be sure they don’t apply in their situation. The Rudd government made an election promise to that effect:

Labor believes that when making new regulations, governments should remove an existing regulation and should design rules with small businesses in mind. We call this approach ‘think small’. It will require government departments and agencies to better understand the realities faced by businesses on the ground. Labor will adopt a ‘one-in, one-out’ principle for federal government regulation. This means that when a new regulation is proposed it must be accompanied by a proposal to remove an existing regulation.

There’s a deregulation group as part of the Department of Finance, but I haven’t seen much talk either way as to how this promise has been holding up. In theory, based on this principle, the Henry review should be proposing about as much reduction in regulation as new regulation though.

One of the obvious ways to reduce the complexity of the tax system would be to remove the various GST-free categories of goods (unprocessed food, etc). It would probably be appropriate to compensate that with a small increase in some welfare payments.

It’s probably also one of the few changes to the GST that’s within the review’s purview, given the clause in its terms of reference that goes “The review will reflect the government’s policy not to increase the rate or broaden the base of the goods and services tax (GST); preserve tax-free superannuation payments for the over 60s; and the announced aspirational personal income tax goals”. It’ll be especially interesting to see how true the Henry review has stayed to that policy, compared to the conclusions being drawn from Rudd’s hospital plan on a backflip there.

Personally, I quite like the “Reform 30/30″ proposal, which involves a massive simplification of both welfare payments and income tax. Supposedly it would boost government revenue by $15B per year, which is a significant fraction of the $125B in income tax or $43B in GST received in the 2008/9 financial year. On the other hand it comes at a cost of not giving welfare bonuses to people doing good things (having kids, buying houses, studying, etc) and taking less account of various other ways in which you might be rich other than having a high paying job (rich parents, rich spouse, money already in the bank, nice house, etc).

Presumably anything like that would be a non-starter politically, but some movement in that direction ought to be plausible. There’s been some talk for a while now about having a simplified tax return, so that you can just tick a box and accept whatever the ATO says rather than fill out a bunch of forms — basically heaps easier and quicker, but you don’t get to claim lots of deductions. Given the ATO’s electronic systems and reporting of interest payments by banks, and PAYG contributions by employers, that ought to be pretty plausible to setup, and might start paving the way for cutting out lots of personal tax deductions — why keep them if barely anyone’s using them, after all?

That, at least, is kind-of like cutting welfare payments — a tax deduction for $1000 is roughly the same as a receiving a cheque from the government for $300 if you’re at a 30% tax rate. Of course that means that deductions are being more considerate of the welfare of people paying more tax, which is similar to being more considerate of the people who lease need consideration.

I can’t see how the Henry review will be able to recommend much in the way of cutting welfare expenditures in general ($125B of expenses in 2008/9), but they’ve at least been told “The review should take into account the relationships of the tax system with the transfer payments system and other social support payments, rules and concessions, with a view to improving incentives to work, reducing complexity and maintaining cohesion”. So maybe there will be some ideas on this.

Maybe this will also mean the Ergas review will be revealed soon too. It looks like it’s even more out there than the 30/30 proposal, with a roughly flat 20% income tax, raising tax on income from superannuation, and taxing the family home. I’m pretty surprised that there’s anything out there more wacky than what the Liberal Democratic Party came up with, but maybe that’s due to its progenitor — supposedly Turnbull ordered the review as shadow treasurer without bothering to even tell Brendan Nelson. Still, it would be interesting to be able to compare the reasoning and recommendations to those of the Treasury-Secretary’s in tomorrow’s report.

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