Henry Tax Review, post release

And here was me thinking forming an opinion on yesterday’s tax review would be hard. Turns out, not so much: the review itself was really well done, pretty much what you’d hope for from a professional public service; the government’s response, on the other hand, was impressively gutless.

The most interesting recommendation (to me) in the Henry Review was the changes to personal income tax, which I’d summarise as:

  • Raise the tax-free threshold from $6,000 to $25,000
  • Change the official income tax rate to 35% for up to $180,000 per annum (ie, almost everyone), and leave it at 45% for above that
  • Drop the Medicare Levy, Low Income Tax Offset, etc, and just have a single rate
  • Fringe benefits tax should be simplified (particularly for cars), moved to market valuations, and taxed progressively rather than always at the top marginal rate
  • Introduce a standard deduction for work related expenses to simplify filing

At first glance, I thought the 35% rate seemed high (it’s currently 15% to $35,000 and 30% to $80,000 and 38% to $180,000). But graphing the rates seems to dispute that thought:

Tax Rates

There is some loss — people earning between $35,000 and $65,000 pay $250 more in tax per year, which then rises $1,000 more per year at $80,000 dropping back to parity at $113,000. People earning more than that get a small tax break that eventually levels off at a flat $2,000 tax benefit for people earning $180,000 or more. At the other end of the scale, people earning between $18,000 and $30,000 pay between $450 and $1500 less tax per year, which seems sensible. And of course, everyone benefits from having a simpler tax system, and (in theory) not having to pay an accountant for help filing your return. And the marginal tax rates become both easier to understand and generally the same or lower, which hopefully means less people are in the situation of thinking “well, I could work a few days a week, but I’d end up with less money that way, so I’ll set at home and watch Oprah instead”.

(Caveat: those numbers aren’t strictly right — they’re based on the current marginal rates and the LITO; so they don’t include the Medicare levy, and probably other things. This is why I’m not the treasury department. But I think it’s a fair indication of what the effect would be)

It’s not clear to me what Labor’s planning to do with the recommendations here — they haven’t accepted them, but they didn’t officially reject them yet either. Presumably they’ll have to say something, sometime, about it, but I don’t see any advantage to waiting if they were going to take this and run with it. I guess that makes them an exercise in cowardice: doing something about it would be too hard, as would finding actual flaws with it, so let’s just ignore it and hope we get re-elected anyway.

The company tax changes seem similarly motivated — dropping two percent over five years? Is anyone seriously going to pay attention to that? I don’t think so; and the Henry review’s recommendation was, in my opinion, much less subtle: dropping from 30% to 25%, the idea being merely to stay in line with international trends, particularly those for small economies. I suppose I can appreciate taking some time to cut the rate, but not if you’re also only going to cut it by what looks like a token amount.

As far as I can see the only reason that recommendation even got the token support from the government that it did was that the Henry review explicitly linked it with the 40% resource rent tax — recommending that the 25% company tax and the 40% resource tax be balanced to maintain an overall 55% tax rate (25+(1-25)*40=55). I can’t say I understand the resource rent tax (or the “super profits tax” as the government calls it) — but then I don’t understand the motivation for it either; if you get $90B of profits, how do you only pay $10B in “resource taxes” when you should be paying at least 30% company tax on profits, which would be $27B? Or are we not counting some tax receipts, in order to make the profits sound more unfair? The numbers all sound very shoddy there.

And of course, the government is using the “super profits tax” to pay for superannuation concessions, which is a clever sound bite I’m sure; while the Henry review was recommending they be tied into infrastructure spending, which seems like an actual logical link (Losing non-renewable resources? Spend the proceeds on stuff that will last…) But a $700M infrastructure fund, versus a $9,000M resource rent tax doesn’t sound like an impressive match to me.

As far as simplification goes, there seems to be lots in the review’s recommendations, and pretty much none in the government’s changes. Whether it’s justified or not, the resource tax is a bunch of extra regulation, that’s not accompanied (as far as I can see) by any reduction in regulation. I guess I’m not terribly surprised, but that was the one election promise that I was actually impressed by and that I figured the government might be willing to keep.

2 Comments

  1. James says:

    The $9B is only state resource taxes, companies still pay other state and federal taxes, including income tax on profits. Of course, profit can be reduced by capex etc.

    My main complaint is not really something the review could fix, since it’s embedded in the constitution – the commonwealth government is getting all the tax income that’s then transferred to the states for their constitutional responsibilities.

  2. [...] Way back when, I wrote fairly approvingly of the recommendations to simplify the income tax system. The idea being to more or less keep charging everyone the same tax rate, but to simplify the formulae from five different tax rates, a medicare levy, and a gradually disappearing low-income tax offset, to just a couple of different rates (one kicking in at $25k pa, one at $180k pa). The government’s adopted that in a half-hearted way — raising the tax free threshold to $18,200 instead of $25,000, and reducing but not eliminating the low-income tax offset. There’s still the medicare levy with its weird phase-in procedure, and there’s still four different tax rates. And there’s still all sorts of other deductions etc to keep people busy around tax time. [...]

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